🔒Recent spate of startup mergers highlights growth of CT’s innovation ecosystem, raises concerns about long-term job growth

A number of high-profile Connecticut startups have been acquired in recent months, raising some concerns about their future growth in the state, especially with new influences from out-of-state owners.

But beyond the jobs concerns, business experts and boosters say the deals offer proof that Connecticut is cultivating a strong innovation ecosystem that could hopefully yield more successful startups in the future.

Connecticut has long sought to grow its network of startup companies, some of which have gained national recognition for the products and services they provide. However, success typically breeds attention from outside investors.

Farmington medtech startup Diameter Health announced in August it was being acquired by national real-time health information network, Availity. The deal, terms of which weren’t disclosed, closed Aug. 26.

Biorez, a New Haven-based medical technology company, also announced last month it had entered into an agreement to be purchased for an undisclosed sum by Florida-based CONMED Corp.

Glastonbury-based digital payments company Payrailz recently closed a deal to be acquired by Missouri’s publicly traded financial technology firm Jack Henry & Associates Inc.

“On one side of the coin, people can get nervous around mergers and acquisitions because it can signal that perhaps companies aren’t staying where they were started, and sometimes that’s the case,” said Michelle Cote, director of Launc[H]artford, an organization focused on building up Hartford’s startup ecosystem. “But I actually think that acquisition activity in particular, is one of the best signs for the overall health and maturation of a startup ecosystem that you can get. Because what it really means is that the startups that are being built in our state and in our communities have enough market potential and are attractive enough to other industry leaders.”

Moving or staying?

Startup acquisitions aren’t new in Connecticut. Last year, Cromwell-based Payveris announced it was being bought by Washington-based Paymentus Holdings Inc. in a deal worth $152.2 million.

And merger deals — even between larger, more well-established companies — don’t automatically mean bad news for Connecticut.

For example, there were major concerns last year after AstraZeneca bought homegrown rare disease drugmager Alexion for $39 billion, but the United Kingdom-based company announced in April it was expanding its New Haven footprint following the deal.

Connecticut Innovations CEO Matt McCooe said such deals, including Pfizer Inc.’s announcement in May that it would be acquiring New Haven-based Biohaven Pharmaceuticals, have resulted in more influence coming out of Connecticut, not less.

“When companies like (Pfizer) acquire and stay in our cities, that’s amazing because now we suddenly have another Fortune 500 company that can be part of the success in building out the New Haven life sciences corridor that’s thriving right now,” McCooe said of the Biohaven deal.

University of Connecticut Professor of Finance and Economics Fred Carstensen, who is also the director of the Connecticut Center for Economic Analysis at the UConn School of Business, said mergers and acquisitions can typically go a number of ways. Sometimes a large firm will buy a smaller startup in their industry to simply squash competition.

Other firms might purchase a startup with the intention of absorbing their technology.

Regardless of intentions, Carstensen said startups might be more willing to consider selling based on the current business climate. Selling a business is the biggest return on investment for some, he said.

“We’re in a (venture capital) winter,” Carstensen said. “Startups are having a very hard time finding funding.”

Marvin S. Goldwasser, vice president of marketing and chief of staff of Payrailz, said his company will remain in Glastonbury even though it’s now part of Jack Henry.

“The plan is to keep the presence,” Goldwasser said.

Payrailz provides cloud-based, AI-enabled consumer and commercial digital payments services that enable money to be exchanged quickly. The company, which was founded in 2016, has been a noteworthy Greater Hartford startup with investors that have included Stamford-based Webster Bank.

Payrailz has 65 employees across the country, mostly remote, and all jobs have been kept through the acquisition. He said 12 employees are Connecticut-based out of the company’s Glastonbury office.

“We were acquired to round out their product line, and they want us to keep going,” Goldwasser said. “Lots and lots of positives.”

Diameter Health CEO Eric Rosow said joining Availity was a natural step for his company. Availity facilitates clinical, administrative and financial transactions, so Diameter Health’s expertise in data analytics is a good fit for the company.

Rosow said Diameter still has its Farmington office and another location in Massachusetts, but many employees work virtually now, which has been increasingly common in the tech industry.

“While we still have an important Connecticut presence here, in our industry, lots of companies are largely virtual,” Rosow said.

Rosow was noncommittal about Diameter’s long-term plans to remain in the state, but said there aren’t any immediate plans to leave.

“Diameter Health is a huge success story for Connecticut,” Cote said. “From our perspective, we celebrate that type of next-level expansion.”

A number of recently-acquired companies — including Alexion, Biohaven, Biorez, Diameter Health, Payveris — have received investments from Connecticut Innovations, which means the quasi-public agency gets a return from the buyout.

Cote said organizations like Launc[H] try to court new tech companies to establish a presence in cities like Hartford, so there’s some give and take when it comes to startups moving into the state or leaving.

“Especially in this day and age of tech companies being more and more remote, I don’t see the threat that an acquisition by a parent automatically means that they’re going to have to pull up out of Connecticut and move out someplace else.”

David Lehman, commissioner of the Department of Economic and Community Development, said the state often reaches out to companies after merger deals are announced.

“We want to make sure they know we’re focused, we care, and certainly we want these businesses to remain in Connecticut,” Lehman said.

To be sure, deals don’t always favor the state, particularly when larger, more well-established companies are involved. CVS Health’s purchase of Hartford health insurer Aetna and Farmington-based United Technologies Corp.’s merger with Raytheon Technologies, which moved the headquarters to Massachusetts and soon to Virginia, have lessened the corporate influences of both companies in Connecticut.

Startup support

Lehman said making Connecticut an innovation hub is important to the state growing its startup ecosystem, whether that’s through venture capital opportunities, accelerator programs or something in-between. Startups are competitive and push each other to be better, he said. Recently, the state has added about 1,100 new startup businesses a month, he added.

“That’s one of the reasons Silicon Valley has been so good — you have a lot of competition and you have a sharing of employees and turnover where one person learns something, then they might go to their next company, have a new idea or start their own company,” Lehman said.

Rosow said Connecticut’s network of business accelerators and investors has been supportive of his company and others he’s started up in the state.

“This is the second startup I’ve been involved with that involved Connecticut Innovations,” Rosow said. “And if I do it again, I’m absolutely going to go back to CI again. They’ve been fantastic from day one and very supportive.”

Goldwasser said Payrailz didn’t take advantage of a lot of the resources the state offers startups, but pointed to incubator programs in New Haven and Hartford as options for new companies.

“Connecticut’s great for startups,” Goldwasser said. “The state does offer a lot of things.”

Carstensen, the UConn economist, said startups can still grow after being acquired, but it often looks different.

“But they’re growing now under a corporate umbrella,” Carstensen said.

Carstensen said Connecticut has a plethora of highly skilled workers and a network of universities that churn out students in high-demand industries, which incentivizes some acquiring companies to want to maintain a presence here.

“If we have a lot of biotech companies, it means we have the workforce with the skill set that those companies need,” Carstensen said.

Still, Lehman and McCooe said they prefer having in-state companies be the acquirer rather than the acquired. The hope is that more Connecticut companies will purchase smaller businesses and grow with a headquarters in the state. Over time, more jobs move closer to where headquarters are located after acquisition, McCooe said.

“We’re going to need more of our companies to be the predator and not the prey,” McCooe said.