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 Healthcare is experiencing a gold rush of
sorts: the amount of capital chasing the dream
of disrupting the industry’s massive bloat and
inefficiency is staggering—with both CEOs and
investors hoping to take even a modest portion
of the enormous pie. The capital piece, these
days, seems easy.

But who will really win: what team, what

thesis, what company will actually gain traction?
There are so many ingredients required to bake
a successful exit. We decided to examine one
critical area: investors and CEOs—how they view
each other and the market. Where do they agree,
what do they want from the “other,” and in what,
if any, areas do their thinking diverge?

‘‘
There’s a ton of capital coming into healthcare IT. Hospitals
are facing unprecedented pressures and health plans are
reinventing themselves. That creates abundant
opportunity for new solutions to drive value.”

Spence McClelland
General Partner,
Noro-Moseley Partners
Given these extraordinary factors, Sage Growth Partners initiated VENTURE CAPITAL
research gauging the attitudes of both investors and CEOs of
INVESTMENT IN 2018
U.S.-based healthcare companies to clarify their relative priorities
for growing revenue in today’s ever-changing industry.

$130.9
Specifically, we engaged 30 investors who have provided capital
to healthcare companies at stages ranging from seed to buy out;
each had made at least one, and upwards of five, investments
in the past 12 months. Also, we engaged 30 CEOs of healthcare
companies—half of whom received funding in the past 12 BILLION
months; the last round of funding received by the group of CEOs invested in US based startups
spanned from $250,000 to $100 million.

Fueled by an all-time high in venture capital investment across

all industries in 2018—$130.9 billion was invested in U.S.-based

$713
startups, eclipsing the previous high established in the dot-
com era—and $713 billion in private equity investment, the U.S.
healthcare market has been experiencing a robust cadence of
M&A activity and startups. Compounding both the pace and
complexity of deal flow are sweeping industry trends ranging BILLION
from managing and measuring health outcomes to reducing the invested in private equity
overall cost of care.

The volume of M&A activity in healthcare was up 14.4 percent

from 2017 to 2018, according to a PricewaterhouseCoopers
report. There were 1,182 such deals in total in 2018, although
the value of those deals dipped 31.4 percent from the previous
year to $121.5 billion, while nevertheless topping 2015 and 2016
$121.5
by 1.4 and 1.7 times, respectively. M&A activity remained strong
in 2019, with deal volume exceeding 250 deals in the first three BILLION
quarters. invested in mergers & acquisitions

“There’s a ton of capital coming into healthcare IT. Hospitals are

facing unprecedented pressures and health plans are reinventing
themselves. That creates abundant opportunity for new solutions
to drive value,” said Spence McClelland, General Partner of

14.4%
Noro-Moseley Partners.

Many of the opportunities for healthcare companies are driven

by the industry’s widespread waste and inefficiencies, as well as
both public and private sector mandates to reduce costs while
increase in mergers & acquisitions
increasing health outcomes. As a result, there is an abundance
of potential partners and investment capital. However, no activity in healthcare
algorithm exists to help the glut of healthcare companies, FROM 2017 TO 2018
especially startups and newly merged businesses, accelerate
their revenue growth in an increasingly crowded marketplace.

