Judging by an increase in the amount of capital at stake, the high rollers of equity investing seem to think healthcare is a sure bet.
Venture capitalists gambled $281.6 million on 48 healthcare deals in the first quarter of 1996, according to a new survey. That's an odds-breaking 261% increase compared with the year-ago quarter.
The healthcare sector accounted for 12.4% of the $2.2 billion of private equity invested by venture capital companies in the quarter ended March 31, according to Coopers & Lybrand, whose latest Money Tree Survey represents investments reported by 600 venture capital firms.
Venture capital investments in healthcare rose 75% compared with the fourth quarter of 1995, when 31 deals totaling $161 million were completed.
"The healthcare services sector, I think, is being driven by the rapid conversion to managed care and also the switch from hospital-based delivery systems to outpatient-based delivery systems," said Chuck Newhall, general partner of New Enterprise Associates, a Baltimore-based venture capital firm that invests about $40 million a year in healthcare service, device, information system and biotechnology companies.
"The field has become a lot more competitive" as companies identify new opportunities to revolutionize the healthcare industry, Newhall said. Venture capital firms not previously involved in healthcare have begun to stake it out.
Others, such as IAI Ventures, Minneapolis, and Vanguard Venture Partners' Houston office, are increasing their healthcare exposure. The two venture capital companies recently teamed up to fund new and early-stage companies in the Midwest through a joint venture called Itasca Ventures (May 6, p. 88).
Most of the "healthcare" companies in the Coopers & Lybrand survey represent service providers, such as HMOs, home-care companies and physician practice management firms. Investments in medical devices and biotechnology were counted separately.
In the first quarter of 1996, some $128.7 million was invested in 41 medical device deals, compared with $106.9 million in 28 deals during the year-ago quarter.
Biotechnology companies snagged $149.3 million in 43 first-quarter deals, up from $76.3 million in 24 deals in the comparable period in 1995.
In total, biotechnology, medical device and healthcare service companies consumed $559.6 million-more than one of every four venture capital dollars invested during the quarter.
Venture capital investing in general is on the rise, said Mark Heesen, director of legislative and entrepreneurial affairs for the National Venture Capital Association in Arlington, Va.
According to Coopers & Lybrand, the $2.2 billion of private equity invested in 489 U.S.-based companies in the first quarter doubled investments made in the year-ago quarter.
Heesen said the stock market's healthy appetite for initial public offerings is driving more money into venture capital. Taking companies public is the primary way venture capitalists cash out their investments.
"When there's a healthy IPO market, we're able to return a solid investment to our investors," Heesen said. "When the public market shuts down, it's not good for a venture capitalist."
For those who place their bets on the right companies, the payoffs can be sizable. Generally, venture capital firms seek annual returns of 16% to 17% on their total investments, Heesen said.
New Enterprise Associates shoots
for a return of 10 times its total investment over the life of the investment, Newhall said. The healthcare companies it has started have $20 billion in revenues and market capitalization of
$60 billion to $70 billion, he said.