While venture capitalists have long been involved in healthcare, the more than $6.5 billion reported to have been invested last year raises the stakes for the VC community and the healthcare industry. New healthcare companies and ventures, flush with investor cash at such a high level, are in the midst of a happy honeymoon phase.
But things could get difficult quickly for VC-backed health IT startups. Healthcare is no longer just another vertical for institutional investors. Now, it's a major bet dominating many firms' portfolios, which means they'll want a competitive advantage even more than they have before.
Unfortunately, VC investors and the healthcare world want different things from health IT. In theory, smart VCs know that the health IT industry is pushing for interoperability, but in practice, they're likely to resist any solution that doesn't give startups a proprietary edge.
The incentives don't line up
Patents are typically a critical concern for venture capitalists when putting serious money into a project, as companies with proprietary intellectual property have greater market differentiation from their competitors when they go to market. If they can't hang their hat on a patent, they’ll at least want to see other product characteristics that make it hard for competitors to horn in.
The problem is that in today's climate, which increasingly rewards interoperability, things could get very dicey if new vendors try to sell proprietary IT that doesn't play well with other IT platforms. While turning out products that don't interoperate might look sexy to investors, vendors making closed technologies don't have much of a future for regulatory reasons.
In fact, if VCs' traditional way of thinking dominates the marketplace, it could be a big setback for the health IT world as a whole.
The two of the top ten sectors for investment for 2014, according to the Startup Health Insights Report, were big data and practice management, which will likely involve EHRs and the data they hold to a large extent.
If these capital investments follow the VC culture's basic tenets, they may encourage startups to launch proprietary solutions that don't interoperate with any other platform. And while that might please the investors, it could serve as a barrier to market in the healthcare industry, which has yet to even settle on any kind of formula for the delivery of data for EHRs and other data-collecting software.
In other words, VCs are going to have to redefine their idea of a sustainable business model if they want to invest successfully in health IT companies. I'm pretty confident they'll get the point eventually, but there's likely to be a fair amount of kicking and screaming along the way.
The value of cooperation
The post ACA world continues to evolve, as technology drives innovations necessary to reduce costs and expand state-of-the-art patient care to rural areas. As these innovations appear, VCs will need to change their thinking. Specifically, it's critical that they understand the danger of pushing billions of dollars worth of proprietary technology into an industry that is in desperate need of cooperative technologies than enable each other.
That's why it is so important for the cultures of venture capital and healthcare IT to find a shared understanding, instead of clash, over the issue of proprietary data schemes. VCs will just have to accept that today's new models for healthcare rely on freely-shared data, and see to it that their portfolio companies discover different ways to be unique.