U.S. Top 10 Healthcare-Focused VCs Favor MedTech, Digital Health, and Oncology Startups

By |Jose Zhou Qianyun

According to reports from the National Venture Capital Association (hereinafter referred to as “NVCA”) and Thomson Reuters, venture capital investment in the U.S. healthcare sector reached $11 billion in 2015, ranking second highest over the past two decades. The years 2014 and 2015 marked the strongest two-year period since the 2008 financial crisis, as venture capitalists increased their investments in the healthcare sector by 66% and 14%, respectively, compared with previous years.

In 2005, total investment in the healthcare sector amounted to approximately $6.5 billion. Since then, healthcare investment has experienced exponential growth, with total investment increasing by 25% in 2006 and 21% in 2007, until the onset of the global financial crisis in 2008. From 2008 to 2010, the decline in healthcare investment was not significant; however, it never returned to the 2005 level.

From 2011 to 2013, the world was in the post-financial crisis era, with major economies gradually recovering and investment in the healthcare sector returning to normal levels. In 2011, investment in the healthcare segment reached $7.98 billion; however, this figure decreased by 14.2% to $7.09 billion in 2012, followed by a modest decline of $500 million in 2013. Since then, venture capital investment in the healthcare sector has surged, rising by 25.4% to $9.44 billion in 2014 and increasing by 13.94% to $10.97 billion in 2015.

When we examine the number of transactions in the healthcare sector, we observe a parallel trend with transaction value. However, the number of transactions in 2014 and 2015 decreased compared to previous years. This phenomenon is noteworthy, as it indicates that healthcare startups achieved higher valuations during this period, further demonstrating that venture capitalists’ enthusiasm for investing in incubation-stage or early-stage companies in the healthcare sector has by no means waned. Between 2011 and 2015, there were a total of 4,367 transactions in the healthcare sector, with 894 in 2011, 872 in 2012, 883 in 2013, 857 in 2014, and 861 in 2015.

Top 10 in the United StatesTop Venture Capital Firms with a Strong Preference for Healthcare and Medical Investments

Among the numerous venture capital firms investing in the healthcare sector, New Enterprise Associates ranked first in 2015 with a total investment of $13 billion. Sequoia Capital and Accel Partners & Co Inc followed closely with $11.3 billion and $9.3 billion, respectively. These three firms accounted for 58% of the total investment made by the top 10 venture capital firms. The details are as follows:

Over the past few decades, these firms have played a pivotal role in healthcare investment. They have participated in more than 900 investments across over 700 healthcare companies. Although the proportion of these investments that were liquidated through IPOs or acquisitions was low before the financial crisis, this phenomenon was primarily driven by heightened uncertainty in the stock market and a pessimistic global macroeconomic outlook. Consequently, in 2006 and 2007, only one portfolio company on average from these top players went public each year. Nevertheless, these ten investment institutions still managed to increase their healthcare investments by approximately fourfold and fivefold in 2006 and 2007, respectively.

However, there was a slight shift in exit mechanisms within the healthcare sector following the global financial crisis, as the global economy recovered and substantial returns in the healthcare industry gradually began to materialize. Additionally, between 2009 and 2011, six of the ten companies in this portfolio achieved exits: In 2009, two startups were acquired, generating an average return of approximately twofold; in 2010, as the stock market slowly emerged from its downturn, two companies successfully completed initial public offerings (IPOs), delivering an encouraging 200% return; and in 2011, one company was acquired while another went public, with the average investment return once again reaching 200%.

Consequently, confidence in the healthcare sector has grown steadily since 2012. In the United States, healthcare has become a hotbed for venture capital investment, with firms scrambling to get on board this fast-moving train. These ten companies are no exception; they have continued to increase their investments in the healthcare sector in pursuit of high returns. Over the following years, the number of successful IPOs and acquisitions among healthcare startups grew exponentially. IPOs increased by 300% annually, peaking in 2014: nine of the startups invested in by these ten companies were acquired, and twenty went public. As a result, their return on investment also peaked in 2013 at 500%.

In-Depth Analysis: Where Has the Money Been Invested?

By tracking the specific healthcare investments made by these top 10 investment firms, we can gain a comprehensive understanding of which healthcare subsectors these funds are directed toward.

