Hey, Where Is Everybody Going? The Flight from Healthcare Investing

11/14/11Follow @venturevalkyrie

If you are simply reading the paper or engaging in any random cocktail party conversation these days, it doesn’t take long before you are reading or talking about healthcare. Health and healthcare issues have been a dominant topic in the national media since the 2008 Presidential election and have been constantly in the news as the Patient Protection and Affordable Care Act (PPACA) has taken center stage. Even if PPACA weren’t always in the headlines, stories about employers who are grasping for solutions to their healthcare cost crises would still be.

Given the massive amount of change currently underway in the U.S. healthcare economy that has resulted from PPACA, the earlier healthcare IT stimulus legislation (ARRA) and the acts of employers saying that they’re mad as hell and not going to take it anymore, we have bona fide industry upheaval on our hands. And where there is upheaval, there is opportunity. Today more than ever there is a tremendous opportunity to find new ways of doing business in the world of healthcare through changing delivery systems, insurance models, technology solutions, drug discovery, device innovation and just about everything else that takes place in the healthcare system. Never before has there been so much energy and so much necessity to produce innovation in our field.

So given this, why are venture capitalists in the healthcare field fleeing like female co-workers from Herman Cain? Historically the source of funding for so much innovation and employment in the healthcare field, venture capitalists with lengthy histories funding the drug, device, service and IT companies of tomorrow are picking up their marbles and going home. Last guy out turn out the lights.

Last week the National Venture Capital Association (NVCA) said the following in their blog:

“…today we can say officially that we are seeing an alarming trend in the area of life sciences investing with the announcement that Scale Venture Partners will cease healthcare investing permanently. This exit follows the announcement last week that long time, established funds Morgenthaler and Advanced Technology Ventures would be effectively spinning out their healthcare investment practices and the announcement just over a month ago that Prospect Ventures would not raise a fourth healthcare fund and return committed capital to limited partners.”

What they didn’t include in their article were the additional facts that Highland Capital Partners recently decided to cut back its healthcare practice, CMEA Ventures has decided to make no more medical device investments and that Versant Ventures appears to be on the verge of reducing its healthcare practice if the industry buzz is correct. There are rumors afoot that a slew of others firms on Sand Hill Road are in the process of divesting themselves of their healthcare practices and there are several others that I know for sure already have taken steps in this direction but have not yet announced it formally.

To add to the pile, the NVCA released a report in October called Vital Signs. The report documents a survey that found that U.S. venture capital firms have been decreasing their investment in biopharmaceutical and medical device companies over the past three years and are planning to decrease their commitments to these areas even more. 39 percent of the 150 firms surveyed report decreasing their investments in life sciences companies over the last three years and the same percentage expect to further decrease these investments over the next three years, some by greater than 30 percent. According to NVCA, this is twice the number of firms that plan to increase healthcare investments.

Given this, I suppose the mass extinction we are now watching is predictable, if sad. It is certainly possible there was too much capital chasing healthcare deals, but now we are likely to swing too far in the other direction. Also, … Next Page »

Lisa Suennen is Managing Partner at Venture Valkyrie Consulting, a firm providing advisory services to companies, organizations, and private equity firms in the healthcare field, and the co-author of Tech Tonics: Can Passionate Entrepreneurs Heal Healthcare With Technology? Follow @venturevalkyrie

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  • http://www.wirelesslifesciences.org Rob McCray

    Well spoken, Lisa. We have seen this phenomenon before. In the early 1990′s biotechnology lost favor and great firms like Mayfield and Accel Partners were investing in healthcare services (actually supplying clinicians) in physician practice management and physician partner business models. Imagine that! By 1999, a healthcare service company might receive a polite reception but it was all about technology. Networking gear and online pet supplies was where the action was! In the U.S. we need some transformational change in healthcare delivery and that is going to be accomplished in smaller companies where a handful of really good investors will help make it happen. The others will return when there is less uncertainty about the shape of the new market. In the meantime, strategic investors may be an entrepreneur’s best friend. Look beyond the U.S. and it is hard to believe that there will not be great returns for companies who help to open access to healthcare for an additional 5 billion residents of this planet. I cannot paint a rosy picture about highly regulated products, though. We need systemic change in the allocation of healthcare financial resources before rational decision making returns to therapeutics research and development.

  • Krassen

    Hi,
    There is a bit of discrepancy with this headline:
    ” Biotechs raised record amount of funds in 2010″

    http://www.fiercebiotech.com/story/analysis-biotechs-raise-record-amount-funds-2010/2011-07-01

  • http://venturevalkyrie.com Lisa Suennen

    Hi Rob, yes you’re right…these things tend to be somewhat cyclical. The problem is that this is the first time that there are other countries jumping in to fill our void and take the focus of capital away in medtech and biotech. It should be interesting and I agree that the companies that enhance access to primary care will be important ones. Lisa

  • http://www.swarmology.com Jack Florio

    Lisa
    Thank You for an excellent article. We need more positive forward-looking views for our industry, while still being realistic of the challenges. The picture of “doom and gloom” painted by some can be an unfortunate self-fulfilling prophecy.
    I would guess that part of your more positive outlook is in part in the description of Psilos Group ” . . . focuses on the medical device, healthcare information technology and healthcare services sectors”.
    Business will not be the same in the future and we as an industry must embrace that change. I personally feel it will be interesting and creative combinations of technologies across your investing spectrum that will be able to meet the healthcare challenges of the future. These will also include embracing the healthcare consumer and helping them become a more knowledgeable participant in the healthcare decision making process.

  • http://venturevalkyrie.com Lisa Suennen

    Jack, thanks for the note. We definitely see opportunity in the health services, health IT and even selected medtech areas in the near future. Companies that can demonstrate a way of improving quality of care while reducing cost of care meaningfully will find their way through the darkness. When a company can align the financial and clinical incentives of patients, payers and providers, they will find a market. Lisa

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