Venture capital investments slowed during the final summer months, but healthcare services drew more venture capital, and investment insiders say market changes under health reform could draw even more interest.
A $50 million investment in Life Care Services, a Des Moines, Iowa-based senior living company, ranked among the largest venture capital deals in July, August and September, and healthcare services—which includes senior living, hospitals, clinics and physician practice management, as well as some healthcare information technology—was one of a few sectors to see an increase in deals and equity investment in the third quarter, according to one survey of activity.
Mark Heesen, president of the National Venture Capital Association, which produces the survey with consultants PricewaterhouseCoopers, said investor interest in healthcare services may prove to be fleeting or could be the start of a trend fueled by healthcare reform law, which is expected to expand insurance coverage and increase demand for healthcare IT services. “The question is whether this is a blip or a long-term interest,” Heesen said.
Venture capital investment in healthcare services increased 156% to $128 million in the third quarter from $50 million in the second quarter, according to the quarterly report. Life Care was one of 15 companies to secure venture capital in the third quarter from eight the prior three months.
Overall, venture capital declined in July, August and September compared with the prior three months according to the MoneyTree report, which relies on data from Thomson Reuters. Two significantly larger healthcare sectors—biotechnology and medical device and equipment companies—saw fewer deals and less new equity in July, August and September compared with the prior three months as well.
Last quarter's decline in venture capital came after six months of more robust activity that had been welcome after the drop in venture capital in 2009.
Heesen said the weak economy and poor results from long-term investments made during the technology bubble of 1999 and 2000 curbed venture capital investments last year. Venture capital firms were also unable to exit deals in the past two years as market uncertainty cooled initial public stock offerings and corporate acquisitions, he said. Venture capital investment fell to $4.8 billion in the third quarter, from $6.9 billion the prior quarter.
Geisinger Health System, Danville, Pa., owns Geisinger Ventures, a for-profit subsidiary that contracts with fledgling and expanding companies to test new products. Jim Peters, a managing partner at Geisinger Ventures, said the recent decline in available capital may force entrepreneurs who are seeking equity investments to ask investors for less money in each round of fundraising but for the frequency of the requests to increase, as companies show growth. Demand may also grow for deals that can reduce fledgling companies' demand for capital, such as the product-testing contracts that Geisinger Ventures favors, he said.
Geisinger Ventures is not a venture capital arm of Geisinger Health System, as some other health systems operate. For example, Ascension Health, the nation's largest Catholic health system, owns Ascension Health Ventures, a venture capital arm. But Geisinger Ventures has sought venture capital to back its corporate affiliates and is expected to return to investors in coming months, Peters said. Cernostics, a pathology IT company in which Geisinger Ventures has a stake, raised $1 million in seed money, and executives expect to seek additional venture capital in the next six months.
Peters said he expects some healthcare companies to see demand for equity investors grow as markets change under the health reform law and capital is needed to rapidly expand.
Chaim Indig, president and CEO of Phreesia, a revenue cycle and patient registration software company, said many venture capital firms lack experience in healthcare IT, but the sector has attracted more interest from investors, particularly those that combine technology and healthcare services. Federal policy to promote healthcare IT adoption, especially the healthcare IT subsidies in 2009's stimulus act and the significant expansion of health insurance under reform, has fueled that interest, Indig said.
Phreesia raised $20 million in venture capital this year after raising $11.7 million in 2009. Among Phreesia's investors were Ascension Health Ventures and Blue Cross and Blue Shield Venture Partners, the venture capital arm of the Blue Cross and Blue Shield Association.
Indig said he believes equity continues to be available for more established companies with a product for sale that can generate immediate revenue and has demonstrated growth.
Indig also noted that more large companies have recently entered into healthcare technology and service sector deals, citing the $6.4 billion acquisition of Affiliated Computer Services by Xerox, which gave the company an entry into healthcare IT (Oct. 5, 2009, p. 14), and the $3.9 billion deal by Dell to acquire Perot System's Corp. (Sept. 28, 2009, p. 12).
“The space is getting big enough and interesting enough for a lot of the big guys to play in,” Indig said.
