Ventures investors still see trends that create opportunity for health-care services startups
April 20, 2017 7:30 a.m. ET
Obamacare’s uncertain future is casting a shadow on startups.
Venture-backed health-care companies just completed their weakest fundraising quarterly total in more than three years.
Last quarter’s total, invested in 14 deals, was the lowest since the $113.8 million spread across 17 rounds in the second quarter of 2013, according to market tracker Dow Jones VentureSource.
Venture capitalists pulled back dollars invested in the category to $114.8 million, down from $595 million in the year-ago quarter.
Spurred by the health-care law, and federal incentives for doctors to use electronic-medical records, health-care services investment had been climbing, rising to $1.41 billion in 2016 from $553 million in 2011. Investors backed companies like Oscar Insurance Corp., a medical insurer that raised a $400 million round last year.
But the Trump administration’s push to repeal Obamacare cast some doubt on the health-care services sector last quarter, likely causing some investors to hit pause. Uncertainty also causes a flight to the highest-quality and most capital-efficient companies, said Bill Geary, general partner of Flare Capital Partners.
A slowdown is also unsurprising given the recent surge of funding that has caused valuations to nudge higher, some investors said.
“We are in the later stages of a cycle, and that means companies raising money have high [valuation] expectations,” said Harry Eichelberger, managing partner of Archimedes Health Investors. “And at the same time, investors know they need to be choosy,” which means marginal deals get passed over, he said.
Although Obamacare boosted the market, several trends continue to make health-care services attractive, even if the legislation does get scrapped, some investors said.
Obamacare pushed medical reimbursement to reward quality over quantity of services provided, a shift that will remain in force because it aligns incentives among doctors, insurers and patients, investors say.
Startups like Iora Health Inc., a primary-care services company, and Welbe Health LLC, which helps frail elderly people stay out of nursing homes, have been built with a value-based mindset and are set to benefit from the trend, said .406 Ventures Managing Partner Liam Donohue, whose firm backed both companies.
And because of the use of electronic-medical records, entrepreneurs have a new source of data that can be analyzed along with other information for better patient management.
“There’s an opportunity now [that] we’ve got data that’s much better,” said Gene Hill, chairman of SV Health Investors.
Health Enterprise Partners, meanwhile, has been exploring a theme called social determinants of health, which focuses on treating the nonmedical conditions of patients with chronic illnesses. That need that will remain apparent regardless of any changes in the health-care law, according to Managing Partner Dave Tamburri.
Orchestrating the array of community-based resources around patients with particular diseases could significantly affect health-care costs and outcomes, according to Mr. Tamburri.
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