Sage Growth Partners | sage-growth.com | 3

‘‘ Often investors bring on board members that only have
experience running large enterprises that don’t match
the maturity of the company or resources available. 
That said, a blue-chip investor can bring the company
real credibility in the talent market, and often have
access to individuals that a small- to mid-cap
company would not be able to attract otherwise.”
We asked investors and CEOs the same set of questions in order to
understand their common ground and identify areas of divergence.
What do you seek in a partner?
When opinions converge
The responses reveal that there is no shortage
of common ground between investors and CEOs.
Both agree that driving revenue growth, possessing
expertise that is relevant to the business, and the
ready access to customers and subject matter
experts are essential to a productive, long-term
partnership. Both further agree on the importance
of adequately capitalizing a business.
When opinions diverge
Still, there are markedly varied perspectives on what
each party brings to the table, as well as variables
that are integral to the success of a business.
I nvestors want to help CEOs run the business,
whereas CEOs want investors’ Rolodexes:
•W
 hen investors were asked to identify the top three
benefits they furnish a portfolio company, providing
board leadership and recruiting senior management
were among the top four responses, with the former
response being the most common.
•W
 hen CEOs were asked to identify the top three
factors they seek in an investor, connectivity with
customers and subject matter experts was one of
the top responses.
4 | The Sweet Spot: How investors and HIT leaders can find common ground to collaborate and grow
Jeff Nelson
Operating Partner,
Linden Capital Partners
In contrast, providing board leadership and
recruiting senior management ranked seventh and
ninth, respectively, out of nine.
“Both CEOs and investors want to see value crea-
tion. Many CEOs are seeking investors’ contacts,
but may see less value in leadership on the board,”
said Mason Beard, co-founder of Wellcentive
(acquired by Philips in 2016). “Investors may feel that
they can play a more central role in sharing their
firms’ expertise, especially to earlier stage com-
panies. It’s interesting, but perhaps not shocking,
where the survey points out a divide among CEOs
and investors around the recruitment of talent.”
• Jeff Nelson, operating partner at Linden Captial
Partners, shares another perspective on this topic.
“There may be a disconnect between the perceived
value that an investor can bring to the development of
a company through board involvement and recruiting
and how a management team sees it, especially at
the onset. Often investors bring on board members
that only have experience running large enterprises
that don’t match the maturity of the company or
resources available. That said, a blue-chip investor
can bring the company real credibility in the talent
market, and often have access to individuals that
a small- to mid-cap company would not be able to
attract otherwise.”
After you have started working with a portfolio company, what
are the top three benefits you provide?

Investors

Board leadership

Connections to customers,
subject matter experts, etc.

Acceleration
(growth, scale, etc.)

Recruiting senior
management

Capital

Expertise related to your

company, market, etc.

Long term partnership

Credibility to the market

Shared services
& operating group

0 2 4 6 8 10 12 14 16 18 20 22

When considering an investor, what are the top three factors

that you seek in a partner?

CEOs

Credibility to the market

Connections to customers,
subject matter experts, etc.

Acceleration
(growth, scale, etc.)

Expertise related to your

company, market, etc.

Capital

Reputation

Board leadership

Shared services
& operating group

Recruiting senior
management

0 2 4 6 8 10 12 14 16 18 20 22

Sage Growth Partners | sage-growth.com | 5

 ‘‘
Relationships should strengthen during difficult times. If
they’re built correctly. If they’re built well. Under duress,
what you hear consistently is that management teams
and boards tend to underperform. Under duress,
sudden significant changes to senior leadership tend to
occur, and this makes boards uneasy. Healthcare is
incredibly difficult—outside the walls of the
business, the path to success will be littered with
challenges. Thus, inside the walls, there needs to be a
foundation of trust, beginning with transparency and
open communication. Strong teams can weather the
storm with incredible resilience and success.”

Roy Bejarano
CEO, Scale Physician Group

‘‘
If I were an investor, I wouldn’t care whether you
had a whizz-bang product if I felt the people
running the company might drive it into a ditch.
The sweet spot would be a differentiated
product and a killer team.”

Mason Beard
Co-founder, Wellcentive
(acquired by Philips in 2018)

6 | The Sweet Spot: How investors and HIT leaders can find common ground to collaborate and grow
The Road to Success is Not Littered with Roses:
What about bad news?
Business is hard. Healthcare is incredibly complex, investors differed. They reported that CEOs deliver
and not everything goes as planned. Therefore, bad news, early yes, but with less than the full story.
we asked investors and CEOs alike: how does bad And in some cases, investors said they received
news get communicated? it late—while none of the CEOs viewed themselves
as delivering bad news late.
In general, CEOs reported that they deliver bad news
early, and with full or partial details. But the view from

When do you disclose bad news to your investors?

(e.g., not hitting KPIs, negative regulatory change, etc.)

CEOs

Early with full details

Early with partial details

Late with full details

Late with partial details

0 2 4 6 8 10 12 14 16 18 20 22

When do you typically receive bad news from your portfolio companies?
(e.g., not hitting KPIs, negative regulatory change, etc.)

