Observing Larger Trends in Healthcare VC

This year, venture investment into the healthcare sector surpassed investment in the traditionally heavyweight information technology sector for the first time in over a decade. This trend has been well covered and there are plenty of reasons as to why venture capitalists have shifted focus to healthcare (less cyclical, lower valuations, less fundamental change, etc).  What’s interesting about the trend is that there’s been a historical correlation between difficult economic environments and the relative level of healthcare venture capital investing.

Here’s a look at healthcare investment as a percentage of all venture capital investment over the past 10 years: 

 

What you notice, besides the clear increase in relative healthcare investment over the past decade, is two dramatic spikes: The first in the years following the tech bubble – which is partly the result of VCs shying away from the tech sector while those investing in healthcare maintained their investment pace. Plus, many tech VCs looked for safety in the relative less volatile healthcare sector. The second spike is more recent - starting last year as the recession took hold and what can be considered a small venture bubble burst.  The reasons for this spike are similar as the previous, and as with the previous spike, the absolute dollars invested in the sector have still declined.

What’s also interesting about the two spikes is that they are predicated by a short decline in relative healthcare investment, which makes you wonder - is the relative level of healthcare investment perhaps a leading indicator for venture capital bubbles? It appears so. During bubbles, VCs are more apt to pour cash into what can be more lucrative, but also more risky technology investments.

This recent spike, where healthcare investment has reached almost 40% of all venture investment, is probably just that - a spike. Unlike earlier this decade, the levels of healthcare investment should come back down again as clean technology and IT investment pick up. But the case for healthcare investment remains and we’ll probably see it remain around 30% of venture investment going forward. Demand will continue to be driven by an aging population, continued technological progress, declined pharma productivity and government programs such as those pushing healthcare IT and increased access to healthcare.

Data Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data:  Thomson Reuters