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“The Voice of Giant Absorption” to standardize digital health

Ross Perot may have popularized the term during his failed presidential campaign in the 1990s as a reference to the negative effects of the North American Free Trade Agreement (NAFTA) on American jobs, but “Giant sucking sound“It might be an apt analogy today for the rapid consolidation of digital health companies.

Recent reports indicate a massive growth in venture capital funding for digital health startups 15 billion dollars For the first half of 2021, with no slowdown in sight. The story from the other side is that these same startups exit through liquidity events at a similar speed.

Amuel’s announcement about Acquisition of two digital health companies It is the latest in a string of M&A moves that have continued to accelerate since Teladoc and Livongo merged last year in an $18.5 billion deal.

On the face of it, the two companies are in unrelated places. Silver Cloud is a behavioral health company that has developed digital models of care that are the equivalent of face-to-face meetings. Conversa is a chatbot technology company that uses conversational interfaces for digital paths to support a wide range of clinical needs – from pre-admission patient education and preparedness to post-acute monitoring and chronic care management.

The unusual deal announcement refers to the acquisition of the two companies, which have combined revenues of less than $15 million, with a combined value of more than $300 million.

The deal announcement underscores the trend of ongoing consolidation in the digital health space. We’re seeing digital health startups merge or get acquired by big tech companies to achieve this goal. An example of the former is a merger Major Health Courses and Doctor On Demand With a combined value of $2 billion. An example of the latter is Microsoft’s $8 billion acquisition of Nuance. Amwell’s acquisitions are small by comparison. However, these deal values ​​may be the norm as we see an increase in the pace of mergers and acquisitions in the digital health space.

Ongoing consolidation makes sense for startups (and venture capital backers). There has been a proliferation of tools based on chatbots and virtual behavioral health companies. The bottom line for startups is how to achieve scale and profitability in this highly competitive landscape. Many will tend to get out in the current environment of unlimited money and attractive valuations rather than dump them in the long run.

What does this wave of consolidation mean for its clients, i.e. healthcare organizations?

The landscape of digital health solutions today is highly fragmented. The CIOs and health system CDOs my company works with struggle to place strategic bets on partnerships in this confusing landscape. Digital leaders in health systems understand that choosing a promising startup for a strategic partnership may have the detrimental effect of starting the startup for a potential acquisition based solely on having a rectangle name as a customer.

On the flip side, many of the more mature digital health solution providers are acquiring smaller startups with complementary offerings to expand their “surface space” — a term that is now trending among digital health VCs. This complicates vendor governance and management further for health systems executives.

If the health system is on the Teladoc platform and uses Conversa chatbots, Amwell may soon be knocking on their doors to enter as the new owners of Conversa. In the long run, the number of non-compliant vendor relationships is bound to increase and will require CIOs and CDOs to design their solution suite with loose coupling and write contracts that provide exit options with minimal penalties and severance costs.

Many health systems join the party, make investments in the startups they bring in, reduce risk, and take advantage of the opportunity to make money if the startup finds a profitable exit. Northwell Health of New York is a major investor in Conversa. Other health systems, notably Providence Health, have actively invested in startups and have seen significant gains from successful exits.

There is no doubt that mergers and acquisitions have become a necessity for the growth and expansion of digital health startups and large corporations. As big tech companies like Microsoft and Amazon move aggressively into telehealth and virtual care, independent companies like Amwell and Teladoc are using mergers and acquisitions to expand their competition and remain strong contenders for leadership in the emerging digital health landscape.

Smaller digital health startups are also discovering that extended sales cycles and slow decision making in healthcare organizations make new customer acquisition increasingly difficult. Your best bet to avoid going out of business is to associate their vehicles with an existing supplier that has a large market footprint. Notably, even the largest telehealth companies are not profitable today.

For Amwell, Tilladock and others, the acquisition of small businesses is really about the strategic location for market share growth and long-term profitability. In the short term, they can exploit the synergies between the acquired companies (Conversa chatbots could complement the Silver Cloud’s behavioral health virtual care model) to increase opportunities for organic growth.

In the long run – well, who knows? The party just started. Waited so hard for the next wild ride.

Paddy Padmanaban is the author of the book The digital transformation of healthcare – How consumerism, technology, and the pandemic are accelerating the future. He is the founder and CEO of Damo Consulting.

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Written by Joseph

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