VC funding sees 'torrid' Q1

Consumer-facing IT getting lots of attention – but is that necessarily the right place to look?
By Mike Miliard
12:00 AM

Nearly half a billion dollars were raised in venture capital funding for health information technology in the first three months of 2013, according to Mercom Capital Group, which touted it as "record quarter."
Some $493 million was raised industry-wide, according to Mercom's 2013 Healthcare IT Funding and M&A Report, in twice as many deals as the previous quarter (104, up from 51). There were nearly four times as many early stage deals – 42, up from 14 – compared to 14 in the fourth quarter of 2012.
The top deal for Q1 was a $41 million round of funding raised by Salt Lake City-based Health Catalyst, which develops data warehousing technology. This was followed by the $40 million raised by Geisinger Health System spinoff xG Health Solutions, whose data analytics platform is aimed at patient and population-focused care management.
Los Angeles-based NantHealth, which is working on advanced secure fiber networks, cloud computing and wireless technology for care delivery, raised $31 million. Fitbit, a fitness and health tracker company, and One Medical Group, a provider of online primary care services, both based in San Francisco, raised $30 million each.
"The trend we began to see last year of VCs investing in consumer-focused companies like mobile health, telehealth, personal health (and) social health . . . has become much more pronounced," said Raj Prabhu, CEO of Mercom Capital Group, in a press statement. 
More than 100 investors participated in deals in the first quarter of 2013, with ten investors involved in multiple funding rounds. Those with multiple rounds include Blueprint Health, Google Ventures, Maverick Capital, Merck Global Health Innovation Fund, Norwest Venture Partners, Psilos Group and others.
"Simply put, the market opportunity is enormous," Prabhu tells Healthcare IT News. "With huge amounts of data available and proliferation of mobile devices, consumer focused technology and applications are a driver. The investment community is recognizing and seizing on the opportunity."
As we near the end of the second quarter, Prabhu says it’s important to think long-term. "Like any sector, the funding level will plateau at some point as newer technologies and platforms make older ones obsolete and the sector begins to consolidate," he adds. "That said Q2 could be another solid quarter."
The key to an attractive investment is that a firm's technology is "addressing the right challenge," he said. "Focus is important; proprietary technology and management vision are also key. A lot of companies out there have a hard time articulating who they are and what they do." That said, "I do believe consumer focused HIT will continue to be attractive."
Despite this flurry of funding activity, health IT remains an opaque and sometimes perplexing area for many capital investors. As Robert Tepper, MD, a partner at Third Rock Ventures, said recently in an interview with Xconomy, "We’re intrigued by it. It’s a really important area, but I’d say to be fair, we still have to learn a bit more about the right strategies there, and how it’s going to evolve. The role of the government in the whole healthcare revamping will impact things significantly in that space."
Stephen Bloch, MD, general partner at Canaan Partners, is similarly discerning, sniffing out smart opportunities in a complex space. Consumer and wellness startups may be the hot sector right now, but Bloch says he's less interested in the latest sexy smartphone-based gewgaw than in less-heralded technologies that have the chance to drive deeper change in the way care is delivered.
"It's a complicated investment," says Bloch. "With all the changes going on in the healthcare industry, and accelerated by the ACA, the entire healthcare ecosystem is thinking about how to be more efficient. And that's been spurred on also by the money that’s been pumped in and some of the incentives that have been put into place. All those things have provided a health IT ecosystem that's been evolving over time."
The "rapidity of change that's happening now" has only heightened the risk, he said. "There's a long history of VC investments in health IT not always being that successful," he said. "There are a lot of challenges in the industry that make it difficult for startups.”
Bloch agrees that "the consumer side of healthcare is super important – patient engagement is particularly an area I'm interested in: how patients access services and find what they need in healthcare."
But he's more likely to take a pass on consumer tools that lack good business models: "stuff that is very wellness-focused, based on personal health or diet have different apps to track your health behaviors. There aren't any established business models for those sorts of things."
Indeed, it may be arguable that some investors are attracted to consumer apps because they're more readily understood – less complicated, say, than technology infrastructure designed to streamline complex hospital workflows.
"People tend to gravitate toward things they know, or think are useful," said Bloch. But many of the maladies targeted by mobile apps "aren't the real drivers of healthcare costs, and it's difficult to show results for those sorts of things. There's no real business model that's clear, except on the margins."
Bloch, instead looks for things "that bring efficiency and lower cost to healthcare," he said. "That might be how consumers purchase their healthcare, how they interact with the healthcare system, things that bring something to HMOs or physicians to make their services more efficient or enable new services. They may have a consumer component, but they're not directly consumer facing."
A radiologist by training, Bloch says he's intrigued by imaging infrastructure – technology that helps move diagnostics to "imaging centers and hospitals and physicians and potentially to patients" – as well as data analytics.
"People see health IT as one of the solutions for lowering healthcare costs," he said. "There will be continued emphasis and investment for the foreseeable future. There has to be. If you're going to have efficient delivery of care, it's going to be an important part of the equation."
That said, as useful as consumer-facing IT can be, to truly transform the system, "it has to be well integrated into how care is delivered."