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Digital Health Investment Success Catches Up to Excitement

Posted Mar 06, 2014

Andrew Farquharson
Andrew
Farquharson

We know that digital health technologies are getting a lot of interest. Of course they are. The field is rapidly evolving, with low capital requirements and uncertain outcomes – so observers can project all kinds of exciting days ahead.

Over the last year, I’ve been watching the data closely, especially where it relates to the dollars being invested in digital health. In the last three months, something new happened: for the first time ever, digital health funding has outpaced traditional healthcare sectors – biotechnology and medical devices – in terms of both the number of deals and the amount of capital being put into these young companies.

It’s a remarkable time in the industry, although it was only a matter of time given the proliferation of digital health technologies. Technology is marching forward rapidly, and capital requirements for these ventures are much lower than they are for biotech/medtech. This is hardly surprising, since healthcare IT plays often seek to create value with innovations that don’t require costly and lengthy FDA approval/clinical trials.

By itself, the money flowing into digital health is not necessarily a signal that thoughtful investors would interpret as a positive. After all, the vast majority of startups in the space have no clue how to build a business in the highly regulated and complex healthcare landscape. So a rational observer could justifiably sit back and wait for the investment carnage to ensue. Where, one might ask, are the exits? Looking back over the past 10 years, they have been long in coming, and investors have not done particularly well even in the winners.

Last week, however, something exciting happened: Veeva Systems, a cloud platform for life sciences analytics, had an amazing debut in its IPO.

The entrepreneurs and VCs who were smart enough to get in on the ground floor of this digital health company – especially Emergence Capital Partners, which invested $6.5 million dollars between a Series B round and other contributions – were able to see a fantastic return. Incredibly, and worthy of a separate article, Emergence was the only venture capital investor that invested. Emergence invested a grand total of $6.5M for an ownership stake slightly above 30%. Emergence now has a stake of nearly 34.5 million shares of the stock. That would be a value of $1.44 billion for their initial investment.

Multiplying invested capital by over 200X makes the Emergence investment in Veeva one of the very best in the history of life science investing. What is interesting – and, in hindsight, inevitable? – is that this return was generated by, essentially, a tech company creating value in the Pharma industry. Incredible. A sign of things to come? I don’t know – but now you have my attention.

 

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