Livongo's former CFO gets real on today's digital health market

Some have called it a bubble - but Lee Shapiro has reasons to remain bullish.

(Shapiro, R, with former Livongo CEO Glen Tullman, L. Credit: NASDAQ.)

When Livongo merged with Teladoc in the summer of 2020 for $18.5 billion, it was a major moment for digital health. Before that happened, there weren’t many examples of runaway success stories in the space. There were a few notable IPOs and exits, to be sure, but nothing that put the sector on the map in such a big way.

One of the key execs behind all that was Lee Shapiro, the company’s longtime Chief Financial Officer. Shapiro, who had joined the company from AllScripts, offered up a different kind of story than Wall Street had heard before. As he put it in our interview, it meant introducing investors to the idea that the antiquated healthcare system would finally get its “Internet moment.”

These days, Shapiro is an investor with 7wire Ventures based in Chicago. And he sits on many a private company board, but still keens a close eye on the Public Markets. For Second Opinion, my OMERS Ventures colleague Marissa Schlueter interviewed him about the digital health gold rush (companies banked a record breaking $29.1 billion last year), his predictions for the space and tips for founders/CFOs.

Her interview with Shapiro below, edited and condensed for brevity.

MS: “Can you talk about lessons learned you’ve had as a CFO at companies like Livongo? What new challenges do digital health CFOs face today and how is the role of a digital health CFO changing (either private or public)?”

LS: “I was really fortunate to have served as CFO of Livongo. The finance and accounting team were awesome – and, honestly, without their dedication and support we couldn’t have orchestrated an IPO, secondary offering, $550M convertible debt offering and an $18.5B merger all in over 12 months.

• Lesson #1 – it’s always about the team. 

• Lesson #2 – You are not your stock price. Once we went public, I would share this advice with the Company every quarter. We experienced a time pocket in 2019 after the IPO where market sentiment shifted and the stock price fell from its IPO level – but by late Spring 2020, the stock was in favor again.

Today, digital health CFOs are also faced with a market shift in valuations.  Public market revenue multiples have come down and this will certainly translate into the private markets as well. We’ve had a dialogue with our 7wire Portfolio companies about cash management. Where possible, they should plan for a cash runway of 18 months – 2 years until this market turbulence settles out. CFOs will also be called on to clearly outline a path to profitability. By partnering with the CEO and the rest of the executive team, the CFO can help set expectations with investors. Communication is critical in times of uncertainty.”

MS: “How should digital health startups be thinking about CFO hiring? When is the best time to do it (vs. using fractional CFO) – does this environment change that timeline?”

LS: “You must have a strong foundation when building any company. At an early stage, it’s important to have an accounting team that can produce rock-solid documentation and processes. This is important to have reliable books and records, with appropriately classified transactions and revenue recognition. An experienced controller can perform this function prior to bringing on a dedicated CFO.  Without this in place, you'll be scrambling in your C and D rounds. At later stages, investors need to be able to look at historical data, knowing that it can be relied upon without the necessity for future adjustments. The next critical element is to add who has experience in FP&A [financial planning & analysis] to prepare projections and to support your business leaders with the insights to operate and grow the business, to improve top-line and overall margin. Once your company moves into later stage capital raises, you need a dedicated CFO. 

You can get by for the first year or so without a dedicated CFO - and use a service to keep your books. But as you accelerate into your second or, certainly third year, you want to have that CFO in place.”

MS: “Any thoughts on the public market sell off -- is this overdone? Is this warranted? If there's something the street is missing, what is it and what could digital health execs be communicating more effectively?”

LS: “Some of it is overblown. We've seen shifts in sentiment before, primarily with the move from growth to value. That's happening here. A demonstrable path to profitability is taking center stage with investors. Investors don’t like uncertainty and there is plenty of that right now with tensions in Ukraine and the expectation of the Fed raising rates. However, when you see a number of public companies trading at a value less than cash on their balance sheet, there is clearly a disconnect (or a bargain purchase opportunity).

Executives faced with this situation need to highlight the long-term potential of their business and look to expand the narrative they are relaying with investors, media and the industry at large.  If you are serving an important need, with a meaningful share of the market, the sentiment around your shares will change with time. For example, the toothpaste is out of the tube when it comes to telehealth. In light of the convenience telehealth offers to consumers, the challenges of accessing a provider (and a shortage of professionals), telehealth will remain an important part of how care is delivered.”

