The State of Healthtech Funding: Considerations for 2024

Introducing Christopher McCord

John Farkas:

Hello everyone, and welcome back to another episode of Healthcare Market Matrix. I’m your host, John Farkas, and we’ve reached the end of a big year here at Ratio. And today’s episode marks our final installment for 2023. We have had some great conversations over this past year and before we dive into today’s episode, I wanted to take a moment just to say thank you for such a great year. Our listeners and guests have made this podcast a thriving community and your support really means so much to us and I just want to say that we’re grateful.

As we look back at what has transpired over the last 12 months. I have no doubt that 2023 is going to be remembered as a groundbreaking year as AI has really clambered up the stairs to take center stage. And as we’ve learned to contend with things like the changes that the pandemic has hastened, I mean persistent staff shortages, alternative channels of care delivery, and the rise of the healthcare consumer, or should I say, the continued rise of the healthcare consumer. They’re all issues that are being addressed by the companies that we have the privilege of collaborating with every day here at Ratio.

We’ve had the chance to host experts and thought leaders and pioneers throughout the healthcare market matrix. We’ve explored trends and the challenges and the opportunities that we anticipate in 2024. We hope you’ve found these conversations as enlightening as we have. And now as we launch into our final episode for the year, we’re going to take a look at healthcare funding, which I know is on the minds, in one form or another, of many of our listeners. Christopher McCord is going to bring us into some great perspective and some crucial considerations as we move into 2024.

Greetings everyone and welcome to Healthcare Market Matrix. I am excited for our conversation today. Here’s something I know; anyone listening to this podcast likely is very keenly aware of all the movement going on in healthcare technology market right now. We saw historic levels of investment through unprecedented numbers of deals in the last part of 2020 through the first half of 2022, and that has very quickly migrated over the last 18 months to some of the lowest levels in years, and lots of companies right now are running out of runway. Add to that picture what the recent advances in the AI realm are hastening, and we are going to see plenty of change in consolidation over the next 18 months.

Today we are joined by Chris McCord, who has lots of perspective on this landscape. Chris is the managing director of Healthcare Growth Partners and they’re a leading investment and merchant banking advisory firm that are focused in this sector. They’ve closed over $4 billion, over 130 healthcare informatics and digital health transactions and, before Healthcare Growth Partners, Chris worked with the Mercury Fund, which is an early-stage venture capital group, and he also worked at BMG Health, which is a strategic financial advisor serving the healthcare providers sector. Also, with KPMG, where he worked in the technology and corporate finance group. So he’s got some pedigree in this universe. He is an active mentor, he’s a director and investor to emerging companies and is a regular speaker and writer in this realm. So I’d like to welcome Chris to Healthcare Market Matrix. Thanks for joining us, Chris.

Christopher McCord:

Hey, John, it’s great to be here. I really appreciate the opportunity to be on the pod and interact with you. I’ve always enjoyed our conversations. One thing that jumped out when I first met you is you’re one of the best listeners that I know, so it doesn’t surprise me that you have a platform like this.

John Farkas:

Well, I appreciate that and I’m looking forward to the conversation today because perspective is certainly something that is needed in our realm right now. I would love for you to share with our listeners just a little bit about Healthcare Growth Partners and what do you see as different and unique about your approach?

Christopher McCord:

Yeah, I mean, first I’ll comment on some of your preamble of the market here in the last few years. We’re in this healthcare industry, all of us and your listeners, and it’s a market that is notoriously slow, but the markets that you’re describing, the capital markets, the COVID, the run-up to COVID, the peak during COVID, the trough that we’ve been experienced post-COVID has been a whipsaw.

John Farkas:

Yeah, it has.

Christopher McCord:

It’s unlike anything that I’ve experienced before. So if you take that and you roll it back to when we started Healthcare Growth Partners, I say we because I had a partner who I co-founded the firm with back in about 2006.

John Farkas:

That’s kind of why it’s called Healthcare Growth Partners?

Christopher McCord:

His name is Jon Phillips. He’s been a mentor to me and really helped me grow within the company. We started the firm back in 2006. We’re an investment bank, as you said. We focus exclusively on health IT and health tech-enabled services companies. An investment bank is a big word; I think it’s a bigger word for what we actually do. We’re advising companies on mergers and acquisitions and capital transactions. So mergers and acquisitions typically means one of two things. You’re helping a company get sold to a strategic acquirer. In that case, we’re often helping smaller-growth companies sell to larger strategic entities, whether that’s a bigger private equity-backed platform company or a publicly-traded company, that’s typically the profile of an acquirer.

On the buy-side, M&A side of things, we’re hired by those bigger entities to make these usually kind of smaller. I don’t think a 50, $100 million transaction is small, but that is smaller in the grand scheme of investment banking. So we’re working these transactions that are typically a little bit smaller than your middle-market investment banks focus on. Everything that we do is dedicated to health IT. And I should also mention the capital side of those transactions. We’re helping companies raise venture capital growth equity or buyouts with private equity funds. To get to where we are, I think you’ve got to put the past into context.

John Farkas:

Definitely. Because there’s a lot of context along that road, for sure.

Christopher McCord:

And one of the things I’ve always said, we started this company and got it really going in 2007. At the time we’re a small firm, we hadn’t done any deals and it’s really hard to get deals done, engage companies, when you don’t have a track record. So we’re fighting to get that track record in place, and what happens next is the great recession. So we enter into the worst capital markets in, many say, since the Great Depression.

John Farkas:

Yeah, it was kind of [inaudible 00:08:36].

Christopher McCord:

It was much more short-lived.

John Farkas:

Yep.

Christopher McCord:

Yeah, yeah. So I think what that instilled in us as a firm was a tenacity to get transactions done. So we were able to get things done during that time period. And I think that this work is notoriously difficult. It has a reputation for a reason, a reputation that we try to differentiate from, a lot of sharp-elbowed kind of blowhard, if you will, bankers out there. And we really try to be not that, try to be authentic and really focused and dedicated to our clients in a truly passionate kind of way. So that taught us from a macro standpoint, the Great Recession set the table for what occurred in the COVID era, in the lead up to the COVID era.

And there are two things that I think made that a really ideal time for us to start doing what we’re doing in health IT. One was the tenacity that we learned. The second was, if you think about the rebound from the Great Recession in health IT, the HITECH Act. The HITECH Act set the table for where health IT is today. That was basically for those either new to the industry or don’t totally remember, that’s all the meaningful use stuff that drove and promoted EMR adoption.

John Farkas:

Lots of mandates. Yep.

Christopher McCord:

Yeah. Prior to that, you were looking at 80% not EMR adoption and then post meaningful use, you’re at 90, 95%, pushing 100% in acute care environments and pretty much across most care settings. Without capturing digital discrete data, you can’t even begin to leverage the backbone of health IT. So that’s step one from a market standpoint. Step one from a macro standpoint is it began a 10-year cycle where Fed monetary policy was about as expansionary and friendly as it gets. We had 0% interest rates going on eight years, from basically 2010 to 2018. And the cost of capital was next to nothing. So it created this explosion and quantitative-

John Farkas:

Amazing environment.

Christopher McCord:

… easing was another program that the Fed put in place where they’re just pumping money into the system. And I think all of us were looking at it thinking, “How long does this need to go on to recover from the Great Recession?” It really flooded the markets with a lot of capital and it changed the way the companies were valued. And software companies were developing cyclically just because of technological innovation and maturation and adoption while market valuations were really favoring those types of companies. And so we just saw this rising tide of valuations, company valuations, during that 10-year period. And so anybody that was in this world of finance, even housing, anywhere where leverage benefits a business, which is pretty much any business-

John Farkas:

Anybody who’s trying to make growth happen.

Christopher McCord:

… had an incredible tailwind during that period. Coupled with that on the health IT regulatory side was the, I’m going to blank on the exact name, the 21st Century Cures Act, I think it was.

John Farkas:

Yeah.

Christopher McCord:

That was the one that promoted interoperability. So you think about meaningful use, that gets all the information in place, but it’s all siloed at the provider’s site. You put the Cures Act in place, now all of a sudden you get that data moving around and that really lays the foundation for AI because you can’t build AI unless you have massive amounts of data. And so all of the steps that went into place during that decade set the table for where we are today. Then came COVID, and COVID basically took all those trends and just put them on steroids. The stimulus, the monetary policy, and then the investment thesis around health IT checked a lot of boxes. You had telemedicine, virtual care models go explosive. Mental behavioral health became more significantly mainstream.

John Farkas:

Came out of nowhere into some of the most prolific focus that it’s ever had.

Christopher McCord:

Exactly. And every day I’m seeing more mental health companies get funded and I think, “My gosh, how many companies does the market need here?”

John Farkas:

Probably no more-

Christopher McCord:

I know, it’s a huge problem.

John Farkas:

… but that’s something we’re going to talk about.

Christopher McCord:

And then you look at the vaccine process and leveraging technology around drug discovery and drug commercialization and all these kinds of things, clinical trials. And you look at the use case for health IT that was manifested through the COVID cycle and it’s just empowered, significantly. At the same time, the valuations hit euphoric levels along with just the appetite for risk because of the amount of money in the system went crazy. Crypto, NFTs. NFTs, where’s the latest-

John Farkas:

What’s up with that?

Christopher McCord:

… NFT that you’ve seen? So we were due a reality check and we got it with inflation. And, initially viewed to be transitory, the Fed reacted arguably too slowly, which puts us now in the cycle that we’re in today, which is one of the biggest Fed high cycles in terms of magnitude and speed that we’ve seen-

John Farkas:

In 30 years, yeah.

Christopher McCord:

… in a lifetime of anybody that’s really actively in the workforce. So it’s a new era and valuations reset. Capital has tightened. The Fed was pumping money in, now the Fed is pulling money out and all of that tightens the flow and velocity of capital, which constrains most everything. And we’ve seen it almost everywhere except the housing market so far. So we’re in a new era, it doesn’t mean it’s the end of everything. It just means that you have to adapt. And that’s what we’re all trained and ideally thoughtful about doing.

John Farkas:

Yeah, certainly what I’ve seen very clearly, and we’ve talked a lot about that and about this in our realm. When you don’t have to be profitable or you have a really long leash on profit, you can pretend that a lot of things are going to happen. It gives you the opportunity to look at a really long runway and hope that you find the traction that you need. And some of what we’re seeing right now is a combination.

Everything I hear from pretty much every CIO, well it is every CIO I’ve talked to, is “We’ve got to simplify our stack. We can’t afford to have this huge number of point or near point-related solutions that we’re deploying that are part of what happened in the midst of that, ‘Hey, we’re going to practically give you this technology because we want you to use it and we don’t have profit as a motive the way it needs to be in the real world. We’re going to give you these solutions and make it as easy as it can for you to adopt them.’”

And now they’ve run into a challenge and being able to manage all the solutions they have. Add to that budget constraints, add to that profit needing to increase. And so increasing prices on things to help companies be sustainable, it’s made it a really… Consolidation, constraints, reductions, all those things are becoming real realities for these companies right now.

Christopher McCord:

No doubt. And so you’re referring on the provider side of things or it could be-

John Farkas:

For sure.

Christopher McCord:

… the employer, anywhere where they’re looking to do-

John Farkas:

Yeah, anybody that’s trying to look at-

Christopher McCord:

… consolidation.

John Farkas:

That’s right.

Christopher McCord:

And I think what you saw with that relaxation of capital flow over the last few years is a lot of companies were funded that really are almost like some of them were just modules in terms of features.

John Farkas:

They were features.

Christopher McCord:

Yeah. And I guess you could get away with that in that loose environment. And I think now it’s a belt tightening period where we need to correct for that. And it doesn’t mean that everybody’s sunk, it just means that you need to consolidate the market. Where the market is going to be harder to consolidate are those companies that got over their skis in capital and valuations and took that growth-at-all-costs mindset. Do you remember when we used to talk about growth-at-all-costs and the mega companies. It was the user-type model businesses that would say, “Let’s go out and build a network, two-sided networks, growth at all costs. We’ll build a network and we’ll monetize it later.”

Well, that kind of made sense for those types of business models to a point, but then it sort of trickled down to enterprise SaaS companies and it doesn’t really make sense for enterprise SaaS. So for sure there’s belt tightening and now kind of a balanced focus on growth and profitability.

Healthcare Growth Partners’ Approach to Partnerships

John Farkas:

So we jumped a little farther ahead sooner, but let’s rewind a little and bring us into Healthcare Growth Partners and some of your approach because one of the things I like about how you are looking at this is you really see this as a partner endeavor. The word partner kind of filters through not just how you’re set up as an organization, but how you work with the folks you work with. I’d love for you to take us in a little bit to your approach and how you look at relationships.

