Is there a health tech bubble?

Venture capitalists poured $48.3 billion into US startups last year, investing at levels not seen since before the dot-com bubble burst of 2001. Software and biotechnology companies were the leading recipients of this venture funding, which rose 60 percent from the previous year, according to last month’s MoneyTree report from PwC and NVCA.While these numbers reflect an unprecedented level of innovation, they’ve also caused some experts to start talking about another tech bubble, and it’s natural to wonder if that bubble has spread to health information technology.

What would a health tech bubble look like? What would cause it and what would be the fallout?

First let’s clarify what we mean by “bubble.” In this case we’re talking about a self-perpetuating rise in the share prices of stock for companies in health information technology. Typically this happens when stories of initial financial wins draw in investors who may not have expertise in a particular industry but are attracted by others making money. This process can flood an industry with money on which businesses can’t provide a return, causing the investors to flee and the bubble to burst.Of course there are a few recent bubbles we’re all familiar with, most notably the 2008 housing bubble and the 2001 dot-com bubble. Because the housing bubble involved institutional lenders like mortgage brokers and Wall Street hedge funds, the housing market collapse extended more broadly throughout the economy. This is one of the main reasons we care about bubbles - because in many cases they affect more than just the initial capital providers.Discussing financial bubbles is tricky, because the term can only be used with certainty in retrospect, after share prices have crashed. But there are some trends - like a rapid increase in the amount of cash venture investors are putting into the sector - that analysts consider early indicators that a bubble exists. Next week we’ll continue this post with some facts that point to the possibility of a health tech bubble.