Two weeks ago we introduced the idea of a health tech bubble, based on news that venture capital funding for US startups had reached a 10-year high.While it’s impossible to know with certainty if a financial bubble exists, there are certain conditions that point to the possibility. Here are a few facts worth noting:
Venture capital investments in health information technology rose dramatically in the last year, following the general trend for startup companies. In July 2014, year-to-date investments in health tech had already passed total 2013 investments at $2.4 billion, and health-care startups set records for initial public offerings in 2014. Experts expect startup venture funding to continue without any sharp drop in 2015, with gains in health technology, biotech, and commercial software companies.
Federal funding and legislation has created a road map for entrepreneurs to take advantage of fundamental change and disruption in the health-care sector. For example, since 2011 the Department of Health and Human Services’ “meaningful use” rules allowed healthcare providers to qualify for up to $27 billion to implement electronic medical records. As CNBC reported, experts say that companies are scrambling to exploit potentially profitable opportunities offered by Obamacare and inefficiencies in the nearly $3 trillion health care system.
Large venture rounds to health tech companies have become more common in the last year. For example, ZocDoc Inc., a mobile app and doctor-finding service, raised $152 million in venture capital to expand its services nationwide in 2015.
The mobile health care movement has put more than 100,000 smartphone and tablet apps in consumer hands as of 2015. These apps represent rapid growth in health IT, indicating more companies and more investment.
These trends combine to create a financial market that risks overvaluing companies in health information technology. If there is a bubble, and it bursts, we would expect to see many of these companies go out of business, while others would see a dramatic drop in their stock prices.
However, it’s important to note that last year’s $48 billion in venture capital investments included 47 “mega-deals” of more than $100 million, and that the majority of those companies are not in health technology. For example, the biggest deals included over $2 billion invested in Uber Technologies, and $485 in SnapChat. While health tech may be experiencing a bubble, the fallout from a larger tech bubble is likely to be more severe.
Investors that are worried about a tech bubble say they’ll put their capital in businesses that have a chance at surviving the burst, and that these companies will target large markets with an excellent product that customers are willing to pay for. If consumers are willing to pay a high enough price for the company to profit and grow, they’ll have other sources of capital to stay viable in the event of a burst. Which companies in particular, this investor does not say.