Tis the season of the down round

There’s a long list of growth-stage companies in health-tech that could theoretically IPO if the markets were more friendly. Despite what you’ve been reading in the press, the IPO window is barely open right now for our industry. Even solid companies like Waystar I’m hearing took a valuation haircut with its debut this week, the first health-tech company to go public since 2022. The company said it will use the financing to pay off debt. Needless to say, I’ll be interested to watch what happens next over at Tempus, as it reportedly seeks a $6.1 billion valuation for its IPO.

Why is this such a problem?

Well as Luba Greenwood, a biotech investor friend put it to me recently, there should be three options on the table at any given time for a growth-stage company that needs money:

1. A fundraise via the private markets

2. An IPO (essentially a fundraise via the public markets)

3. M&A

The problem with our sector - and not Luba’s - is that option 2 is still an ‘avoid at all costs’ for most companies, at least until there are more signs that public market investors will be more receptive to these kinds of businesses.

What’s particularly tricky is that this digital health category is still emerging. Per banker friends, these companies are not traditional software businesses and do not compare favorably to them (selling to health care buyers is not the same as it is in most other sectors). These are still heavy services businesses for the most part. But the VCs who backed them are hoping they’re valued differently than traditional health care companies because of the technology aspect to what they do. That positioning is tricky, for reasons that we’ll discuss in this piece, and is still playing out.

Here’s what I’m hearing from bankers, analysts, media, investors and other important stakeholders about how this will all play out in the 2024/2025 timeframe. And where I’d be focusing my energies right now as a growth-stage digital health player.

In biotech, there’s a clear roadmap. Greenwood says that M&A activity is starting to heat back up, which is fundamentally a good thing because it allows private market investors to double down on the next set of new companies developing new molecules today. And the IPO market is also more active. So it’s feeling more healthy, and companies can simultaneously consider all three when they need to raise capital, taking the best option that materializes.