Christopher McCord:

Yeah. So, we’re in this industry. By definition, we’re an investment bank and when we did our last website back in 2016, I didn’t put the word “investment bank” on there just because I had such a viscerally negative feeling about it. And then I conceded and I thought, “I’ve got to do it because that’s who we are and what we do, and I can’t deny that definition that we fall into.”

But when it comes to all of the other qualitative characteristics of it, I really like to think that we’re the antithesis of an investment bank. I think, as you guys are aware, the industry just has a bit of a tarnished reputation, in that there’s always the treatment of analysts, and “I had it bad, therefore you should have it bad.” Our mindset is, “Okay if it’s bad out there, how do we make it better? How do we work smarter? How do we work efficiently, respect the boundaries of work and life?”

We kind of have this philosophy of we think a career should enable a person rather than define them. And if you get so focused on your career that it becomes who you are, there’s some coolness to that because a career is a very important part of your life, but if it defines you and doesn’t enable you to do the things that you’re otherwise passionate about, then that becomes constraining and self-limiting. So we have this internal philosophy that we try try to live by externally. We’ve closed now 140 transactions, so those early days where I was saying we’re scrapping to put some on the board to establish ourselves, we worked through and then we had very steady, solid inertia ever since then.

That experience is hard to replicate, ane we’ve gained that experience through our more strategic philosophy, which is we’re very disciplined on the number of engagements that we take on. That’s huge. In this world, we find investment banks will spread themselves too thin and they’ll go for batting average. We stay very focused and we try to close almost everything that we take on. So if you go to investment banking websites, you see all the tombstones, there’s selection bias there because what you don’t see are all the tombstones for deals that didn’t close. And so, unfortunately, it doesn’t make that point of reference very transparent.

And then we try to live by the golden rule of advising clients the same way that we would advise ourselves. And in this industry, it’s hard because imagine trying to tell a company who’s thinking about selling what they’re worth. There’s a strong temptation in this line of work to inflate that number, to tell them what they want to hear, to win the business, and we don’t think that does anybody any good in the long run. So we try to be very candid in the advice that we give. There’s no perfect way to value a business. It is an educated guess, at the end of the day, that takes into account a number of different factors.

So we can’t say that we’re right 100% of the time, but we look back on it, we’ve been pretty accurate on assessments. And part of that is we’re very data-driven. We have a proprietary database that we keep and track regularly, and we keep a long-term orientation, too. We’re not focused on having to get deals done, if the right answer is to walk away from a deal, which very much can be the best thing.

That’s the other problem with this model is we’re paid when we close transactions and sometimes, kind of counter to what I was saying before, the right thing to do is to not close a transaction. That’s in the best interest of a client. Which means we walk away with nothing, but our client has a better potential to create more value in the future. If you just do the right thing, in a firm like yours and a firm like ours, you really only have one asset, besides your people, and that’s your reputation.

John Farkas:

Yep.

Christopher McCord:

So from that point of view, I think we couldn’t be more aligned with our clients and the work that we do.

John Farkas:

Yeah, I know that that’s a big reason that, Chris, I feel like you and I resonate well because that’s certainly our approach. I mean, it doesn’t make sense when you’re in a service-related organization and you’re being paid to provide something meaningful, making sure that meaning aligns is really important. It needs to be aligned on all sides, and the moment it’s not… One of our guiding principles is “Same side of the table.” We see ourselves on the same side of the table and any of our clients, and I know that that’s how you’re viewing it in the context of your relationships. It really is building that trust, building that character, that integrity in the context of what we’re doing. It’s so important because that ends up being a big part of why you stay around, at the end of the day. I know that that’s been something I’ve enjoyed about how you’ve looked at it.

Christopher McCord:

I might just piggyback on that and you may feel the same about this, but working with individuals, especially if you’re working with, say, a founder-backed health IT company and helping them with their branding and marketing footprint, it’s so gratifying to work with that level of passion, get to know those kind of people deeply in these complex situations and relationships.

And in our situation, when you’re dealing with an entrepreneur who might be letting go of his company, this might be the biggest wealth event that they ever have in their lifetime. Those two things taken together are insanely emotional and the transaction process itself can be very adversarial for reasons that we often can’t control, and to try to contain those emotions and work through that with a founder, oftentimes it’s a really intense but rewarding process. And I mean, I’ve been so grateful because we’ve worked with people who, through that adversity, they say it builds character, they reveal a character that’s already been built that is just admirable. Those relationships and then the relationships within our team are what really make it worth its while.

John Farkas:

Yeah. I’d be curious if you could walk us into a scenario where you were jumping into a situation where, on the surface really felt fraught and you were able to help, and I know that you can’t get into specifics, but certainly some specific dynamics, where you were not sure how you were going to see the pieces come together and where people were able to find a path to the high road that really enabled something strong to happen as a result. I’m sure that you’ve seen those scenarios and there’s probably a few that stand out. Do you have a dynamic you could talk us through?

Christopher McCord:

I feel like I see pieces of that. Every single deal has just the landmines, whether it’s somebody thinks they’re due a transaction bonus and a key employee thinks they’re due a payday from a transaction. To any of your listeners thinking about a deal, lawyers, selecting a good lawyer is so important. I’ve seen lawyers who take any risk and paint it as a worst-case scenario. And so, calculate a risk. You’re never going to sell a risk, a business and a risk-free transaction. And if you have an expectation as such, then you may as well not even try because it’s just impossible the way agreements are written.

I think that, I probably can just speak to this at a higher level, the bedside manner is really important. And it makes me think about clinicians, too. Because, as I’ve been doing this for a long time, sometimes I find myself having to continue to effort to have the right bedside manner, continue to have the patience in situations where you feel like somebody should just get it or work through an issue.

And you’ve got to think clinicians are in the exact same position and not only compare what we do to that. It really makes you respect and underscore the importance of maintaining patient relationships in situations where you have a lot of relationships that end up being repetitive over time. Not to detract from that, but it makes you think about clinical burnout and all these kinds of things. And just to pivot on that context, I think, as we are all working through our careers and you look at different functional roles, you can appreciate the similarities that others might experience and what they’re going through.

John Farkas:

Yeah, no doubt. Those dynamics and how you navigate it and how you help people through some of those sensitive moments is just such a critical part in that, again, that establishment of trust and the building of that relationship. Because that’s where, like you said, I mean you’re dealing with scenarios where people… This is some of the most tuned events of people’s lives in a lot of cases. We experience that on our anytime we’re dealing with brand work for companies, especially earlier-stage organizations where you’re working on somebody’s baby and the opportunity to help that being, that company, come out the other side of that process in such so much better a framework, so much more effective a condition, and the trust that’s required in that and the process, there’s a lot of dynamics at play and being able to handle that effectively is important.

Christopher McCord:

I can imagine, with the work that you’re doing, I mean it strikes me as very hard to create a brand framework that fits within that internal image that a founder or an executive team may have in their mind about themselves. And maybe that internal image requires some migration-

John Farkas:

Adjustment.

Christopher McCord:

… to something a little bit different in order to be its most effective. And you’ve got to coach them away from that towards something else. And that, I can imagine, is a tricky process to navigate.

John Farkas:

It is, and I’m letting this conversation go this way because it’s pertinent to both of our scenarios. I know you have deals that you’re looking at, and as the conversation moves and migrates and forms and the negotiation back and forth happens, the picture that begins emerging is different than the picture that some of the stakeholders started with and how they thought it was going to roll and the ability in that.

Because I’ll give you an example in our realm. We were working with, and this was a merger, it was an acquisition, but two very similar-sized organizations coming together to create what is a new or better, stronger entity. And our work, as we got in it, we realized the shape of this, and if we brought these two entities together in the context of the shape of the market opportunity, what they needed to form and create ideally was an entity that was a little bit more, from a brand perspective, ideally, to fit the market and reflect who they were needed to be a little bit more aggressive than how they saw themselves.

So the posture, the positioning, ideally, to fit the market and meet the need of the market needed to be a little louder and more aggressive than what they were comfortable with. And ultimately, through the conversation, we ended up pulling back from that because they just couldn’t go there. They weren’t able to see themselves in that light. And I just had a conversation with one of their primary stakeholders at an event where we were meeting and he said, “You know, John, you guys were right. You were right in what you were pushing us toward because we’re in a position now where we’re just not able to assert ourselves at the level that we need to in the market that we’re in.”

And I saw that as a failure on our part because I thought, okay, what I didn’t do is push hard enough and skillful enough a manner to help them get there. I mean, there’s a lot of headwind in it. I mean, there was, but serving them in those scenarios means having some hard conversations and do a good job of spelling out the pros and cons and the eventualities. Those are tricky conversations, and it takes a very skilled, patient, and sensitive hand to navigate those scenarios.

Christopher McCord:

We described so much of what we do as the balance between patience and persistence. And I think what you’re describing is one silo of that when you’re trying to or convince someone to do something.

John Farkas:

It’s about how you navigate the change and making sure that the change that is happening is the change that needs to happen. Nobody likes change. I mean, that’s the reality. It is uncomfortable for everybody in some form or fashion. Some people are a little bit more tuned and able and others it’s just really hard. And understanding how to navigate that, it takes a lot.

Christopher McCord:

Yeah. Yeah. And I think you’re saying you push them harder, and maybe that would’ve been part of it, but keeping it below a point of escalation where it gets emotional. But then also when I hear you talk, I think sometimes people need to come to their own conclusion-

John Farkas:

Yep.

Christopher McCord:

… and you need to make your message heard and then give them a little bit of space to process it. I know that that’s how I can operate. I very much take an approach of sleep on it, for a lot of different things.

An Analysis of the Current Market and Its Horizon

John Farkas:

And what came out of that conversation we had is that we’re probably going to have another conversation at the start of the year about, “Okay, how do we do some of that now?” Because they’re lived the need for it so now maybe they’re going to be ready for it. It’ll be interesting to see.

Let’s take a look at the market we’re in right now. I mean, we’ve got inflation. We’ve seen the job cuts. In the funder realm, we’ve got lots of firms that are writing down portions of their portfolios, especially when we’re looking at the hype over the last three years. Help us into how you’re seeing what’s happening right now in the technology market over the last few years. I mean, we talked about some of this already, but what do you see happening over the next 18 months and how should organizations be anticipating that?

Part of what I’m curious about, too, because I know there’s people listening to this who are in companies that are really staring at some hard pictures right now. That’s going to be the reality. I know there’s companies out here who, despite how you would like to characterize yourself, you are a feature. And your best case scenario right now is going to be figuring out either how to have a really strong partnership or get acquired by a company who can pull your feature into part of their platform. Set some context in how can we be looking at what the next 18 months is likely to see happen here?

Christopher McCord:

This is a weird market that we’re in right now because I think we went from armchair epidemiologists to armchair economists, I feel like, as a population, as we’re watching these changes go on, and all under-educated experts. The market has a lot of cross-currents right now. You look at Q3 GDP was 5.2%, just revised to 5.2%. That’s a crazy strong number. And if anybody told you at the beginning of 2023-

John Farkas:

That that’s where we would be right now?

Christopher McCord:

… that we’d have a Q3 GDP of 5% plus, they’d say, “You’re smoking something.” That was a complete shock, and that’s real economic expansion in the face of-

John Farkas:

A lot of headwind.

Christopher McCord:

… significantly rising rates. At the same time, there’s been a tech recession, no doubt. Tech valuations, I would say for the most part, have almost been halved. I track the NASDAQ, I track the 10-year treasury. The 10-year treasury is kind of my barometer for market performance. And the 10-year treasury has come off of its peak since the Fed meeting and J. Powell’s comments at the beginning of November, pretty significantly, but we’re only back to where we were in September. So we still have a long way to move.

The NASDAQ is pretty close to being within 10% of its all-time high. Its all-time high was around 16,000 something. It’s 14,000 and change right now, so it’s very high. But the NASDAQ is a market cap-weighted index. So the top seven, the magnificent seven, make up 50%, five-zero percent, of the NASDAQ. What you don’t see in the NASDAQ index is all of the carnage.

John Farkas:

It’s all the long tail.

Christopher McCord:

Yeah, huge long tail. And they’ve been just pummeled.

John Farkas:

Yeah, hammered.

Christopher McCord:

So the pummeled side of the NASDAQ is what looks more like that universe of companies that we see in health IT. It’s not the Amazons and the Google Alphabets and the Metas and the like, Nvidias. It’s these growth software companies that are trying to balance cashflow and profitability. And that market has come off the bottom, but this is where the law of percentages comes into play. When you’re a low number to begin with, the percentage looks higher, but you’re still way off from where you used to be.