Investors

Early with full details

Early with partial details

Late with full details

Late with partial details

0 2 4 6 8 10 12 14 16 18 20 22

Sage Growth Partners | sage-growth.com | 7

 Investors Value Business Talent—
Even More than Product Differentiation
When investors are weighing a potential investment,
one of the top factors they consider is the strength of
the company’s leadership team. In fact, by a 2:1 margin,

2:1
Investors prefer a
investors indicated that they would invest in a company
with a proven team and an average product over a com-
pany with a differentiated product and an average team.

proven team and product What makes this finding all the more striking is that
over a differentiated product product differentiation matters more than a little
and an average team. to investors. In response to a separate question,
investors unanimously indicated they would invest
in a company with a differentiated product in a $1 billion
market over a company with an average product in
a $5 billion market.

“Investors lean toward risk mitigation. When you get

100% a team that can sell and adapt, the flavor of the ice
cream they sell matters less,” said Beard. “If I were an
investor, I wouldn’t care whether you had a whizz-bang
product if I felt the people running the company might
drive it into a ditch. The sweet spot would be a differen-
Investors unanimously tiated product and a killer team.”
prefer a differentiated product
Investors Prefer Fragmented Markets and
in a $1 billion market over
Competitive Threats Over Regulatory Threats
an average product in a
When asked about markets that are most conducive
$5 billion market.
to business growth, investors articulated an over-
whelming preference for fragmented markets over
consolidated markets.

• Roughly two-thirds of respondents (63 percent)

indicated they would rather invest in a top 10 company

63%
in a fragmented market over a top three company in
a consolidated market.
“In a more fragmented market you have greater
opportunity for disruption, while in a consolidated
market, there isn’t as much opportunity to change
Investors would rather your path,” said Kurt Skifstad, CEO of ArborMetrix.
invest in a top 10 company
• Similarly, a majority of investors indicated a pre-
in a fragmented market over
ference for threats posed by competing businesses
a top three company in a
(83 percent) versus those resulting from legislation
consolidated market.
(17 percent).
“You can change the product. You can change how
you go to market. But you can’t change what the
government’s going to legislate,” continued Skifstad.

8 | The Sweet Spot: How investors and HIT leaders can find common ground to collaborate and grow
CEOs Want Proven Investment Firms
that Prioritize Their Business

83%
When evaluating partnerships, CEOs consider the
degree to which their business will be a priority of
the investment firm, as well as the firm’s track record
of success.

• 80 percent of CEOs indicated that being a first tier

investment with a firm that is respected is more Investors indicated a
important than being a second tier investment with preference for threats posed by
a firm that is renowned. competing businesses versus
those resulting from legislation.
“There’s no reason to pay a premium for a premium
investment partner name if you’re not going to get
any benefits. I would much rather get the full attention
of a solid firm than the partial attention of one of the
top names,” said Skifstad.

• Also, more than half of the CEOs (60 percent)

indicated that an excellent track record of success
is more important in their choice of an investment
80%
firm than the financial terms of a given deal.

“An investor’s value varies by round. In an A round, CEOs prefer being a first tier
I value the money and connections you bring. I put investment with a firm that
less value on the name brand of the firm. You can is respected than being a
be Joe’s Crab and Venture Capital if you’ve got the second tier investment with
right Rolodex for an A round. But, in a B or C round, a firm that is renowned.
you’re starting to think about an exit and you want
a blue-chip name that has connections with big
buyers,” said Beard.

60%
CEOs prefer an excellent
track record of success
over the financial terms of
a given deal.

