By Don Ross, Managing Director & Founder, HealthTech Capital
Early-stage investors in traditional healthcare companies are certainly having a tough time these days. Many biotech, diagnostic and medical device firms have simply become too risky, as the current uncertain FDA regulatory environment increases cost and time to exit. In fact, venture funding for these companies fell during the fourth quarter of 2010 to the lowest level since 2003, and the number of deals dropped further in the first quarter of 2011, according to PricewaterhouseCoopers.
This overhanging “exit challenge” is leading many angel investors and venture capitalists to seek new types of investments – companies with lower capital requirements and faster exits. Nowhere was this quest more evident than at the 2011 Angel Capital Association Summit, a premier angel investor event, held last month in Boston.
During the event, I participated on the “Future of Life Science Investing” panel, where the discussion quickly left traditional life sciences and zeroed in on what is emerging as the next big investment opportunity arena: healthtech.
Healthtech companies use mobile, cloud, and other information technologies to increase healthcare delivery efficiencies and deliver consumer-centric applications. Unlike traditional “health IT,” healthtech companies target applications everywhere along spectrum of health and wellness—from in-hospital workflow to in-home monitoring to consumer wellness applications.
Healthtech markets are propelled by technical advancements, an aging population, and government regulations and subsidies to drive adoption of electronic medical records. And, although the FDA is turning its attention to healthtech, most companies in this sector are expected to face comparatively low regulatory requirements.
How big is the healthtech opportunity? Data from the Centers for Medicare & Medicaid Services (CMS) show that the U.S. spent $2.5 trillion on health care in 2009. Of this, 84 percent was spent on healthcare delivery, which includes costs associated with clinicians and insurance companies. In contrast, only 16 percent was spent on therapeutics, including medical devices and drugs. Although venture investors traditionally have put their money into therapeutics rather than delivery, the balance is shifting.
In fact, healthtech was a “star” topic at the recent J.P. Morgan Annual Healthcare Conference in San Francisco, where panelists included Eric Schmidt, Google’s then-CEO, and other technologists not typically associated with health care. Further evidence of the shift in investor attention towards healthtech is the recent establishment of HealthTech Capital, the first angel investing group to focus exclusively on this space. Barely a year old, the group’s membership already is larger than many long-established angel groups and includes individual investors, VCs, corporate venture arms, and healthcare providers.
Healthtech is a complex domain, with several factors that can make or break a company. Existing contracts and relationships may have locked up a market segment. Standards of proof are much higher than in the tech world. Lack of reimbursement can kill a company. A sale often must address a multi-part customer with separate value propositions for the patient, doctor, hospital, and insurance company. Improving patient care alone is insufficient. One physician put his requirements for new technologies to me succinctly: “Will I get paid, and will I get sued?”