Editors note from MS: "In my view, three stocks that stand out as potentially undervalued here are Oscar Health, Amwell, and Bright Health Group. Compared to other US-listed health tech shares, these companies’ shares exhibit massive disconnects between their relative cash balance and market cap/cash balance ratio ranks. OSCR, AMWL, and BHG shares rank in the bottom decile of all US-listed health tech shares on a market cap/cash balance basis but in the top decile when it comes to cash balance. Said differently, they have some of the largest cash balances but are disproportionately being valued for not much more than those balances. For these reasons, these companies could be active acquirers and may also be prime targets for HFs looking for value in the public markets.”

MS: “What do you think are the most pressing priorities for startups -- let's say mid-stage startups -- that want to project and then execute on a playbook for growth?”

LS: “Digital health CFOs are driving a growth playbook.  We joke at 7wireVentures that we rarely see a set of projections in a pitch deck that doesn’t go up and to the right.  At the mid-stage in a business life cycle, the CFO has to help the business define where its best opportunities lay. Too many companies suffer from the ‘Shiny Object Syndrome’.  It’s what I saw when I coached 5-year-olds in micro-soccer. Everyone is running where the ball is going and not playing their position. For example, companies may be expanding in too many markets at once. Rare is the mid-stage digital health company that can build in the U.S. and International markets at the same time. The same is true for attacking different Go-To-Market channels, DTC and B2B, at the same time. Growth is good, so pick your market and be really strong there – use it as a springboard for further growth. This is a time to CFOs to be looking at their company’s growth strategy and saying ‘do we believe we have the same prospects in all the markets we serve or is there a way to refine our approach to improve our chances of success?’”

MS: “How about talent in digital health? Are you seeing great engineers, designers and other employees flock to the space or leave it because of the public market uncertainties?”

LS: “The great resignation is real in digital health. So many people are switching jobs right now. We’re hearing anecdotally from other start-ups that recently hired someone but after a number of months, the employee was lured away with a huge signing bonus or doubling of their equity. The growth in our sector has led to a shortage of talented people.”

MS: “On the M&A environment: what's your outlook on it? I have strong conviction that there will be a lot of activity but what I'd love to know from your POV is where it will come from and who will be doing the acquiring. Mostly tech giants? Health giants? Retail? Or a lot of startup-startup consolidation? Said differently, what's the most capital efficient way of pursuing M&A today in a way that rewards both the companies and shareholders in the long-run?”

LS: “There's going to be continued growth in M&A in our sector. For example, last year over $5B was invested in the mental health vertical. And the trend has continued into 2022 with the $235M round announced by Lyra in January.  However, there were also many dollars targeted to dozens of early-stage companies. The digital health market, mental health included, has a number of companies that are subscale. Many have revenue below $10M; many more less than $50M. These companies will need to merge with others in order to create scaled operations and add offerings to meet customer needs. Health plan buyers, for one, are looking for vendors who can address a number of common challenges, as opposed to dealing with multiple small companies.”

Here’s a few thoughts:

o   I could see Ginger/Headspace and Lyra being acquirers in the mental health market

o   Thirty Madison (evidenced by its merger with Nurx) showed the importance of having recognized brands in the consumer-facing market

o   Public companies with undervalued share prices will hesitate using stock for mergers – but will use their cash to bolster top line revenues and expand Total Addressable Market for their companies. This can also help them change investor perception about their business prospects. 

o   There will be an opportunity for companies that have a virtual-only model to merge with brick & mortar companies and grow an omnichannel brand. Walgreens has made significant investments in VillageMD and CareCentrix. Virtual care delivery could be next.

MS: “Do you feel investors should be slowing down their pace of investment now or speeding up bc correction could be coming?”

LS: “I suggest we watch what hedge funds are doing - we've had recent dialogue with some who are redirecting their attention to the public markets (and away from private market investing) because there are bargains to be had in the public markets. There are good companies with long-term growth potential that will get attention from such investors e.g., companies in our sector that are trading below the value of the cash on their balance sheets. And with that there will be a rotation by hedge funds out of areas that have traditionally been the province of venture investors. At 7wireVentures, we are bullish on the digital health market – and for us, accelerating our pace of investment in early stage companies with great founders who are addressing the challenges we all face as consumers of healthcare.”

We’ve got a lot more coming this year from Second Opinion including a deep dive into the Digital Health “tech stack.” We always welcome ideas for interviews or topics you’d love for us to cover so reach out anytime to @MSchlueterMoore or @ChrissyFarr on Twitter.

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