Veteran VC Says Beware of Health IT Bubble: Not Enough ‘Actual Business Plans’
Timothy Hay from the Wall Street Journal wrote a great article after he interviewed me.
With software executives filling out the roster at this year’s JP Morgan Healthcare Conference, and with the reported IPO plans of medical cost-transparency software provider Castlight Health at a $2 billion valuation, information-technology for the health-care industry is beginning to look nearly bulletproof as a sector.
But with feverish activity and high valuations comes the danger of a bubble, said veteran investor Anne DeGheest, who was an investor and entrepreneur through the tech boom of the 1990s, and who founded Sand Hill Road firm HealthTech Capital several years ago.
Ms. DeGheest has invested extensively in medical devices and in health-related information technology, and she said she learned in the ‘90s to read the signs of an economic bubble. She sees some of those signs today, telling Venture Capital Dispatch of a potential “Series B crunch” as a number of health entrepreneurs without solid business plans try to raise money from investors.
Q: What is the ‘Series B crunch?’
A: Right now, there is a bubble forming. The country is re-shaping its largest industry, and it’s the biggest experiment we’ve ever done with the American economy. It’s opened the floodgates, and there is a sort of Gold Rush because there is massive opportunity. So much of the money is going into companies at the seed or Series A level, and it’s coming from angels and unsophisticated investors. When it comes time for these companies to raise a larger, Series B round, they are going to have to answer a lot of tough questions about their business plans. Many will not have answers to those questions, and some of these companies are going to fail.
Q: What are the types of questions investors will ask at the Series B level?
A: We’re going to ask, ‘What is your value proposition, and how will you prove it? What pain points are you trying to solve in the market? What’s the cost of customer acquisition in your business?’ A lot of these companies say they are going to pull data from a variety of sources, run algorithms on the data, and then present the data to the customer. At the Series B level, we would ask, ‘Why is this data actionable? Who is meant to take action on the data? How do you measure the impact of this data?
Q: Why do you think the company founders will not have those answers?
A: This is what I have been seeing. There’s a tidal wave of startups like we’ve never seen before. It’s kind of like the dot-com boom, there is this rush to build a product that you can demo. Thirty-five companies presented [at a health I.T. conference affiliated with the JP Morgan Healthcare Conference]. And at CES, I lost count. The effort is all going into making a product that can be shown, but not into building a business. I don’t see enough actual business plans.
Q: What other signs do you see that there is a bubble forming around health IT?
A: I see a lot of things that remind me of the ‘90s. Just like then, unsophisticated investors and angels are providing a lot of bridge loans. Without a good business plan, though, a bridge loan is a pier to nowhere. Also, there’s a shortage now of good engineers. There are also many, many copycat companies in health IT. They have no actual intellectual property, they just say they are going to take information and deliver it more efficiently. Some of these companies will not put a cap on their valuations. They seem to think there is no actual limit to their value.
Q: What is your prognosis for the whole health IT sector?
A: It’s very strong, because there are massive forces changing the existing players in the health-care system. There is tremendous opportunity. But there is too much activity at the seed and Series A level, and too much a rush to build a product. To raise a Series B, these companies are going to need metrics. Without that, a significant number could fail. I’m hoping to see more emphasis on building solid businesses.