Health IT Wins More Venture Capital in 2011Health IT Wins More Venture Capital in 2011

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Venture capital investments in companies that provide health IT and services hit $207 million in the third quarter of 2011, a 14% increase when compared with the $182 million raised during the same period last year, new figures from Dow Jones VentureSource reveal.

The latest figures, which were published Friday, also show that the health IT and services sector has raised $445 million for the first three quarters of this year and could possibly surpass the $508 million invested in all of 2010.

VC investment in medical software and services is "trending nicely," said Jessica Canning, global research director for Dow Jones VentureSource. "Given the momentum that the industry has already seen over the past year and a half, we'll most likely see a fairly significant increase in deals in the fourth quarter, bringing us above the 2010 level."

VC investment is already over the $416 million that was raised in the first three quarters of last year and is on target to surpass both the number of deals and the total amount raised this year compared with last, Canning said in an interview with information Healthcare.

[One reason for growing VC interest in health IT? The money hospitals and medical practices are spending on it. Read EHR Market To Reach $6.5 Billion By 2012.]

Of the 24 deals struck in the third quarter, 18 were in the administration and electronic health record (EHR) areas, which includes medical practice management and administrative software, as well as software to manage EHRs, she said.

New York City's ZocDoc received $25 million from Goldman Sachs to support its online marketplace that simplifies the process of scheduling doctors' appointments. The funds were an add-on to a $50 million Series C round ZocDoc raised in early August from Russian investment firm DST Global.

Miami's CareCloud announced in September that it had raised $20.1 million from Intel Capital and Norwest Venture Partners. CareCloud, which serves more than 1,000 physicians, provides cloud practice management tools for healthcare providers.

Aventura HQ, a Denver software company, also announced in September that it raised more than $13 million in its first round of institutional venture funding. The round was led by HLM Venture Partners and Excel Venture Management with participation by Siemens Venture Capital (SVC).

Aventura provides doctors, nurses, and other clinicians with a platform that lets them access and update patient data every time they log onto a new terminal at a different location within a hospital. The software helps clinicians increase productivity while reducing medical errors and offers user authentication and other patient privacy tools to enhance privacy and security of patient data.

Health IT companies are receiving investments at the seed, intermediate, and later stages of their business development, Canning said. They also have different business models and are offering software that tackles a variety of complex issues in healthcare, she said.

"Just looking at all the different kinds of solutions that these companies are providing, it shows that there are so many different ways to target this industry," Canning said. "We're just getting started and medical software and services will definitely have a long investment cycle. We are just starting to crack this open."

She also expressed surprise that health IT companies are scattered across the country, rather than clustered in one state or region. Typically you'll see almost all investment going to Silicon Valley, or a group of companies in one place like Boston, with its large healthcare industry, she said.

The Dow Jones figures also show that for the first time since 1998, medical device companies raised more than the biopharmaceuticals sector. In the third quarter, medical device companies raised $857 million in capital invested, compared with $659 million raised in the same period last year. The biopharmaceuticals sector didn't fare as well, posting 78 deals which raised $715 million, a drop in capital invested from the year-ago period when 71 deals raised $865 million.

Investments in medical device companies that make therapeutic devices, diagnostic and imaging equipment, and other medical monitors were weighted toward the later-stage deals, Canning said, which could reflect investors' concern over the clarity of the U.S. Food and Drug Administration's medical device requirements.

In healthcare services, $170 million was raised in the third quarter, compared with $489 million in the same quarter last year. Healthcare services saw a significant decline against the first three quarters of this year attracting approximately $400 million in venture investments, which is down from the $1.1 billion that was raised in the first three quarters of 2010.

The decline in healthcare services helped to drag down the entire healthcare industry's investment figures. Overall, the industry raised $1.9 billion in 184 deals, an 11% decline in capital invested and a 9% increase in deal flow.

In general, investors put $8.4 billion into 765 deals with U.S. companies during the third quarter of 2011, a 29% increase in investment and an 8% increase in deals from the same period last year. The median amount raised for a round of financing during the third quarter was $6 million, an increase from the $5 million median a year earlier.