By nearly every measure, 2018 was a banner year for the venture capital industry, particularly in the healthcare technology sector.
Over $130 billion of venture capital was invested across all sectors in the U.S., easily eclipsing the prior high-water mark in 2000 and nearly 4.8 times what was invested a decade ago.
While certain sectors may now be demonstrating bubble-like tendencies, the data also reflect the activity of SoftBank’s ~$100 billion Vision Fund and other late start cross-over investors. In the healthcare technology sector, according to Rock Health, $8.1 billion was invested in 368 companies, which is notably greater than the $5.7 billion invested in 2017. (StartUp Health pegs 2018 at $14.6 billion invested in the sector globally).
But have we entered a healthcare technology bubble?
First, some context. Over the past five years, healthcare technology investors have funded consistently between 300 and 375 companies each year. Between 2014 and 2016, the amount of capital invested annually ranged between $4.1-$4.7 billion. The average deal size spiked to $21.9 million in 2018 but otherwise had been consistently between $14-$16 million since 2014. In 2011, 92 healthcare technology companies raised $1.1 billion (average deal size was $12 million). Of the 368 financings in 2018, only 11 were greater than $100 million in size. Importantly, there were only 110 M&A exits and no IPOs in 2018, according to Rock Health.
Notwithstanding the herd mentality tendencies of venture capitalists and that chronically there is a “capital absorption” issue (that is, too much capital invested too quickly in any sector depresses returns), the healthcare technology sector does not exhibit the classic characteristics of a bubble. In 2011, this sector accounted for just over 2.4 percent of all venture dollars invested, reaching only 6.2 percent in 2018. Classic bubble markets tend to be awash in hype—either at the novelty of the companies, the seductive rates of growth, dramatic and sudden liquidity, or the ability for a “quick flip” (see all things cryptocurrencies). Arguably none of these attributes are present today.
Importantly, nearly 60 percent of all healthcare technology investors in 2018 had invested in multiple companies in the sector, suggesting some level of investor understanding and commitment to the sector.
Clearly, healthcare is an enormous market going through a remarkable transformation and that has drawn a lot of attention. At over $3 trillion of annual spend, much of which is being reapportioned between new and incumbent players, healthcare is nearly 15 times the size of the U.S. advertising industry, estimated to be approximately $200 billion. And look at the staggeringly valuable companies created over the last two decades as the advertising industry was rearchitected (see Google, Facebook, etc.). Furthermore, with the Democrats’ successes in the midterm elections, many analysts anticipate expanded public healthcare proposals, which will further drive interest and activity (see New York City’s recent $100 million proposal for expanded primary care services).
Many startups in the healthcare technology sector today are relying on quite well-understood technologies which have been widely utilized across other sectors for many years; often times the innovation is around the novelty of the business model, meaningfully limiting the true technical product development risk. The problems healthcare technology entrepreneurs are solving are quite obvious and indisputable (need to lower costs, improve outcomes). Overall healthcare industry growth rates are modest and somewhat predictable. The battle is to reallocate dollars to more efficient, more efficacious solutions and approaches.
And while there are some encouraging signs about investor liquidity and exits, there certainly has not been the explosion of irrational outcomes far in excess of underlying fundamentals. Venture capitalists across all sectors always bemoan the lack of consistent exits; recent exit activity in the healthcare technology sector suggests prudent consolidation of sub-scale companies (most of the exit values were not disclosed, strongly suggesting underwhelming outcomes). However, this does not suggest that many of the later-stage private financings today are not fully valued and priced for perfection.
Arguably, the healthcare technology sector is showing signs of maturation. Larger round sizes may simply reflect