And so I think the giant question looming for folks in the tech industry is where are valuations going to normalize? And I don’t have a crystal-ball answer to that question. I do think that, for the first time in a long time, like during that 10-year low rate environment, a lot of things look very cheap right now. So in terms of where we’ve been pivoting our business is let’s get on the buy side and help buyers, who are motivated and see opportunity, go out and make some acquisitions in a market where valuations are suppressed and likely to come up over time. Part of the problem with this consolidation concept is a lot of buyers are risk-off. So risk was on-

John Farkas:

They’re not in a hurry to go out and put themselves on the plane.

Christopher McCord:

It’s like you’d think that the capital markets are so smart, but they were just pumping capital to work at these insane valuations in ’20 through ’22, now valuation-

John Farkas:

A lot of those potential buyers are in that equation, right?

Christopher McCord:

Yeah.

John Farkas:

I mean, it’s not like they’re just sitting there flush with cash, ready to spend it.

Christopher McCord:

Yeah. And these private equity-backed platforms are not immune to the interest rate cycle. A lot of them have some degree of floating rate debt.

John Farkas:

Leverage, yeah.

Christopher McCord:

Yeah, a lot of leverage, for sure. And then the floating rate debt and even just the interest expense change over time, unless they’re hedged, which a lot of them are not. So they’re feeling that and that impacts their ability to pay. Their own valuations are more suppressed, their leverage is up in terms of interest. What we need is the meter of risk, which was very, very high post-COVID, very, very low post-inflation, to return to a level that allows more transactions to get done. We’re seeing that. I do believe that we’re seeing indications of that. We track trailing data, which we’ll be posting on our new website we’ll be launching here in a few months.

M&A hit a bottom in around Q2 of this year and it actually has come up pretty nicely from the bottom in terms of the volume of activity that’s occurring out there. Investment continues to decline in terms of the dollars of investment flowing into health IT. That was about 15 billion a year pre-COVID, ran up to 40 billion for a period there, post-COVID, incredible amount of capital.

John Farkas:

Crazy period.

Christopher McCord:

And now it’s sub-15. It’s lower than it was pre-COVID, but it’s not scary lower. It’s not like we’re at some fractional amount to what we were pre-COVID. And the same goes for M&A. It’s just we had such a state of euphoria that where we were versus where we are feels so painful. But I think we all have to detach ourselves from that euphoria just for a [inaudible 00:42:09]

John Farkas:

Well, there was a lot of stuff built in that COVID bubble.

Christopher McCord:

Yes. Yes.

John Farkas:

I mean, that’s the reality. And there was a lot of people hired, there was a lot of investment made and, boy, we would’ve liked for that picture to at least have some semblance of what’s still going on. But it’s not, so people, they got pulled into a really aggressive framing and now they’re having to scale it way back to what’s more reasonable.

Christopher McCord:

We put in our mid-year market report that we think the market will enter a period of what we call… We were comparing it to the stages of grief, which I think is capital market’s participant. We chose that because we were feeling it ourselves. And one of the final stages of grief is acceptance. And what we were grieving is the loss of free money, I think, if you just put it in simple terms. And what we are accepting is that money capital, the cost of capital, is going to return to a more historically normal rate. And so we spent a decade-plus in unsustainable waters and now the market just needs to realize it’s not the end of everything. It just means that we have to be able to function and what is ultimately kind of a normal capital environment.

John Farkas:

Much of my frame of reference is just either the floor at ViVE or the floor at HIMSS, where we’ve got all these companies and, like we said, several of which are…. We’ve got platform companies and we’ve got feature companies. What would you anticipate happening just practically? What is some of the movement that you, in light of where the market sits right now and knowing that it’s starting to loosen up, but what do you anticipate, I know there’s no crystal ball here, but if you were to look at the next 18 months, what is some of the movement that you’re thinking is likely to happen? Just on a practical sense, looking at the number of entities that have been out there, the number of little brands and early-stage companies that are out of runway and not able to get additional funding, what do you think the climate’s going to look like for a lot of them?

Christopher McCord:

Even in the years pre-COVID, we were looking at the amount of funding going in versus the number of exits coming out of health It and felt that there was an accumulation of companies in the market around this kind of feature versus company thread that we’re talking about here. It always felt that there would be a moment of capitulation where you see a wave of companies sell or just go out of business. And what I think history has shown is that it’s a much slower burn and the investors will stand behind these companies and keep them alive.

And one of the things that you’ve seen, and I think Rock Health published this, is the number of unlabeled investment rounds. Normally, a company has a series A, series B, series C. Well, if they’re doing a down-round from their series C, that usually shows up as an unlabeled round. And the share of those, I believe, is over 50% of investment rounds are unlabeled in health IT recently.

John Farkas:

Well, just call it [inaudible 00:45:52].

Christopher McCord:

So that’s that [inaudible 00:45:53] of these companies being kept afloat for longer and they’re hoping to see through to the other side. So the question is what’s on the other side? And I think the other side will hopefully be you need a market where buyers are willing to come back in, and I think that they will. No one’s going to sit on the sidelines forever. And every week, I feel like we’re seeing a few more market benchmark type transactions get done that indicate, hey, there’s a healthier trend share of market activity coming in to the market right now. But in the meantime, those companies need to restructure. They need to get their cost structure under control-

John Farkas:

Under control.

Christopher McCord:

… and allow themselves to be marketable companies on the other side.

John Farkas:

Yeah, I think that that’s going to be an interesting thing to watch because what I know is I know for a fact, from an investor perspective, there’s a lot of dry powder sitting out there right now that-

Christopher McCord:

There is.

John Farkas:

And so, as things start looking like identifiable bargains, where people can look at it and say, “Okay, I really think this is a bargain and I feel comfortable with understanding the value and how this could end up being a favorable,” I do think it’ll end up loosening up increasingly more, because that risk equation will get better.

Christopher McCord:

Yeah, that should come [inaudible 00:47:19]. Not all companies look the same in terms of their profile and how they’re valued. We see companies that are valued based on their revenue because they don’t have enough profit to be valued off of profit. That’s been the hardest class of company for us to value in this market. And that’s the share of companies in the NASDAQ that have been hit the hardest, which is why they’re the hardest to value. Previously, companies might’ve been trading at six to 10 times, more than 10 times revenue. Now, hard to say, still really good companies can trade at 10 times revenue, but it’s a lot fewer. There’s a lot less forgiveness for warts on a business than there was in the capital euphoria period.

On the other hand, though, companies valued based on profit have not significantly changed in value over the recent period. So EBITDA multiples, which is kind of the metric for valuing a company based on profit, are pretty consistent today as they’ve been and should continue to be consistent, going forward. So that set of companies that have been profitable and will continue to be profitable, I think are pretty well sheltered from this whipsaw.

John Farkas:

I know that everybody, in the context of JP Morgan, we heard that there’d be a takeoff sometime in 2023 and it didn’t happen. In your mind, do you think the table’s set for a pretty decent increase in activity, coming into the first quarter?

Christopher McCord:

My industry is maybe eternally optimistic. In what we do, you kind of have to be, but I like to think that we’re realists and I do believe that directionally we’re moving up in terms of where things are right now. I think the Fed has made it pretty clear that they’ve hit their terminal rate. So the direction the rates will take in the next move is down. The question is, when is that going to occur? And it will be dependent on inflation data in the interim. But inflation data is tracking really, really well and globally, too. Euro inflation just came out much, much lower. So it feels like we’re getting a handle on this and there’s more and more pressure out there to cut rates. And that’s a big part of what is going to answer that question that you’re asking.

John Farkas:

Yeah, the minute it comes down.

Christopher McCord:

And so the question is, how quickly does it come down and when does it begin to come down? And I think that will dictate the velocity of transaction activity that you see. That has really made it-

John Farkas:

So that’s a fairly simple equation, then. I mean, that’s one of the big pivot points.

Christopher McCord:

Yeah. And the market tends to react quickly. Look at post-COVID. We were coming off the bottom when people were on lockdowns, looking ahead to what’s going to happen from all of the stimulus. So the market moves cycles ahead of where it is at the present. So even the idea of rates heading lower as we get these inflation data points, PCE, CPI, all the metrics, unemployment wages, all these things that are factors into the calculus around interest rates. As these trickle out in the market, digest them, which they’re continuing to do, in the Fed reaction to them, you’ll see movement. So it doesn’t necessarily have to depend on Fed action alone. So I’m optimistic about ’24. I think there’s also an overhang. What didn’t happen in ’23 will need to happen. You can’t hold companies forever. So there’s a lot of force behind a snap back and activity here as we look ahead. There’s always geopolitics, and we have an election year coming up.

John Farkas:

Yeah, I was going to ask about how you’re seeing the election cycle in all this because-

Christopher McCord:

Sadly, I think the market is more numb to this geopolitical and political conflict, and unless it’s something that really looks like it’s going to escalate and be disruptive, it’s almost become more par for the course. We’ll see how the election picture begins to unfold but so far it’s taken up very little share of the conversation.

The Future of Healthcare Sectors

John Farkas:

So as you’re looking at this next term here, are there companies or sectors that you’re looking at as particularly noteworthy? I mean, there are. I’m curious, your perspective on what those look like and where some of the hot segments are. I’m guessing the letter A and the letter I might have something to do with your answer, but talk about that. What are you seeing as some of the places that are getting attention and are noteworthy?

Christopher McCord:

I mean, you can’t talk about this without talking about AI, obviously. AI has been in the vocabulary for a long time. You had machine learning, data science, it’s different words saying similar things as what AI is now or AI in itself. I mean, we’ve met with so many companies over the years that say they’re using AI and it’s really like a glorified rules engine or something like that. It’s been-

John Farkas:

It’s different. Using AI is different than being an AI company. And I think the market is getting increasingly aware of what that difference is and the anatomy of it. It’s important to know, especially from an investment perspective.

Christopher McCord:

For sure.

John Farkas:

“When you say you’re an AI company, are you just plugging in off the shelf open-source or are you creating real knowledge and understanding and value in the context of what you’re developing?”

Christopher McCord:

So the thing I wonder, I mean a couple of things, a few things related to AI. First of all, what really was the pivotal change here, obviously ChatGPT, but what is ChatGPT? It’s really large-language models, and that is the vertical of AI that I think, in the last 12 months and probably rolling forward here, is where we’re going to be able to harness the most leverage from. And within healthcare, given the magnitude of unstructured data, free texts and all that kind of information that is largely underutilized, it’s going to be an incredibly powerful resource.

Then again, I think AI, to me, is a little bit like the concept of mobile, where you’re not a mobile company, you’re not really an AI company. These are enablement tools to allow you to be the best company that you can be and drive your user engagement and productivity. So we see AI as really being core to any business and if a business is purporting themselves to be an AI company, I almost look at that as a little bit dangerous because I think, what are you actually delivering? Because AI, to me, is not a company, it’s an enablement tool.

John Farkas:

Right. One of the gauges I’m using when I hear companies pulling that forward as part of their value proposition is I’m very quick to ask, “What does that mean? How’s that manifest in your value proposition?” Because it’s important that, first of all, you can’t rely on that as a differentiator anymore because everybody’s doing it.

Christopher McCord:

Yes. Man, the volume of AI deals that we screen through every single day is just off the charts.

John Farkas:

Yeah.

Christopher McCord:

And last thing I’d say about AI, too, is I kind of compare it to maybe autonomous driving, autonomous vehicles, where we’ll get to 80, 90, 95% pretty quickly through it, but that last 5, 10% or whatever it is, is going to be a bit more challenging. And so you think about its use case and augment it through interpretation services or whatever it is, kind of looking over the shoulder of AI. I think it’ll be a nice right hand in the clinical setting, but maybe not. It’s going to be more functional where there’s more room for error, basically.

John Farkas:

Yeah, for sure. Knowing healthcare, as a sector, has outperformed the S&P 500 by a couple of times over the last 30 years, how has this out-performance shaped your perspective on the sector on how resilient and enduring things are going to be, especially around the current market, the market scenario?

Christopher McCord:

Yeah, it’s an enduring sector, for sure. It’s enduringly taking up a larger share of GDP, which helps. And maybe the right answer for it is at some point to take a smaller share of GDP and be more efficient. We’re going to value-based care models. And that’s hard. You think about that politically, to be a smaller share of GDP, to actually shrink a segment of the economy or have it grow at a slower rate than GDP is a really hard thing to pull off. So you can see the underlying challenge there.