Sage Growth Partners | sage-growth.com | 9

‘‘ There’s no reason to pay a premium for a premium investment
partner name if you’re not going to get any benefits. I would
much rather get the full attention of a solid firm than the partial
attention of one of the top names.”
Looking Ahead in Health IT:
Investors and CEOs Are Finding Alignment
The perspectives among investors and CEOs need to
be aligned, not simply regarding common business
objectives, but also the imperatives for achieving
those objectives. In our experience, there is no single
factor more integral to the success of a healthcare
company. Here are several critical junctures in the
evolution of a healthcare company that constitute
natural (and necessary) opportunities for alignment:
•R
 ealize that your company’s narrative is only
as good as your data – There is a universal
tendency in healthcare for companies to overstate
their ability to positively affect human lives—see
Theranos’ Elizabeth Holmes—sometimes in ways
that aren’t supported by the underlying scientific
or business data. A compelling corporate narrative
is essential to the vitality of any brand, but not in
the absence of empirical evidence of a technology’s
efficacy, for example, or the ability to profit from it.
It is here, even before committing to doing business
10 | The Sweet Spot: How investors and HIT leaders can find common ground to collaborate and grow
Kurt Skifstad
CEO, ArborMetrix
with one another, that investors and CEOs need
to align, pressure testing the data to the last
decimal point.
•A
 gree on what success looks like for your
company – Few aspects of any company, let
alone one operating in an industry as mercurial
as healthcare, are more subject to individual
interpretation than success itself. Therefore,
investors and CEOs should engage in an
intellectually honest exchange—one that, again,
emphasizes the underlying data—in establishing
short- and long-term performance metrics, the
more quantifiable the better. No less importantly,
they should identify and prioritize both the internal
and external variables affecting a company’s ability
to be successful.
Where do you believe there is the biggest opportunity in healthcare IT?

CEOs

Business to Business

Business to Consumer

Business to Business
and to Consumer

0 2 4 6 8 10 12 14 16 18

Investors

Business to Business

Business to Consumer

Business to Business
and to Consumer

0 2 4 6 8 10 12 14 16 18

•A
 ssemble the plan and resources required
for your company to be successful – While
this observation may seem obvious, it is hardly a
common practice in healthcare. Quantifying the
incremental performance of your company is the
basis of a strategic plan, but these objectives need
to be reconciled with the human and financial
resources required to be successful. You must
demonstrate that your founder is equipped to grow
the business as CEO, and that you will be able to
penetrate new markets with only a modest uptick in
your sales and marketing investments.
•P
 eriodically re-evaluate your plan and
whether the goalposts have moved – Dwight
D. Eisenhower famously observed that plans are
useless, but planning is indispensable. Given the
industry’s constant gyrations, truer words about
healthcare do not leap to mind. Investors and CEOs,
therefore, should annually reassess their business
objectives, casting a discriminating eye towards
the variables and resources on which a company’s
success depends. Has another company’s disruptive
technology disrupted your business model? Will
federal legislation affecting Medicaid reimbursement
rates hinder or help your revenue growth? And to
what extent does your business plan need to shift as
a result?
On balance, we find the varying perspectives
of investors and CEOs to be a net positive for
a healthcare business. Each possesses overlapping,
but largely distinct, experiences and skill sets that
diversify a company’s most valuable resources—
namely their individual know-how and can-do spirit.
The key to optimizing these resources is to align
and deploy them.

Sage Growth Partners | sage-growth.com | 11

 About the Authors
Daniel D’Orazio
Chief Executive Officer, Sage Growth Partners
Dan D’Orazio shapes and leads the vision for the
firm—a vision focused on helping clients accelerate their
Ex
pe

commercial growth. He is actively engaged in all aspects

rti

of the firm’s work, ensuring clients receive the highest

se

quality research, strategy, and marketing expertise. His

y
ilit
dedication and extensive experience helps clients succeed

dib
in the ever-changing and complex healthcare market by

Cre
receiving innovative and effective strategies. Dan has broad
experience across healthcare, and is a recognized thought
leader in virtual care/telemedicine, population health,
health integration, and issues impacting the changing
healthcare landscape.

Stephanie Kovalick
Chief Strategy Officer, Sage Growth Partners
Stephanie Kovalick is a leading healthcare authority with

Acceleration
extensive workflow, product management, and marketing
Shared Ser

expertise focused on the health plan, provider, and

health information technology sectors. She is an expert
on payment reform, population health, reimbursement
vices

models, revenue cycle, and clinical workflows. She began

her career at the Tufts Health Plan and the Johns Hopkins
Health Plan, and later joined IDX Systems Corporation.
She then joined GE Healthcare where she led the product
management function for revenue cycle and managed
care and integrated care/population health solutions in the
Healthcare IT group. In her most recent role prior to joining
Sage Growth Partners, she served as vice president of
Portfolio Operations at Availity, LLC.

Sage Growth Partners accelerates commercial success for

healthcare organizations through a singular focus on growth.
The company helps its clients thrive amid the complexities of a
rapidly changing marketplace with deep domain expertise and
an integrated application of research, strategy, and marketing.