Friday, November 25, 2011

The World of Health Care Venture Capital

He ventured neck or nothing – heaven’s success
Found, or earth’s failure.

Robert Browning (1812-1889), A Grammarian’s Funeral (1885)

November 25, 2011- Luis Pareras, MD, PhD, MBA, of Barcelona, Spain, and I are thinking of writing a book on the world of health care venture capital – how , when, why, where, and and for whom, it works.

We sense physician entrepreneurs are searching for access to venture capital to back their ideas and make those ideas become reality. Unfortunately when you stick your neck out, some ideas you conceived as heavenly fall to earth and fail. Perhaps we can help prevent the fall.

It is our contention that health care venture capital is a world-wide phenomenon, that physician entrepreneurial innovators are worth encouraging, and that "disruptive" health care startups may help relieve the pressure of national health costs by lowering costs and improving practices.

Make no mistake about it. Venture capitalists across the world generate much of the capital – the financial oxygen – required to go public and succeed on a broad scale.

Much of the venture capital activity is centered in the United States, Of the 91 venture firms listed in Wikipedia, 78 are in the US, followed Europe, China, Israel,India, and Singapore with 24 based in multiple countries.

In th U.S., 46 venture firms are concentrated in California, 25 in Menlo Park alone. Massachusetts has 16 venture capital firms. Other states - Minnesota, Texas, New York, Connecticut, and Virginia - are also beehives of venture activity.

Why the concentration of venture capital firms in the U.S.? according to Peter Drucker (1909-2005), the U.S. economy, until recently, outpaced the European economy, growing at a rate of 3-5% per year until about 2005, while European growth rates were stagnant at about 1%. Today the U.S. is in the same no growth funk as Europe.

According to Drucker, the basic reason for the U.S. entrepreneurship success is that in the decentralized U.S. economy, decisions are based on proximity to the market and rapid response to changes while European centralized, socialized economies render market response difficult and slow.

The U.S. says Drucker has switched from a centralized managerial economy to a decentralized entrepreneurial economy while Europe has not.

Critics of the Obama administration maintain that the current slow U.S. growth stems from our drift toward the European model of doing business, centralizing health care, and hog-tying health care enterprises with government regulations and onerous business taxes.

This may be, but health care in the U.S.added 300,000 jobs in 2011, and health care's vibrant growth makes it an attractive sector for venture capitalists.

One way out of the slow growth trap for the U.S. economy as a whole is revitalizing entrepreneurship and innovation. The optimal place for creating new businesses and getting money to launch them is still the U.S.

Foreign entrepreneurs know this, which is why they come to the U.S. to be educated in U.S. universities in science, technology, engineering, and mathematics, then stay here to start up companies backed by venture capitalists, particularly in places like Silicon Valley. And, if these entrepeneurs are not granted visas or green cards, they return to their home countries – such as India, China, or Isreal – to set up startups and gain venture capital.

One reason for writing a book on physician innovation and entrepreneurship is to educate doctors about the process of obtaining venture capital.

Venture capital provides capital to early-stage, high-potential, high risk, growth startup companies.

Venture capital funds make money by owning equity in the companies it invests in. They may be interested in physicians who have ideas about a novel technology or new ways of organizing doctors.

Physicians may gain capital through angel investing, relatives, or personal resources, or from a local bank. But given the current clamp-down on lending to companies without a track record, obtaining money to go public is difficult. Venture capital is attractive for new companies with no operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering.

Venture capital is also associated with job creation (accounting for 21% of US GDP). Every year, there are nearly 2 million businesses created in the USA, and only 600–800 get venture capital funding. According to the National Venture Capital Association, 11% of private sector jobs come from venture backed companies and venture backed revenue accounts for 21% of US GDP.

In closing, I offer this astute observation by Peter Drucker on why some countries' economies grow and others do not (Innovation and Entrepreneurship,Harper & Row, 1986:

And yet it is most unlikely (I am tempted to say impossible) for any counry to be innovative and entrepreneurial in high tech without having an entepreneurial economy. High tech is indeed the leading edge, but there cannot be an edge without a knife. There cannot be a viable high-tech sector by itself any more than there can be a healthy brain in a dead body. There must be an economy full of innovators and entrepreneurs, with entrepreneurial vision and entrepreneurial values, with access to venture capital , and filled with entrepreneurial vigor.

Tweet: Venture capitalist backed small businesses account for 21% of GDP, and many of these new business are in health care.

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