At Sapphire Ventures, we aim to proactively research spaces as we search for new investments. Most recently, we have been taking a closer look at early-stage healthcare investments. In this article is some of the data we reviewed during a recent analysis on healthcare showing the investment and exit environment, as well as performance dynamics that make healthcare seem attractive from an investment perspective. Unless otherwise noted, healthcare figures include both healthcare IT and life sciences combined.
This first chart depicts the portion of healthcare dollars invested in venture capital relative to total dollars invested for all of venture capital. Since 2010, roughly one-third of all venture dollars invested each year goes to healthcare investments, with more than $15bn invested annually over the past three years.
However, not all these dollars invested in healthcare come from healthcare-only funds. According to our data, healthcare funds raise less capital each year than the amount that flows into healthcare investments. Roughly one-fifth of the total dollars is for healthcare-only funds, increasing from just over $2bn raised in 2010 to over $7bn in 2015 and another $7bn in 2016.
Going one layer deeper, we notice that the amount invested in biopharma and healthcare IT has risen quite dramatically in recent years, while dollars into devices and diagnosis or tools has stagnated.
Similarly, the number of deals within the categories of healthcare tracks closely to the trends in dollars invested.
Focusing on healthcare IT, investors with at least one deal a year in healthcare increased more than fourfold to more than 500 investors in 2016, up from just over 125 investors in 2011. Despite the high headline number of unique investors in healthcare IT today, there are far fewer firms actively investing. Specifically, only 32 firms invested in four or more healthcare IT deals in 2016. Moreover, a number of these active venture firms are strategic, meaning there are even fewer healthcare IT-dedicated firms looking for financially-oriented returns.
Why is there so much recent activity in healthcare investing? In addition to structural reasons – need for lower costs and more efficient processes – and regulatory reasons, renewed interest in healthcare may be driven in part by attractive investment returns, with almost $100bn in distributions from VC-backed healthcare investments over the four years since 2012. Attractive performance tends to draw more participants into a space.
On the M&A front, bio-pharma still seems to hold a lion’s share of the exit value. Healthcare IT is still waiting on outsized M&A returns, though the amount per annum has generally increased, especially since 2012.
For public market listings, biopharma also dominates the majority of value created. Similar to M&A, healthcare IT and services have recently seen a cohort of larger companies going public.
As a performance metric for limited partners (LPs – fund investors), healthcare IT returns are distributed faster to LPs than general IT returns. That is, LPs may get their money back faster when investing in top-performing venture-backed healthcare IT with relatively similar IRR performance.*
* DPI: Total fund cash and stock distributions over called capital. Stock distributions valued at date of distribution. IRR: Internal rate of return of fund cashflows, net of fees. DPI and IRR performance does not reflect the performance of Sapphire Ventures.
This is an edited version of an article first published on Medium. Information in it is not intended to constitute investment advice and under no circumstances should it be used or considered as an offer to sell or a solicitation of an offer to buy an interest in any fund managed by Sapphire Ventures. Sapphire Ventures does not solicit or make its services available to the public and none of the funds are currently open to new investors.