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Investing in a market full of excess


While the public markets have shown some fragility thus far in 2022, we haven't seenthe same sentiment in the private health technology market. There is still an excess of private capital looking for good companies. 2021 saw more investment in health technology than 2019 and 2020 combined. Valuation multiples have stayed above their historic averages, and we've seen technology-enabledhealthcare services business valued similarly to software businesses, despite 50-60% gross margins (vs 80+% for software companies).  

Potentially worrisome, there have been 41 IPOs or SPACs of health technology companies inthe past few years. In 2021, on an equal-weighted basis, these companies lostalmost 36% of their equity value. Excluding the 16 companies that went publicvia SPAC, the 25 companies that IPO'd still lost 28%.

Should we be worried? No, but we should be cautious. It's worth rememberingthat 97% of all exits are via M&A and most exits are for <$200m. This iswhy Healthy Ventures continues to underwrite our companies for M&A exit.    

Furthermore,the companies that have suffered the most are those that have inefficientunderlying businesses and went public mostly based on bullish market sentiment,not business readiness. Amidst all the headiness in private markets right now,we are staying focused on real businesses that are providing productsand services necessary for companies to operate more efficiently in healthcare.

We've called these "infrastructure" businesses and they've spanneddata architecture/interoperability, payment & credit-tech, and businessesnecessary for the consumerization of healthcare. As this group of companieshave been critical for cementing technology in to healthcare, we've seeninvestor interest grow markedly since we started Healthy Ventures. Thenumber of infrastructure companies, the amount raised, and the average dealsize in this space have all grown appreciably.      

Nobodycan predict market timing, but we can be prepared to move quickly once macroconditions change. Recalling our experience investing through the 2001 and 2008market cycles, we're ensuring we maintain healthy reserves for our existingportfolio companies and are working with companies to have a plan to cut burnquickly, if necessary. In those earlier cycles, investors de-levered as well aspulled back their private investment allocations, resulting in much lesscapital available to companies. It took several years for the private marketsto recover and even then the best companies couldn't command the same valuationmultiples. Yet, those same post-correction times were when the best investmentopportunities existed.

So, at Healthy Ventures we're keeping our heads down and helping ourentrepreneurs build robust companies and "see around the corner." Weare also aggressively tuned to opportunities that may exist to invest in thebest people and the best ideas when others are hiding scared.     


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