We kind of bifurcate the healthcare market in terms of solvers and exploiters. Solvers are those looking for solutions to the benefit of many and exploiters are looking to take advantage of inefficiencies to the benefit of a few, including themselves. And I think the problem is healthcare is a super inefficient market and you have a lot of exploitation that continues to perpetuate rather than solve for these fundamental problems. We think health informatics, and the reason this field is so compelling is it’s-

John Farkas:

It’s exposing things.

Christopher McCord:

Yeah, exactly. That’s a great choice of words. Transparency. If you’re able to capture data and you want to define value, value’s the optimization of cost and quality. You can’t define those metrics without data to get behind.

John Farkas:

Yeah, I’m hoping that the tenure of the exploiters is it’s going to be shrinking here in this next season because the tolerance level is decreasing. And you’re right, I mean, what we’re seeing, from an analysis capability, is it’s just highlighting a lot. We were just sitting with a client the other day that has a solution around medical devices that is definitely highlighting some of the exploitation going on and they’re able to evolve some real transparency that I’m sure has a lot of vendors going, “Oh, no, don’t make that apparent,” because they’re going-

Christopher McCord:

Yeah, I’m optimistic about the next generation and the maybe a little bit more inherent altruism and purpose that they want to have in the work that they do. I’m hoping we see that in multiple industries, obviously healthcare being one of the most important.

Advice on Being Resilient as a HealthTech Company

John Farkas:

So how would you advise health tech companies to prioritize their efforts in this next year to help ensure that they’re resilient and set up to thrive in this next season? What do you see as some of the underscores?

Christopher McCord:

Yeah, I think a lot of fat was built into the system here in recent years. So I think it’s just a matter of looking internally at where they can be more efficient. And that doesn’t necessarily mean headcount reductions. It just might mean are you using vendors or doing things that are really not generating a good return? So almost go back to a zero-based budgeting approach, build it up and look at what you need for what you’re doing and operate from that standpoint. That ties into this cash management side of things. I think the market will. I’m hoping it’s not just full batten down the hatches, go into self-preservation mode. I think there’s a lot of opportunity for growth. Market-wide, so many different niches in healthcare and health IT to chase down that I think, on that front, AI enablement tools, even from kind of a how you’re running your business, there’s a place for that.

And I think trying to leverage technological innovation across the board for your own internal operations is an important thing, bringing on the right team. I think just continued blocking and tackling. In fact, I would almost go so far as to say this self-preservation mindset where a lot of companies had to recoil and some of them need to recoil significantly, you don’t want that to get in the way of running a good business.

And so I think maybe the market hopefully is returning to a more healthy standpoint that I kind of look at this as just run a good business here and the results will follow. And just like we recommend to everybody, don’t build a business to sell it; build a business to build a great company that delivers value to its customers and has a sticky customer and workforce, and the value will be a product of all of that.

John Farkas:

Yeah, that’s clearly a theme that we hear. One of the questions we ask a lot of the health system leaders that we talk with is, what do you want health tech vendors to know as they’re interacting with you? And one of the very clear refrains we hear is, “Don’t come to us talking about your technology. Come showcasing your value. Help us understand how clearly you understand the value that you bring and hold that forward.” Because, at the end of the day, that’s what we have to focus on right now. We don’t have budgets to experiment with.

Any spend we have right now has to be very clearly tied to real value that pushes the numbers in the right direction quickly. We can’t be staring at a multi-year return. It has to be there really fast and we have to understand how you understand it and know that you know it. That’s a very important underscore right now in this market.

Christopher McCord:

I think you hit on something that we say a lot over the years is, the product needs to be good enough. Think about any sort of software company. It’s not necessarily the best software that wins. It’s coupling a good enough software package with a really good go-to-market strategy. And the go-to-market strategy is going to be communication of your value proposition. But to me, and especially in healthcare, it’s going to be picking your lane in the market. This is a giant market and a lot of companies get enamored by total addressable market opportunities in the billions or whatever it might be.

But if you’re just trying to grow, for starters, a 20 million revenue business, pick a lane where there’s going to be the least friction and go for it and serve your customers well. And your TAM expansion will occur more organically as you just continue to drive value and have commercial success. But if you spread yourself too thin across too many different things, that’s where I feel like you’ve got to find the lane first. You might have to do a little bit of market-finding, discovery, but once you find it, I would argue don’t try to be all things to everyone.

John Farkas:

Yeah, that’s interesting.

Christopher McCord:

And especially know the dynamics with Epic and Cerner. I know old pros listening to this, but I can’t stress enough, in almost every single transaction that we do that has exposure to the provider market, when folks are assessing the durability and value of an enterprise, one of the first questions that they’re asking is, “How is this going to last over time in a world dominated, Epic?” And I’ll put Cerner in there, too.

John Farkas:

Well, that’s definitely a good word. I’m curious, and I’m very also aware of our time and we’ve spent some time talking, which is not surprising to me, but I’m curious for you to tell us a little bit about… You guys have a report that you’re putting out on a regular basis that I think has some real value, talking about value. Tell us a little bit about what you guys publish and what people should know about it.

Christopher McCord:

Yeah. We’ve been doing this for years and the report has grown in terms of its content and we’re going to continue to refine it in terms of trying to get information that’s most valuable to folks in the market. It really synthesizes overall market activity that we think is relevant to participants in the health IT market, whether that’s operators of businesses, investors in businesses, and advisors and the whole ecosystem of health IT. And the way we approach it is we ask ourselves, going in, what’s interesting to us and what are we curious about?

And we’ll get some feedback from folks who read the report and try to just answer those questions in a somewhat conversational way. And it’s fueled by a database that we keep where every single day, and I just scrolled through 119 transactions before we got on the line here, where we are populating a database base with every single health IT transaction that, I can’t say everyone that’s current in the market, but virtually all of them.

It keeps a finger on the pulse of the trends of M&A capital investment globally, and this is a way for us to take that giant set of information and make sense of it and share it out to folks so they can have a finger on the pulse of what’s happening. And then, while sharing along with that, are more qualified observations of what we’re seeing and dealing with in the market, with the theme that we’re an investment bank and so we’re speaking to how are the capital markets, the investment markets, the M&A markets, what’s the temperament like in the health IT space?

John Farkas:

And so talk about where people can find that, because I know that there’s going to be some people interested in figuring out where to get a hold of that?

Christopher McCord:

Yeah, I’d point people to our website, hgp.com, Healthcaregrowthpartner.com. Thanks to your-

John Farkas:

And congratulations on having a three-letter domain, dot-com. That’s no small thing.

Christopher McCord:

We picked that up around 2011 or something like that and I do love it, it’s nice. And thanks to you all, we should be launching a new site here and the new site is going to be much more interactive where we’re going to publish some of the headline, what we think is the most interesting data from our database on a monthly real-time basis on the site. So it’ll be much more interactive and fluid in terms of the information flow, and you can sign up for our research on the site. We don’t spam anybody with anything but the research. Just keep it simple and focused and really focus on what people need and want to know.

The Culture and Expectations of Investment Banking

John Farkas:

Awesome. So that’s hgp.com. Take a look at it. There’s a lot of good insight in the context of that and I think that’ll be a good resource for a lot of folks just to get an idea of, okay, what are some of those trends that are clearly emerging? Chris, I’m curious, we talked a little bit about the culture of investment banking or the expectations around the brand, you could say, of investment banking, and I know that you’ve talked about some of how you look at that differently, and there’s an element of code breaking in that you’re doing some things different. Talk about how have you seen that? How are you looking at changing the game and what are you seeing as some of the fruits in that?

Christopher McCord:

Yeah. I think the industry has a bit of a reputation for being self-serving. And like I said at the onset, if you’re motivated by your reputation, then you can be 100% aligned. And it helps to have drivers out there. You can purport to be as altruistic as you want, but if you can find real areas to align interests, then that’s the best way to go about doing things. As I mentioned, internally, we try to create a culture of respect and externally, we try to create a culture of authenticity.

I don’t want that ever to be interpreted that we are soft in the deals that we do. We are extremely tenacious and fight on behalf of our clients. Many of our clients are, especially on the sell side, these are folks who, this is their very first transaction or meaningful transaction, and they don’t have sophisticated operations within their business, so we really have to roll up our sleeves. I find that these deals are almost harder than the bigger deals or the private equity-backed deals because they haven’t had an entity drop down that set of controls.

And so we’ve got to get in there and prepare the business for the rigors of a process, and it’s really fun and rewarding. Especially, I think what our model has done is it helps self-select working with like-minded kind of people. The holy grail for us is working with folks that we have a ton of respect for and really are motivated to drive outcomes for them.

John Farkas:

That’s awesome. Yeah, I mean, when you see things that way, like we talked about earlier, it’s going to help raise the water level for everybody; it’s going to bring everybody to a better level. I just think that it’s a critical perspective to hold. In any of these scenarios where you’re pulling together multiple interests, trying to hold that high line is so important and I really applaud the way you are looking at that. I think it just is a breath of fresh air in a fraught scenario, for sure. To keep abreast of what’s going on in this market, what are some of the channels, some of the conferences, the places that you’re tuned into, Chris, that keep you on it? What are some of the things that you’re listening to?

Christopher McCord:

For ongoing news, my number one is HIStalk. With HIStalk, there’s multiple themes that they’ll publish around general HIStalk, HIS practice, or ambulatory AI. There are interviews. I’m getting probably three or four emails a week from them with a daily news brief or a market-wide news brief and I just think it’s hands-down… We’ve been a sponsor of it and I’m not even saying this because we’re sponsors. We’re sponsors because we love it and we want to support it since I think 2006, since the very beginning. It’s just an awesome source of information, of unfiltered and honest information in the industry. So hats off to them for doing what they’ve done.

I’m going to say a podcast that some people may roll their eyes at, the All-In Podcasts, which is a handful of tech entrepreneurs and private equity professionals just getting together for both economic and political discourse on a regular basis. I find that they’re pretty thoughtful and I think what they do well is they’re thoughtful in their own minds, but they do a good job of synthesizing a lot of the information that’s out there in the market. And that’s one of the challenges these days. It’s just there’s so much information. Those are probably my top two. I enjoy the Scott Galloway podcast, the Pivot podcast, which I listen to pretty regularly as well. I’m sure that one might strike a chord with you all in the marketing world.

John Farkas:

Awesome. Those are definitely good ideas there. I definitely have benefited from HIStalk, for sure, and glad to hear you guys are aligned in that.

Christopher McCord:

Conference-wise, too, health kind of took it over HIMSS these days, so Health ViVE conferences might get out to JP Morgan. A lot of glad-handing a JP Morgan so we’ll see about that. And just go if there’s a purpose, don’t go just to show up. I think the other conferences are just great. You can’t beat a conference and just getting the volume of people in a single space just to say hello, even if you don’t have a super tight agenda.

Closing Thoughts

John Farkas:

Awesome. Well, Chris McCord, I want to appreciate you taking the time today and sharing some of your insight with us. Definitely, check out out hgp.com and what’s going on there. The work that Chris and his team are doing to make meaning in the context of the M&A space is making a difference and helping people into some good interactions that definitely have some challenges associated with it. So I appreciate you and the work you’re doing, I appreciate your willingness to come and join us today on Healthcare Market Matrix. Thanks for taking the time.

Christopher McCord:

John, I really appreciate it. When I first met you, you struck me as someone, like I said, who listens, who’s super thoughtful and I can only imagine, well, I’m experiencing how good you are at what you do. So, happy to be in your ecosystem, and look forward to a long relationship.

John Farkas:

Thanks, Chris. 

 

Outro:

Healthcare Market Matrix is a Ratio original podcast. If you enjoyed today’s episode, then jump over to healthcaremarketmatrix.com and subscribe and we’d really appreciate your support in the form of a five-star rating on your favorite podcast platform. It does make a difference. Also, while you’re there, you can become a part of the Healthcare Market Matrix community, and get access to courses and content that’s created just for you by signing up for Insights Squared, a monthly newsletter dedicated to bringing you the latest health tech marketing insights right to your inbox.

Ratio is an award-winning marketing agency headquartered in the Nashville Tennessee. We operate at the intersection of brand and growth marketing to equip companies with strategies to create meaningful connections with the healthcare market and ultimately drive growth. Want to know more? Go to foratio.com, that’s G-O-R-A-T-I-O.com. And we’ll see you at Noon Central next week for an all-new episode from our team at Ratio Studios. Stay healthy.

All right, as we sign off for the year, we encourage you to stay connected. Follow us on social media, share your thoughts with us, and let us know the topics you would like us to explore in the upcoming year. We’ve got a great network and we can bring a lot to the conversation. Your feedback is really invaluable to us. From all of us here at Ratio, goratio.com, we wish you a joyful holiday season and a healthy and prosperous new year. Thanks for being a part of our community. Until next time, stay informed, stay inspired, and take good care.

