Wednesday, May 9, 2007

Venture Capital - A Happy Hunting Ground for Health Care Venture Capitalists

“PLACE WITH ABUNDANT SUPPLY a place that provides plenty of something desired.”

Encarta World English Dictionary, St. Martin’s Press, 1999

A health care venture capitalist asked me the other day what my book Innovation-Driven Health Care and were all about. I hesitated for a moment, then blurted out, “A happy hunting ground for health care venture capitalists.” Perhaps my 1/16th Cherokee genes were surfacing.

My answer was, of course, self-serving. But when you think about it, the American stock markets and the venture capitalist markets, are brimming with confidence about the future. They’re on a roll. And they’re on a hunt for a source of information on potential investments with greater than average returns.

This is particularly true in the United States. Our society is blessed. We have a health system with unparalleled scientific and technical capacity. It’s not by chance that 80% of all Nobel Prizes for medicine go to the U.S., even though we have only 5% of the world’s population. Our health care economy is filled with innovators and entrepreneurs with entrepreneurial vision and entrepreneurial values, with access to venture capital,

We are, in short, filled with innovative vigor. Information technologies, are, of course, the leading edge, but there can’t be an edge without a knife anymore than there can be a healthy brain in a dead body. The brain is our high technology sector, and the body is the thousands of inventive medical engineers, programmers, physicians with a technology bent, competent management teams, and knowledgeable venture capitalists with a vision of the future. The woods are full of health care innovators, and there are plenty of venture capitalists to hunt for them.

‘Twas not always so. Just a few years ago, the hunters weren’t so eager. Back in the late nineties and early 2000s, the dot com balloon burst, largely because Internet dreams had meager financial underpinnings, with little revenue and no return of investment. The dot com firms and some of the new health care firms were all hat, and no saddle.

In health care, firms like MedPartners and Phycor had bet the farm on the promise and the premise that consolidating independent physicians into national practice management firms, was feasible. It wasn’t. Those firms collapsed and disappeared from the market. And hospitals lost their assets when they learned the practices they had acquired were largely losers once fee-for-service doctors became employees and lost the incentive to work hard. You can't make money as a doctor working an eight hour day or a 40 hour week or taking month long vacations.

But in the last five years, for a variety of converging reasons – mounting costs, an aging population, the thirst of Americans for high tech health care fixes, pressures on hospitals and doctors to generate revenues from non-traditional venues – venture capital markets have returned to the hunt for worthwhile and predictable health care investments.

It has also become apparent, even to health care skeptics , that collectively, health care is and will continue to be the biggest single sector of the U.S. economy, stimulated by disease management technologies, genomic technologies, nanotechnologies, and High Tech IT. These new technologies may make health care as much as 25% of that economy, especially in such venture capital and “brain” centers as San Francisco, Nashville, Austin,Minneapolis, Boston, and Stamford.

Venture capitalists invested $6.6 billion in 797 deals in the U.S. in the third quarter of 2006, according to a MoneyTree report. A recent survey of venture capitalists he National Venture Capital Association indicated that the VC market will level off somewhere between $20 and $29 billion in 2007. Much of this capital will go into the health care and energy sectors.

What is this thing called venture capital? Venture capital is private equity capital provided by professional, institutionally-backed outside investors to new, growth businesses. Most often in health care, but not always, this capital goes to high technology ventures. The capital is generally offered as cash in exchange for shares in the company. Venture capital investments are usually high risk, but have the potential for above-average returns.

A venture capitalist (VC) is a person who makes such investments. A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. Multiple factors go into making the “deal” – a persuasive and structured business plan, the track record of the founding entrepreneurs, a record of sustainable growth, the quality of the management team, the caliber of the competition, the unique of the idea.

What are venture capitalists like? And what are they looking for? VCs aren’t dreamy idealists. They may be unseemly realists. They’re pragmatists, looking for returns on investment, and a piece of the future action. The latter may cause tension between those looking for capital and those supplying it, and is often the single issue on which the founder and his backer flounder. It may even be the issue responsible for the term “vulture capitalist.” VCs aren’t even necessarily “entrepreneurial.” Successful VCs try to define the risks they have to take and to minimize them as much as possible. They’re not risk-focused but opportunity-focused. They are looking for unfilled niches, and sons of niches.

So why would I characterize my book and my blog as happy hunting grounds for venture capitalists? I freely admit the term "happy hunting ground" is a bit of a stretch. But at the same time, most of the 34 examples I offer in my book as “key concepts for transformation,” have been reality-tested and are backed by case studies of real-world participants. This indicates, to one degree or another, viability in the health care marketplace.

As for the blog, I have now submitted 150 consecutive daily entries on innovation. I will be first to admit these blogs are a mixed bag, but I sincerely believe the bag contains some venture capital nuggets worth sorting, sifting, and “panning” through. Sorry about ending this blog with a a preposition. As Winston Churchill said, and I paraphrase, this is the sort of English up with which I should not put.

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