How Health IT Firms Can Open VC Vault at OpenView Venture Partners

12/8/10

Boston-based OpenView Venture Partners has become more active in backing companies in the healthcare IT arena over the past several months, announcing two significant investments since September. Because this sector is so hungry for capital to fund new ideas, I thought it would make sense to chat with OpenView partner George Roberts about what it takes for health IT companies to raise dollars from his firm.

It should come as good news to health IT entrepreneurs that OpenView is interested in investing in their industry. The venture firm, founded in 2006, goes way beyond writing checks for its portfolio companies. When needed, the firm also helps the companies it funds create marketing strategies, optimize plans for their potential exits, and recruit executives. All this would seem shallow if the firm didn’t have people like Roberts, who helped build Oracle (NASDAQ:ORCL) into one of the most profitable technology companies in the world during his years as a senior executive of the Redwood City, CA-based firm.

Roberts, who ended his 13-year tenure at Oracle in 2003 and joined OpenView in April 2007, doesn’t seem to get caught up in the latest technology fads. There’s more below about what he is looking for from potential portfolio companies. And the proud Wisconsinite is definitely not the VC you want to hit up for money if your business plan resides on a bar napkin. (Read on for his comment about how his firm would have approached Mark Zuckerberg during the Facebook CEO’s Harvard dorm days).

However, OpenView has plenty of money for new investments, Roberts says. In the Q&A that follows, I tried to solicit information and tips from the VC that any health IT entrepreneur might want to know when considering whether to pitch the firm.

Xconomy: What is OpenView looking for while considering investments in health IT firms?

George Roberts: What we’re looking for are what we call expansion-stage companies in the health IT space. That includes companies with $2 million a year in revenue and up to $20 million in annual revenue. We also look for companies that are growing by 100 percent a year to 30 percent a year depending on their size and stage. These are companies that operate in large markets and have an opportunity to get to at least $100 million in revenues. Our belief is that companies that can get to that size, and that can get reasonable market share in their space, can command much better exits or an opportunity to go public.

X: What is OpenView not looking for health IT companies?

GR: We’re looking across the whole health IT spectrum. Consider our two most recent investments. Kareo is a medical billing company, but it’s providing an online medical billing system that is for small doctors offices of five doctors and under. Prognosis Health Information Systems is on the opposite side of the spectrum of health IT. It offers an outpatient order entry system for electronic health records that is sold to smaller hospitals of 200 beds and under. So these are two companies that are almost at opposite ends of the spectrum.

X: What else should health IT entrepreneurs know before approaching the OpenView team?

GR: Entrepreneurs should know about our philosophy. Our philosophy is that it’s not about the money because the types of companies we invest in can get capital from multiple sources. But it’s about how you leverage that capital to scale the business in an operationally efficient manner. If you look at great companies, whether they are in software or not, the key to building great companies is about out-executing your competition from an operational perspective. In health IT, if you look at the Epics and the Cerners of the world, the reason they got to where they are is their ability to out-execute their competition within their particular market segments. OpenView is all about helping founders and their management teams improve their overall operational execution. So if we do it right, the company never needs an additional round of investment. We’re really focused on capital efficiency and operational execution.

X: Do you look to invest as part of syndicate or alone?

GR: Believe it or not, all our investments have been made alone. That’s because if we find a company that we believe in, we are in it with both feet. We’re totally committed, and we’re not looking to reduce risk. Most syndicates are about reducing investment risk. When we select great companies, we’ve taken care of those risk concerns from our perspective. Then what we do is use the outside board director seats to bring in additional expertise that is specific to the industry or market segment that would benefit the portfolio company. The least efficient, most ineffective boards I’ve ever been on are boards with multiple VCs. The last things a founder or a CEO needs, frankly, are multiple wives at the table.

GR: Do you have any set goals for how much of your portfolio you want invested in healthcare?

X: We don’t have a goal because to us it’s about the right metrics. We’ve been looking in healthcare for four years now, and it’s just recently that we’ve found a couple of healthcare companies that fit the metrics we’re looking for. We’re actually looking at a couple of more now. IT really depends on the company and how it’s performing and what segment it is in. We certainly wouldn’t invest in two healthcare companies in the same segment.

X: It seems like there has been more activity in healthcare recently in your portfolio. Why is that?

GR: I think it’s because the market is beginning to grow significantly because of some of the healthcare changes. The reason we really like Prognosis [in the health IT field] is, number one, the market space, which is hospitals. Number two the service segment of the marketplace has been underserved by the traditional legacy vendors, the Cerners, the Epics, the McKessons, and even the Meditechs of the world. Prognosis has an updated technology platform, all Web-based, with much lower risk to implementation. [Editor's note: Providers of web-based software often say that their customers can implement their technology faster than legacy systems that operate mostly on local servers.]

X: The firm has $240 million under management. How much does the company have left for new investments?

GR: Put it this way. We have plenty of money for new investments. I can’t give you specifics, but we have well over $100 million to place for investing.

X: Do companies need to have at least $2 million in annual revenue to get investments from you?

GR: They should be at $2 million in annual revenue or at least $500,000 per quarter in bookings or revenues. That’s really at the low end of the mark for us that says, “It’s an expansion-stage software company.” The reason we use that metric is because there are several things that happen when a company reaches that level; they have customers, revenues, and have a semblance of a distribution model.

X: Let me play devil’s advocate. What would you say if Mark Zuckerberg, fresh from Harvard, walked through your doors and pitched you guys on Facebook before it was making lots of money?

GR: We would pass on the investment. He would be considered early stage and that’s just not what we do. We use discipline in our approach and what we do.

X: What type of new health IT company would you be building if you were in a startup entrepreneur’s shoes?

GR: I would look for a segment in the healthcare space where there are established players. I’m talking about legacy players that have been around for 10 to 15 years at least and are making good profit margins. Then I’d look at how I could introduce a more disruptive business model and newer technology. I don’t believe there are truly disruptive technologies out there today, but there are disruptive business models.

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