Nelson Advisors: HealthTech 2027 and the Big Move From Software to Hardware to De-Risk the AI Threat and address the Defendability questions

For fifteen years the smartest money in HealthTech had a simple thesis. Software eats the world, healthcare is the biggest and slowest-moving industry on earth, and so the biggest returns would come from software companies that digitised, automated and re-platformed the way care is delivered, paid for and administered. Asset-light, high gross margin, infinitely scalable and defended by data, workflow lock-in and the sheer difficulty of selling into hospitals and payers.
  
That thesis is now under real pressure and the pressure is coming from the very technology that was supposed to be its next chapter. Generative AI has made software cheaper to build, faster to copy and harder to defend than at any point since the cloud era began. The question every board, every investment committee and every founder in HealthTech is now asking is the same one: what, exactly, is our moat when a foundation model can generate our product?
  
This post argues that one of the most important answers to that question in 2027 will be physical. We expect a visible shift in both investor appetite and founder ambition towards HealthTech companies that build hardware, or that own a hardware layer as part of a full-stack proposition. Not because hardware is easy, but precisely because it is hard and because hardness is what defensibility looks like in a world where software has become abundant.

The M&A lens
  
From where we sit, advising founders and boards on transactions in the lower to mid market, the shift is already visible in the conversations we have.
  
Strategic buyers are prioritising targets that bring them a device, a sensor, a signal or a manufacturing capability they cannot build internally, and they are willing to pay for regulatory clearance, clinical evidence and installed base. They are more sceptical of software-only assets unless those assets are deeply embedded and demonstrably resistant to substitution. 
 
Due diligence has changed accordingly: the defensibility section of the process now asks explicitly how the business would be affected by the next generation of foundation models, and hardware-enabled companies have an easier time answering.
  
We expect 2027 to bring more acquisitions of hardware-enabled HealthTech companies by medtech, diagnostics, pharma and, increasingly, by large technology companies building health-hardware ecosystems. We expect more software companies to seek hardware partners or acquisitions of their own to shore up their defensibility and more hardware companies to acquire software and AI teams to complete their stack. We also expect private equity, which has historically preferred the predictable cash flows of healthcare software, to build increasing comfort with hardware-enabled recurring revenue models, particularly where consumables and service contracts provide the annuity that software subscriptions used to.
  
For founders contemplating an exit, the practical implication is that the story the market wants to hear has changed. It is no longer enough to show growth and gross margin. Buyers want to know what you own that cannot be generated, and in 2027 the most convincing answer to that question will increasingly be something you can hold in your hand.
  
Conclusion
  
The software era of HealthTech is not ending, but its unquestioned dominance is. Generative AI has made software abundant, and abundance is the enemy of defensibility. The companies that will command premium valuations, attract the most durable capital and achieve the strongest exits over the next few years will be the ones that anchor their intelligence in the physical world, in devices that capture signals nobody else can capture, that clear regulatory bars nobody else has cleared, and that sit in clinical and consumer settings nobody else can reach.
  
We expect 2027 to be remembered as the year that HealthTech investors and founders stopped treating hardware as the difficult, capital hungry cousin of software and started treating it as the foundation of a defensible business. The moat, it turns out, was never the code. It was the thing the code runs on.

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