Selling Your Healthcare Startup
There have been roughly two dozen digital health acquisitions valued at $100M+, and I got the opportunity to talk to the founders behind four of them:
TJ Parker, co-founder and former CEO of PillPack, sold to Amazon for $1B
Surbhi Sarna, founder and former CEO of nVision Medical, sold to Boston Scientific for $275M
David Van Sickle, founder and former CEO of Propeller Health, sold to ResMed for $225M
Gil Addo, founder and CEO of RubiconMD, sold to Oak Street Health for $190M
Even if you’re nowhere near ready to sell your business, it’s worth thinking about M&A early on. Especially if you have taken money from investors (who expect to get it back, exponentially), you’ll always want to have an exit strategy percolating in your mind.
David Van Sickle of Propeller Health advises a proactive approach. He notes that startups often "lack a framework for how to approach the idea, wait too long to get started, and don’t typically get enough encouragement in this direction from people around the business."
So how do you prepare your company for a successful sale? Let’s find out.
Preparing your company for an acquisition
For most companies the best time to sell is when you don’t really need to. That’s an unfortunate truth, especially in today’s climate where venture funding, acquisitions, and IPOs are all down.
Understanding the dynamics and macroeconomic trends affecting your market is important. The four founders I spoke to all sold during the bull market of 2018-2021 and recognized the fortune of their timing. But this doesn't diminish the strategic acumen they demonstrated in capitalizing on favorable market conditions. Being ready when the time is right, even if it's sooner (or later) than anticipated, is a good place to start.
Build a great business
First, each founder emphasized the importance of building a solid business, independent of external financing or market dynamics. This foundation not only positions a company for sustainable growth but also makes it an attractive acquisition target. In a climate where funding is scarce, companies with strong fundamentals are more likely to stand out to potential buyers.
Gil Addo shared, “While building a great business is most important in selling, understanding dynamics and trends can help you maximize value in deciding when to sell. Changes to customer purchasing patterns, regulations, flow of investment dollars, competitive dynamics etc can all inform your perspective on current vs future valuation and timing.”
Surbhi Sarna advises founders to not make selling the company part of the game plan, and instead focus on building a great business. “Focus on advancing the company forward, and you'll become an asset that larger companies will want to acquire. Said more simply, be bought, not sold.”
Customer today, acquirer tomorrow (aka strategic relationship building)
Founders should be viewing every customer, partner, and investor relationship through the lens of potential long-term value. Building these relationships should be more than transactional; they should be seen as stepping stones towards greater opportunities, including acquisitions. By integrating with the strategic narratives of potential acquirers, you can not only increase your startup’s visibility but also demonstrate the value in a tangible, impactful way, setting the stage for future acquisition possibilities.
Propeller Health began building relationships with potential strategic acquirers by approaching them to be partners, customers, and investors first. David Van Sickle emphasized the deliberate effort to foster these connections. “We tried to create opportunities for those relationships to form and develop however they might,” David shared. “We figured there would be value in them getting to know the company, see the team in action, appreciate what we were doing, and so on, and get us close to their strategic narratives.”
This philosophy of engagement proved effective in more than one instance. For example, the acquisition of PillPack by Amazon wasn’t a sudden move; it was the culmination of ongoing partnership meetings. “We were in the midst of a number of commercial conversations when the conversation turned into an M&A offer,” TJ Parker recounted. TJ encourages founders to understand the industry's deepest pockets early on and to “start trying to build commercial relationships as soon as is realistic / feasible”.
RubiconMD followed a similar trajectory. Their acquisition talks sprang from what initially began as a strategic financing discussion. “The discussions around the strategic financing round evolved into a potential acquisition,” Gil Addo said.
Closing the deal
As the CEO, certainly now you’re used to selling your company to customers, investors, and potential employees. You’ll need to use this same skillset to guide your startup towards a successful acquisition. That means also honing the ability to blend your startup's vision with the strategic foresight of a potential acquirer. This process hinges on the idea that the best acquisitions feel like a natural extension of the acquirer's own strategic plans.
Do your homework
Surbhi Sarna suggests that founders read annual and quarterly reports from publicly traded companies to get to know their business. “Get sense of what areas they want to expand into or what businesses are doing well for them,” she advises. “So, if you do find yourself proactively reaching out, you'll have enough knowledge to have a meaningful conversation.”
Make it their idea
As David Van Sickle shared: “Startup acquisitions are driven by a big idea, but the trick is it has to be their idea. You’re trying to connect your product/solution to the big ideas they have about where the market is headed.” There is some maneuvering required in positioning your startup as an attractive acquisition target. It's not about aggressively selling your company; it's about aligning your company's trajectory with the broader market vision of the potential acquirer.
