Restraint replacing exuberance for venture capitalists

In a panel discussion co-sponsored by the Nashville Capital Network and Nashville Health Care Council on Aug. 9, investment gurus almost ran from the phrase "venture capital."

"We prefer to call our company an innovation fund because venture capital has such a bad connotation," said Duncan Dashiff, co-founder of Epiphany Health Ventures in Nashville. "There's plenty of angel and early-stage funding in healthcare, but a real need for more growth capital."

"There's still a lot of froth in healthcare VC, which can lead to some unwise moves," added Rob Coppedge, vice president of Cambia Health Solutions in Portland, Ore. "Healthcare venture capital has underperformed in recent years, mainly because too many entrepreneurs have been funded and there are too many managers."

Some of the panelists cited deals that went well past froth to folly. "I can think of one company with zero revenue that recently got $100 million in venture capital," said Thomas Hawes, MD, managing director of Sandbox Industries in Chicago. "It's a shame because everyone involved will most likely waste five years of their lives trying to make it work."

Dashiff added that there's now a more tempered approach to investing in healthcare technology. "What's desperately needed is innovation in business models to support the use of that technology," he said. "We need to think of healthcare technology as a conduit for service innovation."

In an effort to avoid untested ideas, Nashville-based Hospital Corporation of America's Health Insight Capital pilots prospective products and services in its hospitals before investing in a company. 

"We have a lot of healthcare experience in Nashville and the scars to prove it," quipped Joseph Howell III, HCA's senior vice president who oversees early-stage investing. "That's why we're taking the cautious approach, investing $1 - $5 million in three to five companies a year. We're looking for companies that are a good fit for where healthcare is heading, helping us improve outcomes and provide faster throughput."

Despite the new restraint in VC circles, there are still plenty of funding opportunities for promising healthcare companies. According to a new study, Nashville alone sank nearly $1 billion into early-stage healthcare funding in the last decade. 

"At Sandbox, we provide a variety of ways for young companies to succeed," said Hawes. "In addition to accelerator programs, we have collaborative investment vehicles. If the company is truly exceptional, we can find the resources to nurture their innovations and add value."

The panelists agreed that some cities continue to lead the way in smart VC funding. "It's hard to match the expertise you find in a handful of cities like Chicago, Atlanta, Boston, Salt Lake City and Nashville," said Hawes. "They have all the right ingredients: healthcare experience, capital and proven management."