• Analysis by Subsector

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Among the ten investment institutions, the medical sector (traditional disease treatment) received the most investment within the broader healthcare industry, totaling $1.2 billion in 2015. This represents a 1,018% increase from 2006 to the present. Specifically, the vast majority of these funds were concentrated on cancer treatment research, as curing cancer remains a major challenge for the medical community. Therefore, from the perspectives of human needs and economics, the return on investment in this field will exceed our expectations.

The cosmetic surgery and fitness sectors initially accounted for the smallest share of the overall healthcare market. In 2008, companies in the cosmetic surgery sector received only one additional round of investment, as innovations and new technologies in this field were far from disruptive to the broader healthcare industry. In contrast, the fitness sector enjoyed brighter prospects, having developed and launched numerous novel devices, including wearables and smartphone apps for tracking fitness metrics. These innovations frequently garnered headline coverage in magazines and media outlets, thereby attracting greater investor interest.

Overall, companies associated with emerging technologies—such as medical devices, robotics, smart hardware, and data mining—secured the second-largest share of investment across the entire healthcare sector, totaling nearly $3.2 billion over the past decade. Initially obscure, these companies experienced the most rapid growth once the efficacy of their technologies became evident. From 2006 to the present, total investment in the emerging medical technology sector has surged by 1,387%, with the amount doubling in 2012 to set a new record for the entire healthcare industry. In summary, innovative technologies like big data are being increasingly applied in the medical field, a trend that numerous investors have already recognized. Meanwhile, the research and development of new technologies and technological innovation require substantial financial support; consequently, we will see companies in these fields emerge and grow at an accelerated pace from 2016 onward.

• In-Depth Analysis of Emerging Technology Sectors

Specifically, in the healthcare sector, emerging technologies that have attracted the most investment are primarily concentrated in three branches: medical devices/robotics/smart hardware, medical education, and healthcare media/information/social networks. Among these, medical devices/robotics/smart hardware have received the highest level of investment, securing $550 million in 2015 alone. From 2006 to 2015, annual investment in fields such as medical devices grew by 41%. More specifically, electronic medical devices—such as cardiac pacemakers, patient monitoring systems, ultrasound scanners, radiation scanning equipment, and surgical devices—have garnered the most attention. Consistent with our previous analysis, these devices generally provide direct or indirect assistance in the treatment of cancer and heart disease.

In addition, medical media/information and social networking ranked second. In 2015, companies in this sector received $310 million in investment, a 17.4% increase from the previous year. Notably, the sector experienced an astonishing annual growth rate of 236% consecutively from 2012 to 2014. Medical media and information platforms aim to enhance communication between healthcare professionals and patients, while also enabling the launch of more public health initiatives to popularize health knowledge among the general public. Consequently, many investors view this field as having immense potential.

Finally, in the field of medical education, which had not received any investment prior to 2011, funding peaked in 2012. Medical education focuses on leveraging cutting-edge technologies to improve the overall health literacy of the general public. Although its immediate impact is not yet evident, from the perspective of long-term human development, this sector will undoubtedly attract greater investment in the future.

Prospects for the Development of China’s Healthcare Sector

• Current Investment

Today, China has become one of the most active investment markets in the global healthcare sector. Although, as of 2014, investments in China’s healthcare sector were not yet significant, with total annual investment remaining below the $500 million mark and primarily concentrated in traditional areas such as medical services, pharmaceuticals, and medical research, a major shift occurred after 2014. Since then, annual investment in the sector has reached $1 billion. This transformation has led to a new landscape of resource allocation within healthcare; for instance, while investments previously focused predominantly on the pharmaceutical industry, medical social networks are now attracting increased capital.

Many authoritative financial analysts believe that China’s medical social media and online diagnosis sectors hold significant potential. Meanwhile, China’s robust GDP growth and vast market make it a fertile ground for the healthcare industry. Consequently, many experts predict that China may replicate the success achieved by the United States in the healthcare sector. Could medical social media be China’s next major trend?

In summary, investment trends in the healthcare sector have shifted from traditional areas to fields associated with emerging technologies, such as medical devices/robotics/smart hardware and health media/information/social networks. Given the success achieved by the United States in these domains, there is strong reason to believe that China holds immense potential in these areas, underpinned by its rapidly advancing internet technologies and vast market space.