Why Hospitals Force HIT Vendors to Take VC Money
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One of the funny things about running a web company in the healthcare space is that there’s a lot of interest from the venture capital community. And about once a month, someone from a VC firm will call me up, ask me a few questions about the space, and conclude that yes, we don’t need their money. (Admittedly, I start the conversations with, “I’m happy to talk to you, but we’re not looking for your money…” so this idea has been well-planted in their minds.)
Yesterday it was Michael Segal, from Bessemer Venture Partners, whose name I mention as I promised him I would: he subscribes to a Google Alert for such name dropping events such as these. Bessemer is a fine fund — one of two family-run VC firms that I know of which has thrived — Venrock, from the Rockefeller family ventures, being the other.
I always enjoy these conversations since they follow a predictable pattern: the caller has attended Harvard, is learning about the healthcare space, inquires about competitors, asks about our products, asks about the market, concludes with a vague interest and I suggest if they ever have questions about the space, they should feel free to call.
I never hear from them again.
I’m not knocking VCs — in fact, someday I think it’d be fun to join the ranks – but their job is increasingly hard given the stock market, decreasing talent who can run large companies, and a shrinking need for their services. Thanks to web technology becoming less expensive every day, the need for $10m or $20m has been cut to a few hundred grand. That’s actually tough for VC firms since they want to put the most amount of money in the most likely winners and focus their portfolio on what they need to manage. If you had a choice between putting $10m to work in one company or $1m in 10 companies, which would you pick?
I’d go for the latter, but that’s my outlook as a passive investor. When you’re managing a $350m fund, you pick the former, believe it or not.
So why the ramblings about VCs other than to tweak my new acquaintance? Nearly every HIT vendor needs to take outside capital to get a company going because of the sales cycle in healthcare. If one were to custom build an application for a specific hospital and then try and roll it out globally, you will fail.
The sales/marketing cycle for healthcare is easily 18 months, often much, much longer. HIT companies need to capitalize accordingly. In other words, hosptials are loathe to make decisions quickly and that drives up their costs, which requires outside capital to fund the sales cycle, and that drives up the costs. And when the companies are big enough and need to pay back the VCs? They go public… which drives up the costs. So anytime you see large amounts of outside funding flowing into a healthcare company, especially when they are profitable, you can be sure prices will rise within 18 to 24 months.
All that said, I don’t see any other way for HIT vendors to get into the business except if you’re lucky or very, very good coming out of the gate.
In the (admittedly small) market that we are in, MedTouch is known for delivering results at a considerably higher quality and at a very fair price, still less than what others charge. I think that’s such a competitive advantage, I’m not sure we’d trade that for a few million in funding we wouldn’t need anyway. Maybe someday, we’ll have the Starbucks-sized idea, but for now, we’re content to get smarter with each new client – and boy, do we have some exciting announcements coming out regarding new clients — as the industry moves away from e-health and towards Health 2.0
More about that change, later this week…
UPDATE: A had some complaints from VCs about a comparison I made to the banking industry, which I thought was a fair critique given it wasn’t the point of this article. Hence, rescinded.