Venture capitalists, trying to curb health-care costs

Over the past two decades, venture capitalists helped make possible striking advances in health care, including robotic surgery, cancer vaccines and genomics. But such innovations also fuel higher health-care spending, and now private investors see new opportunities in betting on companies that could curb those costs.

America’s health-care spending is “twice what it was 10 years ago, and it’s forecasted to grow in an unaffordable way for the country,” said John Doerr, a Kleiner Perkins Caufield & Byers partner who backed Google, Twitter and other Silicon Valley giants. Doerr’s answer to the health-care problem is Essence Group, a St. Louis health plan he bought in 2007 and converted into a laboratory to develop software and services to help doctors and insurers tackle costs.

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Doerr isn’t alone in spotting an opportunity in health care’s high costs. Venture capitalists are increasingly interested in nuts-and-bolts businesses such as data-mining and grass-roots care management. Meanwhile, the appeal of companies that seek high-ticket, high-risk medical breakthroughs is on the wane.

The share of venture dollars flowing to seed and early-stage investments in biotechnology and medical devices has plummeted since 2007, when investors pumped $3.6 billion into 332 deals in which a price was disclosed, according to data compiled for Kaiser Health News by FactSet Research Systems. As of late October, investors had spent $1.1 billion on only 89 such deals this year. Overall venture investing declined by nearly one-third as the economic recession set in but is on track this year to return to nearly pre-recession levels.

“There’s a realization that part of the health-care cost problem is adding on the bells and whistles of [medical] technology,” said Ian Morrison, a health-care consultant in Menlo Park, Calif. “The smart money is recognizing that’s not the winning formula for the future.”

Some of that money is increasingly going to information technology, business services and other health-focused companies. For instance, software companies that cater to the health-care industry received $407 million in investments in the first three quarters of this year, compared with $311 million for the full year in 2007 before the recession, according to PricewaterhouseCoopers researchers, who compile the industry-backed quarterly MoneyTree Report. Though the increase so far remains modest, investors say interest in the sector is heating up.

Venture capitalists are still looking for strong companies in all sectors – drugs, devices and services – but cost concerns and other factors have led to changes in demand. Investors are wagering that customers will pay attention to the promise of lower costs.

“If you come in with [a device] that’s 10 percent better and twice as expensive, it’s hard to get anyone to care,” said Bryan Roberts, a Palo Alto, Calif., venture capitalist at Venrock who invests in health services and device- and drugmakers.

Doerr’s firm and Camden Partners put $61 million into Essence this summer in a bid to help market the technologies it has developed to rival health plans. Sandbox Industries followed with a $9 million investment in October.