Health IT funding bubble seen by veteran investor

click to enlarge How is health tech like the 1990s ‘dot-com’-ers? Veteran Silicon Valley investor (HealthTech Capital) and former entrepreneur Anne DeGheest projects a ‘Series B crunch‘ in funding health tech and IT in an interview with The Wall Street Journal’s Venture Capital Dispatch. The key factors: angels and ‘unsophisticated investors’ are pouring money into all sorts of devices, apps and related services in seed and Series A stages just to get on board in a hot sector. When the founders of these companies get to Series B and present to more demanding investors, the lack of a true value proposition and a detailed business plan that answers basic questions leave them standing on, as aptly put, ‘a pier to nowhere’ or as Joe Hage termed it last month, ‘insolvent with a great idea.’

Ms. DeGheest’s view that we are reprising the elements of the ‘dot-com’ bubble is confirmed by the numbers in Rock Health‘s and PwC‘s funding reports throughout 2013:  

  • Mid-year reports indicated that few A round companies were moving to B (TTA 9 July), though countervailed by ‘the screams of crushed startups’ in Silicon Valley and a far rosier report from Mercom Capital (18 July).
  • For full year 2013, this Editor will quote the 23 Jan summary of Rock Health’s year 2013 in digital health investment:
    • Concentration continues #1: Major funders are still a small group (slide 11) and only six deals accounted for nearly 20 percent of the total funding. Dabblers (1 deal) grew by 70 percent.
    • Funding is skewing more towards startups, not a trend you’d expect at this point. Deals are ever more concentrated in seed and Series A–51 percent, versus 39 percent in 2012. Single digits move from Series A to B, Series B to C, and D onward. Series B rounds dropped to 27 percent from 34 percent.

“The effort is all going into making a product that can be shown, but not into building a business” according to Ms. DeGheest. While this may be the nature of entrepreneurship, it’s not the year for that. 2014 is the Year of Reckoning for the Better Mousetraps, and our readers may want to revisit our 1 January forecast for more thoughts on this.

What’s in HealthTech Capital’s portfolio? See here.

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