Introducing Christopher McCord

John Farkas:

Hello everyone, and welcome back to another episode of Healthcare Market Matrix. I’m your host, John Farkas, and we’ve reached the end of a big year here at Ratio. And today’s episode marks our final installment for 2023. We have had some great conversations over this past year and before we dive into today’s episode, I wanted to take a moment just to say thank you for such a great year. Our listeners and guests have made this podcast a thriving community and your support really means so much to us and I just want to say that we’re grateful.

As we look back at what has transpired over the last 12 months. I have no doubt that 2023 is going to be remembered as a groundbreaking year as AI has really clambered up the stairs to take center stage. And as we’ve learned to contend with things like the changes that the pandemic has hastened, I mean persistent staff shortages, alternative channels of care delivery, and the rise of the healthcare consumer, or should I say, the continued rise of the healthcare consumer. They’re all issues that are being addressed by the companies that we have the privilege of collaborating with every day here at Ratio.

We’ve had the chance to host experts and thought leaders and pioneers throughout the healthcare market matrix. We’ve explored trends and the challenges and the opportunities that we anticipate in 2024. We hope you’ve found these conversations as enlightening as we have. And now as we launch into our final episode for the year, we’re going to take a look at healthcare funding, which I know is on the minds, in one form or another, of many of our listeners. Christopher McCord is going to bring us into some great perspective and some crucial considerations as we move into 2024.

Greetings everyone and welcome to Healthcare Market Matrix. I am excited for our conversation today. Here’s something I know; anyone listening to this podcast likely is very keenly aware of all the movement going on in healthcare technology market right now. We saw historic levels of investment through unprecedented numbers of deals in the last part of 2020 through the first half of 2022, and that has very quickly migrated over the last 18 months to some of the lowest levels in years, and lots of companies right now are running out of runway. Add to that picture what the recent advances in the AI realm are hastening, and we are going to see plenty of change in consolidation over the next 18 months.

Today we are joined by Chris McCord, who has lots of perspective on this landscape. Chris is the managing director of Healthcare Growth Partners and they’re a leading investment and merchant banking advisory firm that are focused in this sector. They’ve closed over $4 billion, over 130 healthcare informatics and digital health transactions and, before Healthcare Growth Partners, Chris worked with the Mercury Fund, which is an early-stage venture capital group, and he also worked at BMG Health, which is a strategic financial advisor serving the healthcare providers sector. Also, with KPMG, where he worked in the technology and corporate finance group. So he’s got some pedigree in this universe. He is an active mentor, he’s a director and investor to emerging companies and is a regular speaker and writer in this realm. So I’d like to welcome Chris to Healthcare Market Matrix. Thanks for joining us, Chris.

Christopher McCord:

Hey, John, it’s great to be here. I really appreciate the opportunity to be on the pod and interact with you. I’ve always enjoyed our conversations. One thing that jumped out when I first met you is you’re one of the best listeners that I know, so it doesn’t surprise me that you have a platform like this.

John Farkas:

Well, I appreciate that and I’m looking forward to the conversation today because perspective is certainly something that is needed in our realm right now. I would love for you to share with our listeners just a little bit about Healthcare Growth Partners and what do you see as different and unique about your approach?

Christopher McCord:

Yeah, I mean, first I’ll comment on some of your preamble of the market here in the last few years. We’re in this healthcare industry, all of us and your listeners, and it’s a market that is notoriously slow, but the markets that you’re describing, the capital markets, the COVID, the run-up to COVID, the peak during COVID, the trough that we’ve been experienced post-COVID has been a whipsaw.

John Farkas:

Yeah, it has.

Christopher McCord:

It’s unlike anything that I’ve experienced before. So if you take that and you roll it back to when we started Healthcare Growth Partners, I say we because I had a partner who I co-founded the firm with back in about 2006.

John Farkas:

That’s kind of why it’s called Healthcare Growth Partners?

Christopher McCord:

His name is Jon Phillips. He’s been a mentor to me and really helped me grow within the company. We started the firm back in 2006. We’re an investment bank, as you said. We focus exclusively on health IT and health tech-enabled services companies. An investment bank is a big word; I think it’s a bigger word for what we actually do. We’re advising companies on mergers and acquisitions and capital transactions. So mergers and acquisitions typically means one of two things. You’re helping a company get sold to a strategic acquirer. In that case, we’re often helping smaller-growth companies sell to larger strategic entities, whether that’s a bigger private equity-backed platform company or a publicly-traded company, that’s typically the profile of an acquirer.

On the buy-side, M&A side of things, we’re hired by those bigger entities to make these usually kind of smaller. I don’t think a 50, $100 million transaction is small, but that is smaller in the grand scheme of investment banking. So we’re working these transactions that are typically a little bit smaller than your middle-market investment banks focus on. Everything that we do is dedicated to health IT. And I should also mention the capital side of those transactions. We’re helping companies raise venture capital growth equity or buyouts with private equity funds. To get to where we are, I think you’ve got to put the past into context.

John Farkas:

Definitely. Because there’s a lot of context along that road, for sure.

Christopher McCord:

And one of the things I’ve always said, we started this company and got it really going in 2007. At the time we’re a small firm, we hadn’t done any deals and it’s really hard to get deals done, engage companies, when you don’t have a track record. So we’re fighting to get that track record in place, and what happens next is the great recession. So we enter into the worst capital markets in, many say, since the Great Depression.

John Farkas:

Yeah, it was kind of [inaudible 00:08:36].

Christopher McCord:

It was much more short-lived.

John Farkas:

Yep.

Christopher McCord:

Yeah, yeah. So I think what that instilled in us as a firm was a tenacity to get transactions done. So we were able to get things done during that time period. And I think that this work is notoriously difficult. It has a reputation for a reason, a reputation that we try to differentiate from, a lot of sharp-elbowed kind of blowhard, if you will, bankers out there. And we really try to be not that, try to be authentic and really focused and dedicated to our clients in a truly passionate kind of way. So that taught us from a macro standpoint, the Great Recession set the table for what occurred in the COVID era, in the lead up to the COVID era.

And there are two things that I think made that a really ideal time for us to start doing what we’re doing in health IT. One was the tenacity that we learned. The second was, if you think about the rebound from the Great Recession in health IT, the HITECH Act. The HITECH Act set the table for where health IT is today. That was basically for those either new to the industry or don’t totally remember, that’s all the meaningful use stuff that drove and promoted EMR adoption.

John Farkas:

Lots of mandates. Yep.

Christopher McCord:

Yeah. Prior to that, you were looking at 80% not EMR adoption and then post meaningful use, you’re at 90, 95%, pushing 100% in acute care environments and pretty much across most care settings. Without capturing digital discrete data, you can’t even begin to leverage the backbone of health IT. So that’s step one from a market standpoint. Step one from a macro standpoint is it began a 10-year cycle where Fed monetary policy was about as expansionary and friendly as it gets. We had 0% interest rates going on eight years, from basically 2010 to 2018. And the cost of capital was next to nothing. So it created this explosion and quantitative-

John Farkas:

Amazing environment.

Christopher McCord:

… easing was another program that the Fed put in place where they’re just pumping money into the system. And I think all of us were looking at it thinking, “How long does this need to go on to recover from the Great Recession?” It really flooded the markets with a lot of capital and it changed the way the companies were valued. And software companies were developing cyclically just because of technological innovation and maturation and adoption while market valuations were really favoring those types of companies. And so we just saw this rising tide of valuations, company valuations, during that 10-year period. And so anybody that was in this world of finance, even housing, anywhere where leverage benefits a business, which is pretty much any business-

John Farkas:

Anybody who’s trying to make growth happen.

Christopher McCord:

… had an incredible tailwind during that period. Coupled with that on the health IT regulatory side was the, I’m going to blank on the exact name, the 21st Century Cures Act, I think it was.

John Farkas:

Yeah.

Christopher McCord:

That was the one that promoted interoperability. So you think about meaningful use, that gets all the information in place, but it’s all siloed at the provider’s site. You put the Cures Act in place, now all of a sudden you get that data moving around and that really lays the foundation for AI because you can’t build AI unless you have massive amounts of data. And so all of the steps that went into place during that decade set the table for where we are today. Then came COVID, and COVID basically took all those trends and just put them on steroids. The stimulus, the monetary policy, and then the investment thesis around health IT checked a lot of boxes. You had telemedicine, virtual care models go explosive. Mental behavioral health became more significantly mainstream.

John Farkas:

Came out of nowhere into some of the most prolific focus that it’s ever had.

Christopher McCord:

Exactly. And every day I’m seeing more mental health companies get funded and I think, “My gosh, how many companies does the market need here?”

John Farkas:

Probably no more-

Christopher McCord:

I know, it’s a huge problem.

John Farkas:

… but that’s something we’re going to talk about.

Christopher McCord:

And then you look at the vaccine process and leveraging technology around drug discovery and drug commercialization and all these kinds of things, clinical trials. And you look at the use case for health IT that was manifested through the COVID cycle and it’s just empowered, significantly. At the same time, the valuations hit euphoric levels along with just the appetite for risk because of the amount of money in the system went crazy. Crypto, NFTs. NFTs, where’s the latest-

John Farkas:

What’s up with that?

Christopher McCord:

… NFT that you’ve seen? So we were due a reality check and we got it with inflation. And, initially viewed to be transitory, the Fed reacted arguably too slowly, which puts us now in the cycle that we’re in today, which is one of the biggest Fed high cycles in terms of magnitude and speed that we’ve seen-

John Farkas:

In 30 years, yeah.

Christopher McCord:

… in a lifetime of anybody that’s really actively in the workforce. So it’s a new era and valuations reset. Capital has tightened. The Fed was pumping money in, now the Fed is pulling money out and all of that tightens the flow and velocity of capital, which constrains most everything. And we’ve seen it almost everywhere except the housing market so far. So we’re in a new era, it doesn’t mean it’s the end of everything. It just means that you have to adapt. And that’s what we’re all trained and ideally thoughtful about doing.

John Farkas:

Yeah, certainly what I’ve seen very clearly, and we’ve talked a lot about that and about this in our realm. When you don’t have to be profitable or you have a really long leash on profit, you can pretend that a lot of things are going to happen. It gives you the opportunity to look at a really long runway and hope that you find the traction that you need. And some of what we’re seeing right now is a combination.

Everything I hear from pretty much every CIO, well it is every CIO I’ve talked to, is “We’ve got to simplify our stack. We can’t afford to have this huge number of point or near point-related solutions that we’re deploying that are part of what happened in the midst of that, ‘Hey, we’re going to practically give you this technology because we want you to use it and we don’t have profit as a motive the way it needs to be in the real world. We’re going to give you these solutions and make it as easy as it can for you to adopt them.’”

And now they’ve run into a challenge and being able to manage all the solutions they have. Add to that budget constraints, add to that profit needing to increase. And so increasing prices on things to help companies be sustainable, it’s made it a really… Consolidation, constraints, reductions, all those things are becoming real realities for these companies right now.

Christopher McCord:

No doubt. And so you’re referring on the provider side of things or it could be-

John Farkas:

For sure.

Christopher McCord:

… the employer, anywhere where they’re looking to do-

John Farkas:

Yeah, anybody that’s trying to look at-

Christopher McCord:

… consolidation.

John Farkas:

That’s right.

Christopher McCord:

And I think what you saw with that relaxation of capital flow over the last few years is a lot of companies were funded that really are almost like some of them were just modules in terms of features.

John Farkas:

They were features.

Christopher McCord:

Yeah. And I guess you could get away with that in that loose environment. And I think now it’s a belt tightening period where we need to correct for that. And it doesn’t mean that everybody’s sunk, it just means that you need to consolidate the market. Where the market is going to be harder to consolidate are those companies that got over their skis in capital and valuations and took that growth-at-all-costs mindset. Do you remember when we used to talk about growth-at-all-costs and the mega companies. It was the user-type model businesses that would say, “Let’s go out and build a network, two-sided networks, growth at all costs. We’ll build a network and we’ll monetize it later.”

Well, that kind of made sense for those types of business models to a point, but then it sort of trickled down to enterprise SaaS companies and it doesn’t really make sense for enterprise SaaS. So for sure there’s belt tightening and now kind of a balanced focus on growth and profitability.

Healthcare Growth Partners’ Approach to Partnerships

John Farkas:

So we jumped a little farther ahead sooner, but let’s rewind a little and bring us into Healthcare Growth Partners and some of your approach because one of the things I like about how you are looking at this is you really see this as a partner endeavor. The word partner kind of filters through not just how you’re set up as an organization, but how you work with the folks you work with. I’d love for you to take us in a little bit to your approach and how you look at relationships.

