MaSSSoftech

Venture capitalists invested more in health care than information technology last quarter for the first time in a quarter this decade. That shift is likely to correct itself as the economy improves, but there is a trend that does have legs: emerging opportunity at the intersection of both fields.

IBM’s Anatomic Symbolic Mapper Engine, which allows doctors to visualize patient medical records.

New efforts to overhaul the health care system is creating opportunity for a new generation of health care-IT hybrids. The federal stimulus law, which allocates $19 billion to health care-IT, combined with Congress’s efforts to provide health insurance to the uninsured, is enticing entrepreneurs and investors alike. “I have seen a marked increase in deal flow to capture the $19 billion in stimulus spending,” said Michael Greeley, general partner of Flybridge Capital Partners.

In the second quarter, venture firms injected $90 million into 19 financing rounds for medical software companies, up from $63 million in 15 rounds in the first quarter, according to VentureSource, which, like this newsletter, is owned by Dow Jones & Co. While this investment area is still small relative to the entire health care sector, the uptick signals a shift in VCs’ view of health care-IT, historically a minefield for small companies, which have struggled with the long sales cycles of hospitals, insurers and other big clients.

Part of the shift can be traced to the success of athenahealth Inc., a provider of physician-billing and practice-management services that went public in 2007 and is now valued at $1.3 billion. Bryan Roberts, a partner with athenahealth backer Venrock, said health-IT is starting to draw VCs who haven’t invested in the field before.

“I’ve gotten calls from a variety of venture firms, saying, ‘Hey, we’re really interested in this area, will you come talk to us about it?’” he said. One Venrock medical-IT start-up has received 10 term sheets in three weeks for a Series B round, at a material step-up in valuation, he said.

The stimulus law provides financial incentives for physicians to exchange paper health records for electronic ones, which creates opportunity for providers of solutions to store and share sensitive patient data. Technologies for monitoring patients remotely, and keep them out of the hospital, will also be in demand because of their ability to hold down health care spending, some investors contend.

But any start-up seeking to sell a medical-IT business idea to venture firms must show that its product improves cash flow, said Venrock’s Roberts. “The real hitch has been whether the product is a nice–to-have or a have-to-have,” he said. “If you’re a have-to-have, the sales cycle is tolerable; if you’re a nice-to-have, it’s awful.”

Hospitals aren’t the only potential targets for health-IT tools. Consumers are increasingly being called upon to manage their own health care, and will need tools to do so. That opportunity is drawing firms such Atlas Venture and Ignition Partners, which are bankrolling a stealthy San Francisco start-up, Keas Inc., which plans to provide patients with custom action plans to improve their health.