The M&A Matchmaking in VC Portfolios
A merger in the works between two struggling startups, online pharmacy Truepill and health test provider LetsGetChecked, signals a growing trend in an era of tough financing: deals between companies that share major shareholders.
Dublin-based LetsGetChecked has offered to buy California-based Truepill for $500 million in stock and $25 million in cash, according to merger documents sent by Truepill CEO Paul Greenall to investors.
The venture capital arm of UnitedHealth Group, the biggest health insurance firm in the U.S., and its affiliates are “significant stockholders” of the soon-to-be-merged startups, according to private merger documents.
These kinds of deals aren’t unusual but happen more frequently when funding and business strains mount, as venture capitalists try to minimize losses by consolidating two bets that could end up leading to a better outcome.
One early-stage venture capitalist, Masha Bucher of Day One Ventures, told me she’s actively trying to get the firm’s portfolio companies to merge to increase their chances of survival and fund returns.
“If you can merge two to three companies outside the 40 companies that aren’t going to be your fund returners but get a chance to get another fund returner by merging them, you should do it,” she said. “They get more capital if they merge, more energy in the founding team, hopefully higher chances of getting funded.”
We saw this phenomenon a few years ago when fast-delivery firms were faltering. In particular, Mubadala Investment Co., the United Arab Emirates sovereign wealth fund, encouraged merger discussions between delivery startups Flink and Getir, we reported early last year. A sale never happened, though merger talks resurfaced this year, Bloomberg reported.
Details of the Truepill takeover show one path startups can end up taking after they make the bruising valuation adjustments known as down rounds.
Last year Truepill raised an additional round of capital that reduced the value of early investors’ shares by more than 90%, known as a cram down, resulting in a new valuation of about $540 million. The financing essentially wiped out some early investors, as I reported last year. This new acquisition offer—first reported by Axios—values the shares at a range of prices similar to the ones in that offering.
UnitedHealth Plans
There’s another wrinkle: It turns out UnitedHealth has had its eyes on Truepill for a while. In 2021, UnitedHealth tried to buy the startup for $1.6 billion, according to a person who saw proposed merger documents from that time. The conversations lasted several months, and Truepill’s board voted in favor of the acquisition, but it ultimately fell through.
Instead, one of UnitedHealth’s affiliates offered a term sheet to invest in Truepill’s Series D round, according to the same person. When the funding round later came together, Optum Ventures—UnitedHealth’s VC arm—also put money into the round, the person said.
Investors responded by offering term sheets of their own, leading to a 2021 round that valued Truepill at $1.6 billion. Given the valuation drop since then, UnitedHealth dodged at least some pain by not acquiring the company outright when it had the chance. (Optum and Truepill did not respond to requests for comment.)
These deals tend to involve inherent conflicts of interest. Larry Renfro, managing partner of Optum Ventures and former CEO of UnitedHealth’s health services platform Optum, is on the board of both startups, according to the documents.
Renfro recused himself from voting and negotiations on the takeover, the documents say. But some investors privately griped that his recusal was just symbolic.
Truepill was clearly struggling and needed to do something. The nine-year-old startup had raised more than $300 million from investors including healthcare specialist Oak HC/FT, Initialized Capital and Y Combinator. It benefited from a swell of consumer demand for online pharmacies such as Hims and GoodRx, shipping drugs on their behalf.
But rising competition, high costs and federal drug agency charges over its business supplying Adderall prescriptions to telehealth firm Cerebral hurt the business after the 2021 capital raise.
Last year, co-founder Sid Viswanathan stepped down as Truepill CEO, following co-founder Umar Afridi out the door. The startup tried to stem losses with at least two rounds of layoffs.
Still, the company was burning about $4 million a month as of April while generating about $20 million in revenue a month, documents sent to investors show.
In March, the company started hunting for buyers, hiring boutique bankers MTS Health Partners to shop it around. The bankers approached 17 potential buyers; 15 declined. The Truepill board then picked LetsGetChecked’s offer over that of another unnamed party.
The Irish buyer looks like it’s in even more wobbly shape than Truepill. As of May, it was burning about $8 million in cash a month on monthly revenue of about $6.6 million. In fact, as part of the deal, LetsGetChecked is taking out $150 million in debt that can convert to equity.
Together the startups just got an extended lease on life.