Venture capital is booming business and 2018 was a banner year. With over $30 billion invested across all sectors in America, it’s far surpassed the previous record set in 2000 and 4.8 times what it was ten years ago.
Healthcare commanded a large piece of that pie with over $8.1 billion invested across 368 companies. While some other sectors have showed some evidence of effervescence, the question currently being asked is whether health technology is entering its own bubble.
In the past five years, investors have consistently contributed capital to between 300 to 375 companies a year. The amount of money raised between 2014 to 2016 averaged between $4.1 to $4.7 billion and while there was a significant bump to $21.9 million in the average deal done for 2018, most others have held steady at $14 to $16 million over the last four years. Of the 368 investments made in 2018, only eleven exceeded $100 million in size and, interestingly, there was only 110 merger and acquisition exits and no IPOs in 2018.
Beyond the concerns of capital absorption, the healthcare sector does not exhibit the common characteristics of a bubble. Despite the large amount of money invested, the industry only accounted for between 2.4 to 6.2 percent of venture dollars doled out between 2014 and 2018. Those warning signs of unsustainability – such as a market overrun with quick-flip companies and overly-opportunistic outcomes – are not evident in healthcare.
Additionally, almost 60% of investors in healthcare technology have given money to many companies in 2018. The important takeaway being that the wider dispersal of funds across multiple options demonstrates a certain level of understanding and commitment to the sector.
As for the future, health care is an industry in transition. With over $3 trillion in annual spending, new challenges associated with increasing consumer expectations combined with the need to keep costs low have led to the adoption of technology long-used in other industries.
Consequently, many of the start-ups are relying on innovations that are well-known to solve problems that are easy to understand.
Growth rates in healthcare have been modest and relatively predictable over recent years and, fortunately, free of the explosive, over-hyped outcomes found in more precariously-positioned markets. While the health tech industry may lack the siren-song of easy money for venture capitalists, the slow and steady route will provide a buffer against the fear of the bubble.