Christopher McCord:

Yeah. So, we’re in this industry. By definition, we’re an investment bank and when we did our last website back in 2016, I didn’t put the word “investment bank” on there just because I had such a viscerally negative feeling about it. And then I conceded and I thought, “I’ve got to do it because that’s who we are and what we do, and I can’t deny that definition that we fall into.”

But when it comes to all of the other qualitative characteristics of it, I really like to think that we’re the antithesis of an investment bank. I think, as you guys are aware, the industry just has a bit of a tarnished reputation, in that there’s always the treatment of analysts, and “I had it bad, therefore you should have it bad.” Our mindset is, “Okay if it’s bad out there, how do we make it better? How do we work smarter? How do we work efficiently, respect the boundaries of work and life?”

We kind of have this philosophy of we think a career should enable a person rather than define them. And if you get so focused on your career that it becomes who you are, there’s some coolness to that because a career is a very important part of your life, but if it defines you and doesn’t enable you to do the things that you’re otherwise passionate about, then that becomes constraining and self-limiting. So we have this internal philosophy that we try try to live by externally. We’ve closed now 140 transactions, so those early days where I was saying we’re scrapping to put some on the board to establish ourselves, we worked through and then we had very steady, solid inertia ever since then.

That experience is hard to replicate, ane we’ve gained that experience through our more strategic philosophy, which is we’re very disciplined on the number of engagements that we take on. That’s huge. In this world, we find investment banks will spread themselves too thin and they’ll go for batting average. We stay very focused and we try to close almost everything that we take on. So if you go to investment banking websites, you see all the tombstones, there’s selection bias there because what you don’t see are all the tombstones for deals that didn’t close. And so, unfortunately, it doesn’t make that point of reference very transparent.

And then we try to live by the golden rule of advising clients the same way that we would advise ourselves. And in this industry, it’s hard because imagine trying to tell a company who’s thinking about selling what they’re worth. There’s a strong temptation in this line of work to inflate that number, to tell them what they want to hear, to win the business, and we don’t think that does anybody any good in the long run. So we try to be very candid in the advice that we give. There’s no perfect way to value a business. It is an educated guess, at the end of the day, that takes into account a number of different factors.

So we can’t say that we’re right 100% of the time, but we look back on it, we’ve been pretty accurate on assessments. And part of that is we’re very data-driven. We have a proprietary database that we keep and track regularly, and we keep a long-term orientation, too. We’re not focused on having to get deals done, if the right answer is to walk away from a deal, which very much can be the best thing.

That’s the other problem with this model is we’re paid when we close transactions and sometimes, kind of counter to what I was saying before, the right thing to do is to not close a transaction. That’s in the best interest of a client. Which means we walk away with nothing, but our client has a better potential to create more value in the future. If you just do the right thing, in a firm like yours and a firm like ours, you really only have one asset, besides your people, and that’s your reputation.

John Farkas:

Yep.

Christopher McCord:

So from that point of view, I think we couldn’t be more aligned with our clients and the work that we do.

John Farkas:

Yeah, I know that that’s a big reason that, Chris, I feel like you and I resonate well because that’s certainly our approach. I mean, it doesn’t make sense when you’re in a service-related organization and you’re being paid to provide something meaningful, making sure that meaning aligns is really important. It needs to be aligned on all sides, and the moment it’s not… One of our guiding principles is “Same side of the table.” We see ourselves on the same side of the table and any of our clients, and I know that that’s how you’re viewing it in the context of your relationships. It really is building that trust, building that character, that integrity in the context of what we’re doing. It’s so important because that ends up being a big part of why you stay around, at the end of the day. I know that that’s been something I’ve enjoyed about how you’ve looked at it.

Christopher McCord:

I might just piggyback on that and you may feel the same about this, but working with individuals, especially if you’re working with, say, a founder-backed health IT company and helping them with their branding and marketing footprint, it’s so gratifying to work with that level of passion, get to know those kind of people deeply in these complex situations and relationships.

And in our situation, when you’re dealing with an entrepreneur who might be letting go of his company, this might be the biggest wealth event that they ever have in their lifetime. Those two things taken together are insanely emotional and the transaction process itself can be very adversarial for reasons that we often can’t control, and to try to contain those emotions and work through that with a founder, oftentimes it’s a really intense but rewarding process. And I mean, I’ve been so grateful because we’ve worked with people who, through that adversity, they say it builds character, they reveal a character that’s already been built that is just admirable. Those relationships and then the relationships within our team are what really make it worth its while.

John Farkas:

Yeah. I’d be curious if you could walk us into a scenario where you were jumping into a situation where, on the surface really felt fraught and you were able to help, and I know that you can’t get into specifics, but certainly some specific dynamics, where you were not sure how you were going to see the pieces come together and where people were able to find a path to the high road that really enabled something strong to happen as a result. I’m sure that you’ve seen those scenarios and there’s probably a few that stand out. Do you have a dynamic you could talk us through?

Christopher McCord:

I feel like I see pieces of that. Every single deal has just the landmines, whether it’s somebody thinks they’re due a transaction bonus and a key employee thinks they’re due a payday from a transaction. To any of your listeners thinking about a deal, lawyers, selecting a good lawyer is so important. I’ve seen lawyers who take any risk and paint it as a worst-case scenario. And so, calculate a risk. You’re never going to sell a risk, a business and a risk-free transaction. And if you have an expectation as such, then you may as well not even try because it’s just impossible the way agreements are written.

I think that, I probably can just speak to this at a higher level, the bedside manner is really important. And it makes me think about clinicians, too. Because, as I’ve been doing this for a long time, sometimes I find myself having to continue to effort to have the right bedside manner, continue to have the patience in situations where you feel like somebody should just get it or work through an issue.

And you’ve got to think clinicians are in the exact same position and not only compare what we do to that. It really makes you respect and underscore the importance of maintaining patient relationships in situations where you have a lot of relationships that end up being repetitive over time. Not to detract from that, but it makes you think about clinical burnout and all these kinds of things. And just to pivot on that context, I think, as we are all working through our careers and you look at different functional roles, you can appreciate the similarities that others might experience and what they’re going through.

John Farkas:

Yeah, no doubt. Those dynamics and how you navigate it and how you help people through some of those sensitive moments is just such a critical part in that, again, that establishment of trust and the building of that relationship. Because that’s where, like you said, I mean you’re dealing with scenarios where people… This is some of the most tuned events of people’s lives in a lot of cases. We experience that on our anytime we’re dealing with brand work for companies, especially earlier-stage organizations where you’re working on somebody’s baby and the opportunity to help that being, that company, come out the other side of that process in such so much better a framework, so much more effective a condition, and the trust that’s required in that and the process, there’s a lot of dynamics at play and being able to handle that effectively is important.

Christopher McCord:

I can imagine, with the work that you’re doing, I mean it strikes me as very hard to create a brand framework that fits within that internal image that a founder or an executive team may have in their mind about themselves. And maybe that internal image requires some migration-

John Farkas:

Adjustment.

Christopher McCord:

… to something a little bit different in order to be its most effective. And you’ve got to coach them away from that towards something else. And that, I can imagine, is a tricky process to navigate.

John Farkas:

It is, and I’m letting this conversation go this way because it’s pertinent to both of our scenarios. I know you have deals that you’re looking at, and as the conversation moves and migrates and forms and the negotiation back and forth happens, the picture that begins emerging is different than the picture that some of the stakeholders started with and how they thought it was going to roll and the ability in that.

Because I’ll give you an example in our realm. We were working with, and this was a merger, it was an acquisition, but two very similar-sized organizations coming together to create what is a new or better, stronger entity. And our work, as we got in it, we realized the shape of this, and if we brought these two entities together in the context of the shape of the market opportunity, what they needed to form and create ideally was an entity that was a little bit more, from a brand perspective, ideally, to fit the market and reflect who they were needed to be a little bit more aggressive than how they saw themselves.

So the posture, the positioning, ideally, to fit the market and meet the need of the market needed to be a little louder and more aggressive than what they were comfortable with. And ultimately, through the conversation, we ended up pulling back from that because they just couldn’t go there. They weren’t able to see themselves in that light. And I just had a conversation with one of their primary stakeholders at an event where we were meeting and he said, “You know, John, you guys were right. You were right in what you were pushing us toward because we’re in a position now where we’re just not able to assert ourselves at the level that we need to in the market that we’re in.”

And I saw that as a failure on our part because I thought, okay, what I didn’t do is push hard enough and skillful enough a manner to help them get there. I mean, there’s a lot of headwind in it. I mean, there was, but serving them in those scenarios means having some hard conversations and do a good job of spelling out the pros and cons and the eventualities. Those are tricky conversations, and it takes a very skilled, patient, and sensitive hand to navigate those scenarios.

Christopher McCord:

We described so much of what we do as the balance between patience and persistence. And I think what you’re describing is one silo of that when you’re trying to or convince someone to do something.

John Farkas:

It’s about how you navigate the change and making sure that the change that is happening is the change that needs to happen. Nobody likes change. I mean, that’s the reality. It is uncomfortable for everybody in some form or fashion. Some people are a little bit more tuned and able and others it’s just really hard. And understanding how to navigate that, it takes a lot.

Christopher McCord:

Yeah. Yeah. And I think you’re saying you push them harder, and maybe that would’ve been part of it, but keeping it below a point of escalation where it gets emotional. But then also when I hear you talk, I think sometimes people need to come to their own conclusion-

John Farkas:

Yep.

Christopher McCord:

… and you need to make your message heard and then give them a little bit of space to process it. I know that that’s how I can operate. I very much take an approach of sleep on it, for a lot of different things.

An Analysis of the Current Market and Its Horizon

John Farkas:

And what came out of that conversation we had is that we’re probably going to have another conversation at the start of the year about, “Okay, how do we do some of that now?” Because they’re lived the need for it so now maybe they’re going to be ready for it. It’ll be interesting to see.

Let’s take a look at the market we’re in right now. I mean, we’ve got inflation. We’ve seen the job cuts. In the funder realm, we’ve got lots of firms that are writing down portions of their portfolios, especially when we’re looking at the hype over the last three years. Help us into how you’re seeing what’s happening right now in the technology market over the last few years. I mean, we talked about some of this already, but what do you see happening over the next 18 months and how should organizations be anticipating that?

Part of what I’m curious about, too, because I know there’s people listening to this who are in companies that are really staring at some hard pictures right now. That’s going to be the reality. I know there’s companies out here who, despite how you would like to characterize yourself, you are a feature. And your best case scenario right now is going to be figuring out either how to have a really strong partnership or get acquired by a company who can pull your feature into part of their platform. Set some context in how can we be looking at what the next 18 months is likely to see happen here?

Christopher McCord:

This is a weird market that we’re in right now because I think we went from armchair epidemiologists to armchair economists, I feel like, as a population, as we’re watching these changes go on, and all under-educated experts. The market has a lot of cross-currents right now. You look at Q3 GDP was 5.2%, just revised to 5.2%. That’s a crazy strong number. And if anybody told you at the beginning of 2023-

John Farkas:

That that’s where we would be right now?

Christopher McCord:

… that we’d have a Q3 GDP of 5% plus, they’d say, “You’re smoking something.” That was a complete shock, and that’s real economic expansion in the face of-

John Farkas:

A lot of headwind.

Christopher McCord:

… significantly rising rates. At the same time, there’s been a tech recession, no doubt. Tech valuations, I would say for the most part, have almost been halved. I track the NASDAQ, I track the 10-year treasury. The 10-year treasury is kind of my barometer for market performance. And the 10-year treasury has come off of its peak since the Fed meeting and J. Powell’s comments at the beginning of November, pretty significantly, but we’re only back to where we were in September. So we still have a long way to move.

The NASDAQ is pretty close to being within 10% of its all-time high. Its all-time high was around 16,000 something. It’s 14,000 and change right now, so it’s very high. But the NASDAQ is a market cap-weighted index. So the top seven, the magnificent seven, make up 50%, five-zero percent, of the NASDAQ. What you don’t see in the NASDAQ index is all of the carnage.

John Farkas:

It’s all the long tail.

Christopher McCord:

Yeah, huge long tail. And they’ve been just pummeled.

John Farkas:

Yeah, hammered.

Christopher McCord:

So the pummeled side of the NASDAQ is what looks more like that universe of companies that we see in health IT. It’s not the Amazons and the Google Alphabets and the Metas and the like, Nvidias. It’s these growth software companies that are trying to balance cashflow and profitability. And that market has come off the bottom, but this is where the law of percentages comes into play. When you’re a low number to begin with, the percentage looks higher, but you’re still way off from where you used to be.

