Health IT Garners Investment Interest

My fellow blogger Mark Douglas used to work with an investment bank and has, over the past few years,  shared many interesting (and sometimes shocking) insights on how investors evaluate companies.  Now, whenever I see an article related to investment in health IT firms, I wonder how Mark interprets the article.

According to an article in Information Week, investors are showing increased interest in medical software and information services companies with the level of investment increasing nearly 100% year over year.  Of the $157M invested by venture capital firms:

  • $77M for clinical decision support
  • $37M for health administration software
  • $15M for drug discovery and bioinformatics
  • $13M for medical imaging

According to Jessica Canning, global research director for Dow Jones VentureSource, “the important part is that investors are really focusing on conveying more information about health care to patients and within the hospital organization itself.”

So, Mark, what is your take on the increased investment in healthcare IT?

Mike

One response to “Health IT Garners Investment Interest

  1. Oh boy Mike are you asking for it on this one!!! Healthcare IT and the private equity markets are two of my favourite topics. 

    My own experience is more of being an observer of how investors value the bits and pieces of a company. I have a great deal of respect for my old iBank boss, because he was one of the most practical people I’d ever met. He provided traditional VC investment types with a dose of cold operational reality when it came to evaluating, turning around or perhaps selling a company. Working for him gave me the opportunity to see how VCs think and operate.

    The VC industry is largely interested in investing in transformational technologies/business models that will either create net new markets or rapidly disrupt existing ones. There are some exceptions to the rule, but the bulk of them want 5-10x or more return on their investment in as little time as possible. A common misconception amongst the general public is that VC s invest in only highly risky companies, whereas the reality is far more different. Successful VCs know their risk profiles better than the names of their own children. In order of importance are interested in a solid management team they know can deliver, a highly disruptive and scalable concept/software/model that can deliver very high margins, and of course IP they can protect. You can even break VCs into two broad camps, leaders and followers. The bulk of VCs are followers who do a lot of “me too” investing when they see a leader VC investing in a particular space. Think of the NHL, and other merit based markets. There are only a handful of Gretzky types who can go to where the puck is going to be , but the bulk of plugger type players who simply can’t do this. VCs are the same.

    It is very important to keep in mind that the numbers (by category) mentioned in the article are quarterly, and you really need detailed quarterly information over at least a year to have a lot of confidence in any so called “trends”. You also have to put them into the context of the large US Healthcare IT spend.

    All that being said….What does this all mean in relation to the investment trends identified in the article you mentioned? Good question.

    If you dig at the limited numbers and data presented in the article, what struck me was:

    1 – Whether you agree or not, the VCs top two bets by $$$ and money per deal is on companies selling niche or highly specialized add on products in acute care. It fits the profile of a typical VC…high margin stuff that solves a real problem in an underserved market. It also helps that the customers are enterprise customers with real budget and (relative to selling to docs) a low cost of sales. I would also guess that many VCs are betting that a big wack of the US spend on healthcare IT over the next few years will unduly benefit companies selling stuff in these two categories.

    2 – I’m not at all surprised at the lower rates of investments in drug discovery and bioinformatics and medical imaging. I would guess that these reduced investment rates (historically speaking) are potentially a combination of follow on follow on Round C, D or E investments in portfolio companies that still hold promise and/or the VCs simply don’t see the same short market opportunities as the first two categories. It would be interesting to see if there is correlation between investments in these two categories and current market conditions surrounding pharma companies and the market penetration of medical imaging technologies in US healthcare.

    3 – What I find most interesting is what they are not investing in. If you dig at the article it suggests that little if any of the numbers being invested are aimed outside of companies selling stuff to large hospitals. Where are the investments in EMRs? There is an enormous opportunity for vendors selling software directly to doctors outside of acute care. From a VC perspective this market is very risky. There are hundreds of vendors with similar offerings selling into a fragmented market. Few if any of these companies offering something truly disruptive that will garner them 50% of the market in less than a year.
    I would love to be able to comment more, but this would be rather fruitless without access to more details on quarterly/yearly data.

    Mark

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