Venture capitalists see a potential bonanza in health IT

The markets apparently believe that the government's health IT blitz will bear fruit in the form of investor profits. The IPO of Epocrates (EPOC), a vendor of mobile information for physicians, looks like a wild success, with share values jumping 29 percent above the initial offering price in trading on Feb. 2.

At the same time, a Dow Jones VentureSource survey reveals that venture capitalists sank $460 million into the health IT sector in 2010, a 19 percent rise from the $388 million they invested in the field the previous year.

An earlier survey showed that VCs were bullish on health IT's prospects for 2011. Seventy-seven percent of respondents believed that more venture capital would pour into the sector this year, according to the 2011 Venture View prediction poll.

"The improving exit market and a renewed excitement in the IT sector have engendered a confidence among VCs and the CEOs of the companies in which we invest that promises to propel the start-up community forward in 2011," said Mark Heesen, president of the National Venture Capital Association. "While the venture industry will continue to evolve, and likely contract, the companies we fund will continue to grow, innovate and drive the U.S. economy."

The "exit market" Heesen referred to is, in effect, the market for IPOs, which offer venture capitalists the best profit opportunities within a reasonable time frame. Epocrates' IPO indicates that that potential is there in health IT.

But the biggest reason for high expectations is the $27 billion that the government expects to spend on incentives for providers who show meaningful use of EHRs. That, plus the half a billion dollars in federal funding for health information exchanges, provides a lot of fuel for growth in health IT.

A recent survey showed that 41 percent of office-based physicians and 81 percent of hospitals plan to apply for federal rewards for meaningful use.

To learn more:
- read this Healthcare IT News article about venture capital investment in 2010
- scan this earlier piece about VC predictions for 2011
- check out this Associated Press story on the Epocrates IPO