And so I think the giant question looming for folks in the tech industry is where are valuations going to normalize? And I don’t have a crystal-ball answer to that question. I do think that, for the first time in a long time, like during that 10-year low rate environment, a lot of things look very cheap right now. So in terms of where we’ve been pivoting our business is let’s get on the buy side and help buyers, who are motivated and see opportunity, go out and make some acquisitions in a market where valuations are suppressed and likely to come up over time. Part of the problem with this consolidation concept is a lot of buyers are risk-off. So risk was on-

John Farkas:

They’re not in a hurry to go out and put themselves on the plane.

Christopher McCord:

It’s like you’d think that the capital markets are so smart, but they were just pumping capital to work at these insane valuations in ’20 through ’22, now valuation-

John Farkas:

A lot of those potential buyers are in that equation, right?

Christopher McCord:

Yeah.

John Farkas:

I mean, it’s not like they’re just sitting there flush with cash, ready to spend it.

Christopher McCord:

Yeah. And these private equity-backed platforms are not immune to the interest rate cycle. A lot of them have some degree of floating rate debt.

John Farkas:

Leverage, yeah.

Christopher McCord:

Yeah, a lot of leverage, for sure. And then the floating rate debt and even just the interest expense change over time, unless they’re hedged, which a lot of them are not. So they’re feeling that and that impacts their ability to pay. Their own valuations are more suppressed, their leverage is up in terms of interest. What we need is the meter of risk, which was very, very high post-COVID, very, very low post-inflation, to return to a level that allows more transactions to get done. We’re seeing that. I do believe that we’re seeing indications of that. We track trailing data, which we’ll be posting on our new website we’ll be launching here in a few months.

M&A hit a bottom in around Q2 of this year and it actually has come up pretty nicely from the bottom in terms of the volume of activity that’s occurring out there. Investment continues to decline in terms of the dollars of investment flowing into health IT. That was about 15 billion a year pre-COVID, ran up to 40 billion for a period there, post-COVID, incredible amount of capital.

John Farkas:

Crazy period.

Christopher McCord:

And now it’s sub-15. It’s lower than it was pre-COVID, but it’s not scary lower. It’s not like we’re at some fractional amount to what we were pre-COVID. And the same goes for M&A. It’s just we had such a state of euphoria that where we were versus where we are feels so painful. But I think we all have to detach ourselves from that euphoria just for a [inaudible 00:42:09]

John Farkas:

Well, there was a lot of stuff built in that COVID bubble.

Christopher McCord:

Yes. Yes.

John Farkas:

I mean, that’s the reality. And there was a lot of people hired, there was a lot of investment made and, boy, we would’ve liked for that picture to at least have some semblance of what’s still going on. But it’s not, so people, they got pulled into a really aggressive framing and now they’re having to scale it way back to what’s more reasonable.

Christopher McCord:

We put in our mid-year market report that we think the market will enter a period of what we call… We were comparing it to the stages of grief, which I think is capital market’s participant. We chose that because we were feeling it ourselves. And one of the final stages of grief is acceptance. And what we were grieving is the loss of free money, I think, if you just put it in simple terms. And what we are accepting is that money capital, the cost of capital, is going to return to a more historically normal rate. And so we spent a decade-plus in unsustainable waters and now the market just needs to realize it’s not the end of everything. It just means that we have to be able to function and what is ultimately kind of a normal capital environment.

John Farkas:

Much of my frame of reference is just either the floor at ViVE or the floor at HIMSS, where we’ve got all these companies and, like we said, several of which are…. We’ve got platform companies and we’ve got feature companies. What would you anticipate happening just practically? What is some of the movement that you, in light of where the market sits right now and knowing that it’s starting to loosen up, but what do you anticipate, I know there’s no crystal ball here, but if you were to look at the next 18 months, what is some of the movement that you’re thinking is likely to happen? Just on a practical sense, looking at the number of entities that have been out there, the number of little brands and early-stage companies that are out of runway and not able to get additional funding, what do you think the climate’s going to look like for a lot of them?

Christopher McCord:

Even in the years pre-COVID, we were looking at the amount of funding going in versus the number of exits coming out of health It and felt that there was an accumulation of companies in the market around this kind of feature versus company thread that we’re talking about here. It always felt that there would be a moment of capitulation where you see a wave of companies sell or just go out of business. And what I think history has shown is that it’s a much slower burn and the investors will stand behind these companies and keep them alive.

And one of the things that you’ve seen, and I think Rock Health published this, is the number of unlabeled investment rounds. Normally, a company has a series A, series B, series C. Well, if they’re doing a down-round from their series C, that usually shows up as an unlabeled round. And the share of those, I believe, is over 50% of investment rounds are unlabeled in health IT recently.

John Farkas:

Well, just call it [inaudible 00:45:52].

Christopher McCord:

So that’s that [inaudible 00:45:53] of these companies being kept afloat for longer and they’re hoping to see through to the other side. So the question is what’s on the other side? And I think the other side will hopefully be you need a market where buyers are willing to come back in, and I think that they will. No one’s going to sit on the sidelines forever. And every week, I feel like we’re seeing a few more market benchmark type transactions get done that indicate, hey, there’s a healthier trend share of market activity coming in to the market right now. But in the meantime, those companies need to restructure. They need to get their cost structure under control-

John Farkas:

Under control.

Christopher McCord:

… and allow themselves to be marketable companies on the other side.

John Farkas:

Yeah, I think that that’s going to be an interesting thing to watch because what I know is I know for a fact, from an investor perspective, there’s a lot of dry powder sitting out there right now that-

Christopher McCord:

There is.

John Farkas:

And so, as things start looking like identifiable bargains, where people can look at it and say, “Okay, I really think this is a bargain and I feel comfortable with understanding the value and how this could end up being a favorable,” I do think it’ll end up loosening up increasingly more, because that risk equation will get better.

Christopher McCord:

Yeah, that should come [inaudible 00:47:19]. Not all companies look the same in terms of their profile and how they’re valued. We see companies that are valued based on their revenue because they don’t have enough profit to be valued off of profit. That’s been the hardest class of company for us to value in this market. And that’s the share of companies in the NASDAQ that have been hit the hardest, which is why they’re the hardest to value. Previously, companies might’ve been trading at six to 10 times, more than 10 times revenue. Now, hard to say, still really good companies can trade at 10 times revenue, but it’s a lot fewer. There’s a lot less forgiveness for warts on a business than there was in the capital euphoria period.

On the other hand, though, companies valued based on profit have not significantly changed in value over the recent period. So EBITDA multiples, which is kind of the metric for valuing a company based on profit, are pretty consistent today as they’ve been and should continue to be consistent, going forward. So that set of companies that have been profitable and will continue to be profitable, I think are pretty well sheltered from this whipsaw.

John Farkas:

I know that everybody, in the context of JP Morgan, we heard that there’d be a takeoff sometime in 2023 and it didn’t happen. In your mind, do you think the table’s set for a pretty decent increase in activity, coming into the first quarter?

Christopher McCord:

My industry is maybe eternally optimistic. In what we do, you kind of have to be, but I like to think that we’re realists and I do believe that directionally we’re moving up in terms of where things are right now. I think the Fed has made it pretty clear that they’ve hit their terminal rate. So the direction the rates will take in the next move is down. The question is, when is that going to occur? And it will be dependent on inflation data in the interim. But inflation data is tracking really, really well and globally, too. Euro inflation just came out much, much lower. So it feels like we’re getting a handle on this and there’s more and more pressure out there to cut rates. And that’s a big part of what is going to answer that question that you’re asking.

John Farkas:

Yeah, the minute it comes down.

Christopher McCord:

And so the question is, how quickly does it come down and when does it begin to come down? And I think that will dictate the velocity of transaction activity that you see. That has really made it-

John Farkas:

So that’s a fairly simple equation, then. I mean, that’s one of the big pivot points.

Christopher McCord:

Yeah. And the market tends to react quickly. Look at post-COVID. We were coming off the bottom when people were on lockdowns, looking ahead to what’s going to happen from all of the stimulus. So the market moves cycles ahead of where it is at the present. So even the idea of rates heading lower as we get these inflation data points, PCE, CPI, all the metrics, unemployment wages, all these things that are factors into the calculus around interest rates. As these trickle out in the market, digest them, which they’re continuing to do, in the Fed reaction to them, you’ll see movement. So it doesn’t necessarily have to depend on Fed action alone. So I’m optimistic about ’24. I think there’s also an overhang. What didn’t happen in ’23 will need to happen. You can’t hold companies forever. So there’s a lot of force behind a snap back and activity here as we look ahead. There’s always geopolitics, and we have an election year coming up.

John Farkas:

Yeah, I was going to ask about how you’re seeing the election cycle in all this because-

Christopher McCord:

Sadly, I think the market is more numb to this geopolitical and political conflict, and unless it’s something that really looks like it’s going to escalate and be disruptive, it’s almost become more par for the course. We’ll see how the election picture begins to unfold but so far it’s taken up very little share of the conversation.

The Future of Healthcare Sectors

John Farkas:

So as you’re looking at this next term here, are there companies or sectors that you’re looking at as particularly noteworthy? I mean, there are. I’m curious, your perspective on what those look like and where some of the hot segments are. I’m guessing the letter A and the letter I might have something to do with your answer, but talk about that. What are you seeing as some of the places that are getting attention and are noteworthy?

Christopher McCord:

I mean, you can’t talk about this without talking about AI, obviously. AI has been in the vocabulary for a long time. You had machine learning, data science, it’s different words saying similar things as what AI is now or AI in itself. I mean, we’ve met with so many companies over the years that say they’re using AI and it’s really like a glorified rules engine or something like that. It’s been-

John Farkas:

It’s different. Using AI is different than being an AI company. And I think the market is getting increasingly aware of what that difference is and the anatomy of it. It’s important to know, especially from an investment perspective.

Christopher McCord:

For sure.

John Farkas:

“When you say you’re an AI company, are you just plugging in off the shelf open-source or are you creating real knowledge and understanding and value in the context of what you’re developing?”

Christopher McCord:

So the thing I wonder, I mean a couple of things, a few things related to AI. First of all, what really was the pivotal change here, obviously ChatGPT, but what is ChatGPT? It’s really large-language models, and that is the vertical of AI that I think, in the last 12 months and probably rolling forward here, is where we’re going to be able to harness the most leverage from. And within healthcare, given the magnitude of unstructured data, free texts and all that kind of information that is largely underutilized, it’s going to be an incredibly powerful resource.

Then again, I think AI, to me, is a little bit like the concept of mobile, where you’re not a mobile company, you’re not really an AI company. These are enablement tools to allow you to be the best company that you can be and drive your user engagement and productivity. So we see AI as really being core to any business and if a business is purporting themselves to be an AI company, I almost look at that as a little bit dangerous because I think, what are you actually delivering? Because AI, to me, is not a company, it’s an enablement tool.

John Farkas:

Right. One of the gauges I’m using when I hear companies pulling that forward as part of their value proposition is I’m very quick to ask, “What does that mean? How’s that manifest in your value proposition?” Because it’s important that, first of all, you can’t rely on that as a differentiator anymore because everybody’s doing it.

Christopher McCord:

Yes. Man, the volume of AI deals that we screen through every single day is just off the charts.

John Farkas:

Yeah.

Christopher McCord:

And last thing I’d say about AI, too, is I kind of compare it to maybe autonomous driving, autonomous vehicles, where we’ll get to 80, 90, 95% pretty quickly through it, but that last 5, 10% or whatever it is, is going to be a bit more challenging. And so you think about its use case and augment it through interpretation services or whatever it is, kind of looking over the shoulder of AI. I think it’ll be a nice right hand in the clinical setting, but maybe not. It’s going to be more functional where there’s more room for error, basically.

John Farkas:

Yeah, for sure. Knowing healthcare, as a sector, has outperformed the S&P 500 by a couple of times over the last 30 years, how has this out-performance shaped your perspective on the sector on how resilient and enduring things are going to be, especially around the current market, the market scenario?

Christopher McCord:

Yeah, it’s an enduring sector, for sure. It’s enduringly taking up a larger share of GDP, which helps. And maybe the right answer for it is at some point to take a smaller share of GDP and be more efficient. We’re going to value-based care models. And that’s hard. You think about that politically, to be a smaller share of GDP, to actually shrink a segment of the economy or have it grow at a slower rate than GDP is a really hard thing to pull off. So you can see the underlying challenge there.

We kind of bifurcate the healthcare market in terms of solvers and exploiters. Solvers are those looking for solutions to the benefit of many and exploiters are looking to take advantage of inefficiencies to the benefit of a few, including themselves. And I think the problem is healthcare is a super inefficient market and you have a lot of exploitation that continues to perpetuate rather than solve for these fundamental problems. We think health informatics, and the reason this field is so compelling is it’s-

John Farkas:

It’s exposing things.

