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The Role of Venture Capital in Healthcare

Telehealth. mRNA vaccines. Gene therapy. What links these areas of healthcare with other innovative fronts? Venture capital. Throughout the past twenty years, the role of venture capital (VC) in accelerating innovation in healthcare has been rapidly increasing. To understand the role of venture capital, we must analyze a few critical aspects: where investments are being made in the industry, whether healthcare priorities align with those of VC, how VC constrains or expands healthcare innovation, VC’s focus on underserved populations and countries, and how VC can transform an idea into a full-fledged, effective healthcare solution. With an understanding of these functions of VC in the healthcare industry, we can properly judge whether it is a positive or negative force and how it has and continues to change.


The allocation of venture capital within the healthcare industry has touched every corner of the space. VC funding has been an important factor in the significant growth of the healthcare sector by improving the general health status of society as life expectancy increased and death rates decreased [1]. A new form of medical care, telehealth, has been on the rise because of its ability to connect doctors with patients who are hard to reach and need frequent connection with physicians. Recently, COVID-19 has pushed the development and importance of behavioral health, remote patient monitoring, telehealth, cybersecurity, and virtual fitness [2]. Since only 30% of all medical visits were provided by telemedicine channels and platforms during the pandemic, VCs worked towards reducing the cost and avoidable readmissions to care providers as they knew that telehealth was an efficient solution to addressing this problem because of its capability to connect patients and doctors quickly [2]. Telehealth as well as other adaptable health solutions grew their reach throughout the pandemic, and in 2021, VC fundraising in this space hit a record of $28.3 billion in U.S. markets alone [3]. As healthcare has changed in recent years in the United States, VCs have adapted their deployment of capital to focus on emerging healthcare solutions such as telehealth.


When evaluating the influence of VC on healthcare, we need to ask if and how VC funding aligns with healthcare priorities and sub-sector demands. At a fundamental level where we assume efficiency in the healthcare market, what people demand and what they prioritize is what they will spend money on. When people spend money on specific areas in an industry, those areas become more profitable, and in turn, more appealing to investors such as venture capitalists. So, in theory, VC investment and societal demands are aligned. Now looking at the after-effects of the pandemic, consumers continue to demand three things in healthcare—access, price, and outcomes [2]. And, as expected, VC investment focused on those three things. Whether it be patient monitoring solutions hosted on virtual platforms or mobile applications that help patients navigate the care continuum digitally, VC funding has been focused on areas that are rapidly growing and in deep demand for their services.


On the other hand, VC funds are being allocated toward transforming scientific discoveries into products for patients in low and middle income countries and other overlooked demographics. Dr. Nina Rawal shared her story of how she has “spent the recent years investing in start-up companies within areas such as cancer and rare diseases and [has] seen the power of the venture capital and active ownership model to translate and transform promising scientific discoveries into commercial products that improve people’s lives” [4]. Ultimately, by funding unproven, high-risk technologies and demonstrating their clinical benefits in patients, venture capital has played a significant role in healthcare transformation [4]. Venture capital also has the capability to transform weak domestic economic conditions in marginalized countries. “Innovative products can be scaled across populations and geographies, achieving sizable gains in health in countries that have a limited ability to individually fund innovation [4]” says Dr. Rawal. Through investment in traditionally overlooked segments of consumers, VC has the capability to transform the healthcare space from a segmented-based level.


Yet, an often referred argument in discussions regarding venture capital impact is whether VC funding imposes constraints on development and innovations in the healthcare space. While venture capitalists can have mandates and viewpoints that are extraneous to healthcare, they still shape health technologies by conditioning how capital-backed technology development processes unfold [5]. This mandate is represented in their “term sheet,” which defines the milestones at how much money is made.This also has direct implications for technology design priorities. For example, researchers at the University of Montreal identified one clinically-led firm that had to modify the key goal of its labor monitoring system:developing medicolegal functionalities for physician insurers who were more likely to purchase the system instead of reducing unnecessary cesarean sections. This redesign of the system enabled their business to expedite sales and generate revenues but altered the market service of the product [5].


The venture capital space has had immense impact in molding the healthcare space among other industries. However, it is important to consider the flip side of its impact. The future of healthcare-oriented VC should be focused on optimizing impact that aligns with health priorities and puts societal demands over corporate profit, no matter how embedded they are within each other.


References

  1. Frimpong, Fauna A., Akwaa-Sekyi, Ellis K., Saladrigues, Ramon (2022). Venture capital healthcare investments and health care sector growth: A panel data analysis of Europe. Borsa Istanbul Review, 22 (2), 388-399. https://doi.org/10.1016/j.bir.2021.06.008

  2. Amato, Kerry (2021, February 18). Healthcare Investing Trends Report. Healthcare Information and Management Systems Society. https://www.himss.org/resources/healthcare-investing-trends-report

  3. Hamerrand, Jim (2022, January 11). Healthcare venture funding boomed in 2021; expect a slowdown in 2022. Medical Design and Outsourcing. https://www.medicaldesignandoutsourcing.com/healthcare-vc-venture-funding-svb-ipos-2021-record-investments-2022-slowdown/

  4. Rawal, Nina (2019, December 5). How venture capital can transform global health. World Economic Forum. https://www.weforum.org/agenda/2019/12/investing-in-healthcare-venture-capital/

  5. Lehoux, Pascale, Miller, Fiona A., Daudelin, Geneviève (2016). How does venture capital operate in medical innovation? BMJ Innovations, 2(3), 111-117. http://dx.doi.org/10.1136/bmjinnov-2015-000079



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