Advice for health-care IT entrepreneurs

Mass High Tech: The Journal of New England Technology - January 19, 2007
by Anupendra Sharma and Tamara Nazzal


Health-care IT is a complex, dynamic business. A 200-bed hospital can have up to 100 software applications, each supplied by a different vendor. It takes up to five systems exchanging data to dispense a drug. If you are CIO, it's a nightmare. If you're a systems integrator, it's an opportunity. If you're an entrepreneur, these are interesting times.

Health-care IT is a $25 billion to $30 billion industry, with the largest segment targeting hospitals and physicians. The 2 percent to 3 percent of revenues providers spent on health-care IT starkly contrasts with 7 percent spent by financial services, where investments in seamless, integrated global IT systems have all but eliminated paper. The investment lag in health-care IT is evident in multiple hand-filled forms, 100,000 annual medication-related deaths and billions spent in redundant testing. It is a large, but fragmented industry represented by six public companies with capitalization greater than $1 billion, divisions of a few large companies, and mostly midsize companies.

After several lackluster years, the sector started to surge in 2004 with a spate of acquisitions. Strong M&A activity and rising stock prices have improved the sector's investment profile. Awareness is rising in government. In the 2005 State of the Union address, President George W. Bush urged higher spending in health-care IT to reduce medical errors. As principal author on the Wired for Health Care Quality Act, Sen. Hillary Clinton, D-N.Y., will likely incorporate health-care IT in her campaign agenda. Health-care IT is a bipartisan issue.

Popular tech companies have also created a buzz. Intel Corp. created a Digital Health Group, Microsoft Corp. acquired the Azyxxi software from Datomics Licensing and General Datomics, and "Google Health" has everyone wondering about what they are up to.

The pie is growing. Top hospitals are expected to double their IT budgets over the next few years as hospitals strive to implement electronic medical records (EMRs), improve operations and grow margins. Analysts are predicting 12 percent annual growth. The major players, including GE Co., McKesson Corp., Philips Medical Systems and WebMD Inc., are showing willingness to invest in or acquire smart startups.

Massachusetts has its share of interesting startups. Medventive Inc. of Cambridge (cost and quality management), Radianse of Lawrence (RFID) and PatientKeeper Inc. in Newton (EMR) raised VC money in 2006. Other startups include eClinicalWorks of Westborough (EMR) and Sentillion Inc. of Andover (patient identity).

So where are the opportunities? The emphasis is on quality; reducing errors; improving efficiency; capturing data in a painless, integrated way; and better decision-support systems. Hospitals are concerned about reimbursements, proper billing and collapsing revenue cycles. Companies looking to get into the health-care IT space should focus on solving problems, reducing or eliminating waste, improving supply chains and automating workflows.

To get a foot in the door, start with a pilot at one hospital. Build relationships with clinicians. Find a champion. The radiologist who cuts test wastage may be a better entry point versus the IT department.

When you pursue ideas, remember that ROI is important, but ultimately products or services must significantly impact patient outcomes or hospital efficiencies. Don't get caught up in the elegance of a disruptive technology, nor build another EMR. Instead leverage RFID, wireless, remote monitoring, robotics or web-enabled applications as components to solve problems. Health-care IT is a different beast than traditional IT, with more regulation, slower adoption, longer sales cycles, and different players. For patient entrepreneurs with good ideas, the sector offers several structural advantages: consistent topline growth even in tough times, good margins and barriers once you are in.

A comment on financings. Consider bootstrapping with SBIR, STTR grants or by selling services. Annually, 20 to 30 companies get early-stage venture capital money, but expect that number to rise in 2007. New investors are getting interested. Series A premoney valuations are typically under $5 million; Series B valuations remain in single digits even for the most successful startups, reflecting the risk-return profile of investing in this sector.

The opportunities are here and the dollars are coming. So tread carefully, but do get in.

Anupendra Sharma is a Boston-based investment partner for the Medical Solutions Fund of Siemens Venture Capital, which has no investments in any of the companies mentioned above. He can be reached at anupendra.sharma@siemens.com. Tamara Nazzal is a research assistant with the Center for Integration of Medicine and Innovative Technology. She can be reached at tnazzal@partners.org.