Venture capitalists invested record amounts in healthcare businesses in 1993, and they're expected to raise the stakes again in 1994.
One of those capitalists, James B. Hoover, general partner with Welsh, Carson, Anderson & Stowe, a New York-based venture capital firm, explained his firm's interests this way: "We like to buy and build. We like to consolidate niches."
If that's the case, venture capitalists have come to the right place. Consolidating specialty markets seems to be what healthcare is all about these days as mergers and acquisitions envelop hospitals, home healthcare, outpatient services and physician practices.
Money flowing. That kind of activity gets the venture capitalists' juices flowing, and the outcome was an 80% increase in funding for healthcare services companies to $280.8 million in 1993, according to VentureOne, a San Francisco-based research firm (See chart). Overall venture capital funding grew 19% during the same period.
Interestingly, venture capitalists did nearly the same number of healthcare services deals-44 in 1993, compared with 43 in 1992-but the dollars invested were significantly larger.
Healthcare services accounted for just 7% of the $4.2 billion invested by venture capitalists in 859 deals in 1993. However, that's up from 4% the year before, and healthcare services is the second-fastest growing venture capital segment, VentureOne reported. Only the retailing and consumer products sector grew faster.
In the medical industry, healthcare services clearly outpaced other related segments. For example, biotechnology and pharmaceuticals attracted $807 million in 1993, up just 11% from the previous year. Medical devices and equipment makers received $393 million in 1992, a 10% drop from the previous year, according to VentureOne.
Venture capitalists are known as risk-takers and, not surprisingly, the healthcare services industry is taking on those spots as well.
"The risk is shifting from payers to providers," said Thomas Erickson, chief executive officer of Erickson Capital Group, a Dallas-based venture capital firm. However, many providers lack adequate capital to assume such risks or hire the experts needed to manage risks.
An example of a provider that is taking on such risks is Paidos Healthcare-one of Mr. Erickson's investments. The Boston-based company provides and manages care for low-birthweight babies and children with complicated medical needs.
Heading off costs. Not surprisingly, many of venture capitalists' recent investments are in companies that take procedures out of expensive hospital settings or provide preventive care to preclude high-cost health problems.
"We focus on getting to the front of the food chain," said Paul Queally, general partner of Sprout Group, which has made investments in First Physician Care, an Atlanta-based primary-care physician company, and OccuSystems, a Dallas-based occupational medical clinic chain that specializes in workers' compensation cases. Sprout is the venture capital affiliate of Donaldson, Lufkin & Jenrette, a New York-based investment banking firm.
This month, Sprout is closing a $2.5 million investment with another venture capital firm in Cardiovascular Ventures. The Stuart, Fla.-based firm operates outpatient cardiac catheterization labs, focusing on a high-volume procedure that traditionally has been done in a hospital setting.
Special interest. Obviously, certain businesses are hotter than others. Medical groups have sparked a great deal of interest, snagging two of the top five venture capital deals in 1993 and 1994 (See chart).
Welsh, Carson's Mr. Hoover expects five specialties to attract significant venture capital this year: managed care, transitional/subacute services, home healthcare, information services and physician practice management.
In fact, Welsh, Carson is completing two deals now, one in managed care and one in home healthcare. Mr. Hoover declined to disclose the details until the financings are complete. However, the home-care firm has revenues of $60 million in two states. Despite recent financial problems experienced by some publicly traded home-care firms, such as Atlanta-based T2 Medical, Mr. Hoover said he believes that industry will "enjoy a nice recovery."