Health Catalyst, the Salt Lake City-based data warehousing and analytics company, has raised $70 million in a Series E round from investors including Norwest Venture Partners and the UPMC health system.
The fundraising could be one of the largest of the quarter as startups have had a much harder time accessing the capital markets this year. Although traditional healthcare investors still see opportunity in digital health, some of the newcomers to the space have been more cautious about investing after some high profile stumbles.
Health Catalyst plans to use the funds to invest in product development, particularly around population health and activity-based costing, or helping providers determine the precise cost of the services they provide.
The capital also will help cover the cost of four recent intellectual property acquisitions, mostly from health systems. The company hasn't ruled out doing one additional deal, said CEO Dan Burton.
Health Catalyst had a strong 2015, doubling its revenue and nearly doubling its headcount to more than 400 employees. It serves 300 hospitals and 3,000 clinics, representing 65 million patients.
The business now has a sustainable cash flow and the financing is likely to be Health Catalyst's last private funding round, Burton said. The company, which has raised $200 million to date, is looking toward a 2017 initial public offering.
“We're not open to the acquisition path,” Burton said. “The path we're on is an IPO path. We've been approached many times (for a sale) and we're not interested in that path.”
With the Dow Jones industrial average about 8% lower than it was on Jan. 2—with significant volatility along the way—the IPO market has cooled considerably compared to last year, and venture funding has chilled along with it.
“It's been a tough start to 2016,” said Stephen Kraus, a partner at Bessemer Venture Partners. “I would call some of the valuations in the market frothy.”
In the digital health space in particular, investors have watched as companies that were once darlings of the industry—like Zenefits, Theranos and Castlight Health—run into regulatory or business hurdles.
Even under the best circumstances, healthcare has a longer sales cycle than a consumer industry; there are privacy, workflow and cultural barriers to overcome. “You don't really hyper-scale those companies—it's more linear growth,” Kraus said. On the other hand, “Once you get a customer, the lifetime value is exceptionally long.”
So while the slow pace of change has frustrated some technology-focused venture funds, others still see significant growth potential ahead.
“There are two very different views of investors,” said Tom Rodgers, managing director of McKesson Ventures. “There's a small club of investors that has always invested in healthcare IT. And that group is incredibly excited. This group is saying: We're not in a panic and we'll probably invest more in this space.”
Pittsburgh-based UPMC is not only an investor in Health Catalyst but also pilots its cost-accounting technology. “The only time we'll make that investment is when we think we can use it,” said Tal Heppenstall, president of UPMC Enterprises. “We've seen a huge ROI internally to ourselves because we've already had the product.”
Health Catalyst has watched the capital markets begin to shift in a negative way, which has impacted valuations in the digital health space, Burton acknowledged. But its own investors include a mix of health systems that have industry knowledge and financial investors that push the company to reach its growth targets. While healthcare may be slow to change, it also weathers recessions better than many other industries, Burton said.
“It doesn't spike as high and it doesn't dip as low. It's more steady,” he said. “If you have a syndicate that really understands those dynamics, it can work out well.”
