The travails of Theranos — once a Silicon Valley favourite, now a poster child for what can go wrong with hot startups — have done nothing to slow investment in the healthcare sector.
Early stage funding for healthcare-focused startups is on pace to hit a record $2 billion in 2016, according to a recent report by Silicon Valley Bank.
The dollars are coming on the heels of some high profile success stories, like DNA mapping startup 23 & Me, which is currently valued at $1.1 billion. Solving big healthcare problems with technology is appealing to investors who already think of themselves as out to change the world.
“I think you’re seeing unprecedented new entities, new therapies, and faster ways of doing things,” said Jon Norris, managing director for SVB’s healthcare practice. “I think there is that optimistic feeling that’s the reason why you’re seeing more investors.”
Investors are particularly interested in diagnostics and medical tools (think: a genetics test, or a liquid biopsy that looks for tumour DNA in the blood). Already, by SVB’s analysis, there have been more early-stage series A funding deals in the first half of 2016 than the entirety of 2015 worth more than each of the last few years.
Still, Norris notes that investors in the sector now are years from being able to see a way out of their investments. Typical exits for early investors, like initial public offerings, are rare these days. So it makes the increased funding somewhat surprising.
“It’s counterintuitive,” said Norris. “Why you would increase early stage and make bigger investments into a sector where you’re seeing struggle to get to M&A and IPO?” he wondered. “It all comes down to trying to make the right midterm bet.”
That diagnostics and tools area is where there’s a lot more “diverse” investments, including a lot of tech investors looking to get more involved in the healthcare space. Unlike drug development, which can be a much more tricky area to jump into, tech companies are equipped to tackle diagnostics and medical tools a lot more easily.
“You have a data problem that’s out there,” Norris said. For example, a genetics test that sequences your DNA and analyses that information to tell you whether you have a certain trait that could predispose you to cancer, that’s something a tech company could more easily approach.
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