TJ Parker agrees with the importance of not awkwardly pushing these conversations. “You've got to find a way to end up in sale conversations in the most organic way possible. It's a very difficult thing to force, and, like anything, the more organic the origination the better the outcome.”
Remember, this isn’t a VC pitch
Selling your company requires a distinctly different approach compared to seeking venture capital.
TJ Parker shared, “When we sold PillPack, each potential acquirer had different wants and needs and the materials, pitch, and conversations were all tailored to the audience and what they cared about. You’re showing them the additive value of the specific combination between what you’ve built, what they bring to the table, and their business risks and goals.”
Gil echoed this sentiment, highlighting the unique nature of acquisition discussions: “There is enterprise value that you can unlock only in an acquisition scenario, not in an investment. Showing that value was key to agreeing on a valuation/deal model.”
Do you need to hire a broker or banker to sell your company?
The founders I spoke to all recommended hiring a broker or banker to support the transaction.
TJ Parker shared, “In my experience, the best advisors operate more like coaches behind the scenes helping you manage the process rather than acting as negotiators on your behalf.”
“A red flag is an advisor that wants to actively insert themselves in the process, take over materials, etc. The best bankers prefer to be invisible until quite far along in the process. I was actively engaged with Qatalyst for months before the first buyer even knew they were advising,” he added, highlighting the importance of advisors who support without overshadowing the founder's role.
The RubiconMD and nVision teams both waited until after they had an offer to hire a banker.
Surbhi Sarna shared, “If you hire a banker before you have acquirers lined up, it can betray the feeling of desperation - that your first choice is to sell the company. I don't recommend doing this unless you have found yourself in a truly tough position. If you have several buyers at the table, and you want a middleman to effectively communicate deadlines and updates and help you negotiate the price.”
Gil Addo agreed,“In our situation, we hired a banker after we had identified and negotiated with the buyer. We wanted to have someone to guide the process to a close and keep the buyer honest. In the end, it was a really expensive insurance policy”.
You’ll want to shop around
Once you get a deal offer, you’ll want to shop it around. You won’t have a ton of time to do this, but hopefully you’ve followed the advice shared above and you already have established relationships with several other potential acquirers. This will help create a competitive environment, which can lead to better terms and a more favorable deal overall. Of course, this part needs to be done with discretion and professionalism. You’ll need to follow maintain confidentiality and handle all negotiations with the respect for all parties involved.
Final words of wisdom
Keep a small circle
One piece of advice that came up a few times is the deliberate limitation of the number of people involved in deal discussions. Keeping the circle of employees aware of and involved in the acquisition talks small not only helps in controlling the flow of sensitive information but also reduces the risk of creating unnecessary anxiety or distraction among the wider team. Gil Addo advises, “You need to operate as though the deal won’t close.”
By involving a limited number of key people, your company can continue to operate effectively, knowing that the deal might not reach the finish line. One banker told me from his experience, roughly a quarter of deals fall apart during diligence. You’ll want to avoid a scenario where the entire company's momentum hinges on the uncertain outcome of the deal.
Don’t put all your eggs into the acquisition basket
David Van Sickel shared a good reminder that “Acquisitions fall apart all the time, and even when they don’t you can end up with a bad/failed deal. You can reduce that likelihood by talking with people who have done it before who can help you avoid unnecessary originality and complexity. Don’t do stuff that is going to make deals more complicated in closing or afterwards.”
Don’t wait until you (or the business) are out of gas
Some founders decide only to sell the business when they are tired of running it. Don’t forget that most acquirers will want you to stay on, at least for a transition period. TJ Parker shared, “You want to be selling with the knowledge that you and the business have the juice to capture that additional value.”
Find a trusted advisor
Surbhi Sarna recommends finding an advisor to support you, specifically a former CEO who has sold their company. “They'll be invaluable in guiding you and helping you predict next steps or reading between the line when certain questions are asked. They'll also help support you emotionally -- it's hard to know how much of a rollercoaster the process can feel unless you've experienced it first hand.”
Move fast and keep your head up
Opportunities and deals can change rapidly, and staying adaptable is crucial. As a founder, it's important to be quick in decision-making but also to keep an eye on the evolving dynamics of the deal. This means being prepared for sudden shifts in negotiations, adjusting your strategy as needed, and always having contingency plans in place.
During acquisition negotiations and diligence, your job as CEO doubles. You’ll need to be full time on the M&A deal while simultaneously running the company. It won’t be easy, but hopefully it’s worth it in the end.