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VC will ride out of the downturn on health care, fintech and online ads

The first quarter of 2009 saw venture capital investments hit a 12-year low, according to a report from PricewaterhouseCoopwers and the National Venture Capital Association (NVCA). While investors are still wary about making new investments as the economy slowly begins to correct itself, venture capital will no doubt reemerge as the preeminent source of financing in the technology and life science industries.

Ultimately, a shift in the way consumers use the internet will serve as the major catalyst for increase venture capital interest in certain technology sectors. With the advent and growth of collaboration tools on the web, new technologies geared toward project management among companies and groups will become better developed for both enterprises and average consumers.

There are three main sectors in technology that will become hot spots for venture capital funding moving forward: Health care information technology, financial software and online advertising.

Health care IT will continue to gain speed, especially if president Obama passes his health care reform package. With new government regulations on the horizon, opportunity for compliance systems will grow exponentially. New processes that have long been completed manually will be automated, and the prospect of using shared platforms for record keeping and other data exchange will only increase companies’ appeal to investors.

Firms seeking opportunities in health care will be diligent about the details. Today, the focus is on treating chronic diseases. Moving forward, we’ll see a sea change from drugs and devices used to treat diseases and their symptoms to preventative care and awareness campaigns. As such, investors will likely be targeting diagnostics, specialty pharmaceuticals, regenerative medicine and preventative devices. The companies that do the most to prevent diseases and reduce health care costs accordingly will come out the winners in the venture capital game.

Improved collaboration will also cast the spotlight on financial technology, or fintech. Enhanced information sharing tolls can be used to create best practices that will, in turn, reduce costs, improve efficiencies and bolster the whole financial services sector.

Finally, online advertising will see a surge in venture dollars due to increased internet-based sharing. We’ve already seen advertising shift dramatically to new media in the last few years. And with this new emphasis on collaboration, companies will be able to more easily see others’ successes and mirror their efforts. Measuring successful ad returns quickly and accurately will also drum up investor interest in a big way.

In all three of these sectors, investors will be giving preference to companies that have more cost effective ways of getting products to market. From now on, comparative effectiveness research (CER) will require companies to demonstrate how efficient they are at this, and based on these results, set prices for reimbursements. For example, those that can reduce the current overwhelming costs of health care, or who can produce the same (or better results) at a lower cost will hit the sweet spot for most venture firms.

In addition, both technology and life sciences will be impacted by strategic themes that will eventually drive growth and attract VC financing. For instance, many technology platforms are migrating to newer technologies with changing cost structures at the same time that many medical treatments are moving from generalized to personalized medicine.

Also, many existing technologies are reaching the end of their lives or patent protections. As a result, many businesses based on once-novel innovations are now facing consolidation and other competitive pressures. Most important is convergence; information technology will increasingly merge with life sciences. Right now, diagnostic test makers are partnering with therapeutics providers to increase efficacy and safety.

The economy isn’t going to repair itself — nor is the government going to be able to fully turn it around. But, when the time is right, new, smart enterprises will begin to flourish, and venture capitalists will be ready to lend the most promising and viable among them enough financing to get them through the remainder of the slump.

James A. Datin is executive vice president and managing director, life sciences group of Safeguard Scientifics. Kevin L. Kemmerer is executive vice president and managing director, technology group of Safeguard Scientifics.

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