Christopher McCord:

Yeah, exactly. That’s a great choice of words. Transparency. If you’re able to capture data and you want to define value, value’s the optimization of cost and quality. You can’t define those metrics without data to get behind.

John Farkas:

Yeah, I’m hoping that the tenure of the exploiters is it’s going to be shrinking here in this next season because the tolerance level is decreasing. And you’re right, I mean, what we’re seeing, from an analysis capability, is it’s just highlighting a lot. We were just sitting with a client the other day that has a solution around medical devices that is definitely highlighting some of the exploitation going on and they’re able to evolve some real transparency that I’m sure has a lot of vendors going, “Oh, no, don’t make that apparent,” because they’re going-

Christopher McCord:

Yeah, I’m optimistic about the next generation and the maybe a little bit more inherent altruism and purpose that they want to have in the work that they do. I’m hoping we see that in multiple industries, obviously healthcare being one of the most important.

Advice on Being Resilient as a HealthTech Company

John Farkas:

So how would you advise health tech companies to prioritize their efforts in this next year to help ensure that they’re resilient and set up to thrive in this next season? What do you see as some of the underscores?

Christopher McCord:

Yeah, I think a lot of fat was built into the system here in recent years. So I think it’s just a matter of looking internally at where they can be more efficient. And that doesn’t necessarily mean headcount reductions. It just might mean are you using vendors or doing things that are really not generating a good return? So almost go back to a zero-based budgeting approach, build it up and look at what you need for what you’re doing and operate from that standpoint. That ties into this cash management side of things. I think the market will. I’m hoping it’s not just full batten down the hatches, go into self-preservation mode. I think there’s a lot of opportunity for growth. Market-wide, so many different niches in healthcare and health IT to chase down that I think, on that front, AI enablement tools, even from kind of a how you’re running your business, there’s a place for that.

And I think trying to leverage technological innovation across the board for your own internal operations is an important thing, bringing on the right team. I think just continued blocking and tackling. In fact, I would almost go so far as to say this self-preservation mindset where a lot of companies had to recoil and some of them need to recoil significantly, you don’t want that to get in the way of running a good business.

And so I think maybe the market hopefully is returning to a more healthy standpoint that I kind of look at this as just run a good business here and the results will follow. And just like we recommend to everybody, don’t build a business to sell it; build a business to build a great company that delivers value to its customers and has a sticky customer and workforce, and the value will be a product of all of that.

John Farkas:

Yeah, that’s clearly a theme that we hear. One of the questions we ask a lot of the health system leaders that we talk with is, what do you want health tech vendors to know as they’re interacting with you? And one of the very clear refrains we hear is, “Don’t come to us talking about your technology. Come showcasing your value. Help us understand how clearly you understand the value that you bring and hold that forward.” Because, at the end of the day, that’s what we have to focus on right now. We don’t have budgets to experiment with.

Any spend we have right now has to be very clearly tied to real value that pushes the numbers in the right direction quickly. We can’t be staring at a multi-year return. It has to be there really fast and we have to understand how you understand it and know that you know it. That’s a very important underscore right now in this market.

Christopher McCord:

I think you hit on something that we say a lot over the years is, the product needs to be good enough. Think about any sort of software company. It’s not necessarily the best software that wins. It’s coupling a good enough software package with a really good go-to-market strategy. And the go-to-market strategy is going to be communication of your value proposition. But to me, and especially in healthcare, it’s going to be picking your lane in the market. This is a giant market and a lot of companies get enamored by total addressable market opportunities in the billions or whatever it might be.

But if you’re just trying to grow, for starters, a 20 million revenue business, pick a lane where there’s going to be the least friction and go for it and serve your customers well. And your TAM expansion will occur more organically as you just continue to drive value and have commercial success. But if you spread yourself too thin across too many different things, that’s where I feel like you’ve got to find the lane first. You might have to do a little bit of market-finding, discovery, but once you find it, I would argue don’t try to be all things to everyone.

John Farkas:

Yeah, that’s interesting.

Christopher McCord:

And especially know the dynamics with Epic and Cerner. I know old pros listening to this, but I can’t stress enough, in almost every single transaction that we do that has exposure to the provider market, when folks are assessing the durability and value of an enterprise, one of the first questions that they’re asking is, “How is this going to last over time in a world dominated, Epic?” And I’ll put Cerner in there, too.

John Farkas:

Well, that’s definitely a good word. I’m curious, and I’m very also aware of our time and we’ve spent some time talking, which is not surprising to me, but I’m curious for you to tell us a little bit about… You guys have a report that you’re putting out on a regular basis that I think has some real value, talking about value. Tell us a little bit about what you guys publish and what people should know about it.

Christopher McCord:

Yeah. We’ve been doing this for years and the report has grown in terms of its content and we’re going to continue to refine it in terms of trying to get information that’s most valuable to folks in the market. It really synthesizes overall market activity that we think is relevant to participants in the health IT market, whether that’s operators of businesses, investors in businesses, and advisors and the whole ecosystem of health IT. And the way we approach it is we ask ourselves, going in, what’s interesting to us and what are we curious about?

And we’ll get some feedback from folks who read the report and try to just answer those questions in a somewhat conversational way. And it’s fueled by a database that we keep where every single day, and I just scrolled through 119 transactions before we got on the line here, where we are populating a database base with every single health IT transaction that, I can’t say everyone that’s current in the market, but virtually all of them.

It keeps a finger on the pulse of the trends of M&A capital investment globally, and this is a way for us to take that giant set of information and make sense of it and share it out to folks so they can have a finger on the pulse of what’s happening. And then, while sharing along with that, are more qualified observations of what we’re seeing and dealing with in the market, with the theme that we’re an investment bank and so we’re speaking to how are the capital markets, the investment markets, the M&A markets, what’s the temperament like in the health IT space?

John Farkas:

And so talk about where people can find that, because I know that there’s going to be some people interested in figuring out where to get a hold of that?

Christopher McCord:

Yeah, I’d point people to our website, hgp.com, Healthcaregrowthpartner.com. Thanks to your-

John Farkas:

And congratulations on having a three-letter domain, dot-com. That’s no small thing.

Christopher McCord:

We picked that up around 2011 or something like that and I do love it, it’s nice. And thanks to you all, we should be launching a new site here and the new site is going to be much more interactive where we’re going to publish some of the headline, what we think is the most interesting data from our database on a monthly real-time basis on the site. So it’ll be much more interactive and fluid in terms of the information flow, and you can sign up for our research on the site. We don’t spam anybody with anything but the research. Just keep it simple and focused and really focus on what people need and want to know.

The Culture and Expectations of Investment Banking

John Farkas:

Awesome. So that’s hgp.com. Take a look at it. There’s a lot of good insight in the context of that and I think that’ll be a good resource for a lot of folks just to get an idea of, okay, what are some of those trends that are clearly emerging? Chris, I’m curious, we talked a little bit about the culture of investment banking or the expectations around the brand, you could say, of investment banking, and I know that you’ve talked about some of how you look at that differently, and there’s an element of code breaking in that you’re doing some things different. Talk about how have you seen that? How are you looking at changing the game and what are you seeing as some of the fruits in that?

Christopher McCord:

Yeah. I think the industry has a bit of a reputation for being self-serving. And like I said at the onset, if you’re motivated by your reputation, then you can be 100% aligned. And it helps to have drivers out there. You can purport to be as altruistic as you want, but if you can find real areas to align interests, then that’s the best way to go about doing things. As I mentioned, internally, we try to create a culture of respect and externally, we try to create a culture of authenticity.

I don’t want that ever to be interpreted that we are soft in the deals that we do. We are extremely tenacious and fight on behalf of our clients. Many of our clients are, especially on the sell side, these are folks who, this is their very first transaction or meaningful transaction, and they don’t have sophisticated operations within their business, so we really have to roll up our sleeves. I find that these deals are almost harder than the bigger deals or the private equity-backed deals because they haven’t had an entity drop down that set of controls.

And so we’ve got to get in there and prepare the business for the rigors of a process, and it’s really fun and rewarding. Especially, I think what our model has done is it helps self-select working with like-minded kind of people. The holy grail for us is working with folks that we have a ton of respect for and really are motivated to drive outcomes for them.

John Farkas:

That’s awesome. Yeah, I mean, when you see things that way, like we talked about earlier, it’s going to help raise the water level for everybody; it’s going to bring everybody to a better level. I just think that it’s a critical perspective to hold. In any of these scenarios where you’re pulling together multiple interests, trying to hold that high line is so important and I really applaud the way you are looking at that. I think it just is a breath of fresh air in a fraught scenario, for sure. To keep abreast of what’s going on in this market, what are some of the channels, some of the conferences, the places that you’re tuned into, Chris, that keep you on it? What are some of the things that you’re listening to?

Christopher McCord:

For ongoing news, my number one is HIStalk. With HIStalk, there’s multiple themes that they’ll publish around general HIStalk, HIS practice, or ambulatory AI. There are interviews. I’m getting probably three or four emails a week from them with a daily news brief or a market-wide news brief and I just think it’s hands-down… We’ve been a sponsor of it and I’m not even saying this because we’re sponsors. We’re sponsors because we love it and we want to support it since I think 2006, since the very beginning. It’s just an awesome source of information, of unfiltered and honest information in the industry. So hats off to them for doing what they’ve done.

I’m going to say a podcast that some people may roll their eyes at, the All-In Podcasts, which is a handful of tech entrepreneurs and private equity professionals just getting together for both economic and political discourse on a regular basis. I find that they’re pretty thoughtful and I think what they do well is they’re thoughtful in their own minds, but they do a good job of synthesizing a lot of the information that’s out there in the market. And that’s one of the challenges these days. It’s just there’s so much information. Those are probably my top two. I enjoy the Scott Galloway podcast, the Pivot podcast, which I listen to pretty regularly as well. I’m sure that one might strike a chord with you all in the marketing world.

John Farkas:

Awesome. Those are definitely good ideas there. I definitely have benefited from HIStalk, for sure, and glad to hear you guys are aligned in that.

Christopher McCord:

Conference-wise, too, health kind of took it over HIMSS these days, so Health ViVE conferences might get out to JP Morgan. A lot of glad-handing a JP Morgan so we’ll see about that. And just go if there’s a purpose, don’t go just to show up. I think the other conferences are just great. You can’t beat a conference and just getting the volume of people in a single space just to say hello, even if you don’t have a super tight agenda.

Closing Thoughts

John Farkas:

Awesome. Well, Chris McCord, I want to appreciate you taking the time today and sharing some of your insight with us. Definitely, check out out hgp.com and what’s going on there. The work that Chris and his team are doing to make meaning in the context of the M&A space is making a difference and helping people into some good interactions that definitely have some challenges associated with it. So I appreciate you and the work you’re doing, I appreciate your willingness to come and join us today on Healthcare Market Matrix. Thanks for taking the time.

Christopher McCord:

John, I really appreciate it. When I first met you, you struck me as someone, like I said, who listens, who’s super thoughtful and I can only imagine, well, I’m experiencing how good you are at what you do. So, happy to be in your ecosystem, and look forward to a long relationship.

John Farkas:

Thanks, Chris. 

 

Outro:

Healthcare Market Matrix is a Ratio original podcast. If you enjoyed today’s episode, then jump over to healthcaremarketmatrix.com and subscribe and we’d really appreciate your support in the form of a five-star rating on your favorite podcast platform. It does make a difference. Also, while you’re there, you can become a part of the Healthcare Market Matrix community, and get access to courses and content that’s created just for you by signing up for Insights Squared, a monthly newsletter dedicated to bringing you the latest health tech marketing insights right to your inbox.

Ratio is an award-winning marketing agency headquartered in the Nashville Tennessee. We operate at the intersection of brand and growth marketing to equip companies with strategies to create meaningful connections with the healthcare market and ultimately drive growth. Want to know more? Go to foratio.com, that’s G-O-R-A-T-I-O.com. And we’ll see you at Noon Central next week for an all-new episode from our team at Ratio Studios. Stay healthy.

All right, as we sign off for the year, we encourage you to stay connected. Follow us on social media, share your thoughts with us, and let us know the topics you would like us to explore in the upcoming year. We’ve got a great network and we can bring a lot to the conversation. Your feedback is really invaluable to us. From all of us here at Ratio, goratio.com, we wish you a joyful holiday season and a healthy and prosperous new year. Thanks for being a part of our community. Until next time, stay informed, stay inspired, and take good care.