The slow medtech IPO (Initial Public Offering) market in 2023 is having a significant impact on venture capital investments in the medical technology (medtech) sector. For purposes of this post, we include therapeutics and digital health in the broad term “medtech.”
According to Evaluate Medtech, there were exactly zero IPOs in the space in the first half of the year and In the first half of this year and just 42 medtech acquisitions were closed, for a total spend of $13.1B. Unless the second half picks up the pace, 2023 will see the lowest spend for a decade, and the fewest deals since Evaluate Medtech began tracking the sector. We will distinguish here between biotech and medtech since there were actually 6 IPOs in biotech in the first half of the year, but this is tracking to be the worst year in the past 6 years.
Here are some ways in which a dormant IPO market can influence venture capital investments:
Reduced Exit Opportunities: Venture capitalists invest with the expectation of eventually exiting their investments, either through IPOs or acquisitions. A slow IPO market means fewer opportunities for portfolio companies to go public, potentially extending the time to exit. This can lead to VC funds being tied up for longer periods, affecting their ability to allocate capital to new startups.
Valuation Concerns: When the IPO market is slow, investors may become more cautious about valuations for medtech startups. They may be less willing to invest at high valuations, which can affect the amount of funding available to early-stage companies.
Risk Aversion: A dormant IPO market can lead to increased risk aversion among venture capitalists. They may be more conservative in their investment decisions, focusing on companies with proven track records and near-term revenue generation potential rather than earlier-stage, high-risk startups.
Extended Funding Rounds: Startups in the medtech sector may need to raise larger funding rounds to sustain their operations while waiting for IPO opportunities to improve. This can result in longer and more complex fundraising processes, as well as potential dilution for existing investors.
Market Sentiment: Investor sentiment and perception of the overall medtech sector can be influenced by the performance of IPOs. A slow IPO market can lead to negative sentiment, making it challenging for startups to attract capital even if their technologies have strong potential. You can see this reflected in a lot of the industry press coverage.
Shifting Investment Focus: In a slow IPO market, venture capitalists may shift their investment focus to other sectors or industries that offer more attractive exit opportunities. This can divert capital away from the medtech sector, impacting its growth and overall appetite for risk/innovation.
It’s important to note that the medtech sector, like any other, can be influenced by various factors beyond the IPO market, such as technological advancements, regulatory changes, and global health trends. However, the state of the IPO market can serve as a barometer of investor confidence and risk appetite, which in turn can have a ripple effect on venture capital investments in the medtech space.
It’s also important to remember that everything in the markets is cyclical. There is no need to get caught up in the emotional response to short term trends. Rather, investors should usually be buying when others are holding. This advice from Warren Buffett is as applicable to private investments as it is to public investments. Take a long term perspective which means measuring in years, not months or quarters.