Jan 31, 2011 (06:01 AM EST)
Healthcare Software Venture Funding Jumps 19%

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Venture capital investment in medical software and information services increased from $387.5 million in 2009 to $460 million in 2010 -- a 19% annual growth rate, according to figures from Dow Jones VentureSource.

The investments were driven by the increased adoption of health IT as healthcare delivery organizations move from paper-based systems to digitized medical records. According to Dow Jones VentureSource analysts in a report published last week, that trend is poised to continue in 2011.

"The information management and software area is really the sweet spot for venture capitalists whether in healthcare or in IT overall," Jessica Canning, global research director, Dow Jones VentureSource, told InformationWeek. "It fits their investment model the best because it's much easier to get up and running. It has a shorter investment lifecycle compared with trying to develop new drugs or new cancer research."

Canning also said conditions are ripe for investments in medical software as more hospitals and physician practices are starting to incorporate applications to run their clinical and business process workflows.

She also said that as the baby boom generation increasingly turns to the Internet to check on their personal health records and an estimated 32 million people enroll in health insurance plans by 2019, venture capitalists will see very good investments prospects in the health information software market over the next two years. "The market opportunity is really opening up and I do foresee more investment in the future in information management and IT-related healthcare investments," Canning said.

Figures also show that capital invested in medical devices and equipment dropped from $3 billion in 2009 to $2.3 billion in 2010, a 22% decline. The drop in medical device investments contributed to the decline in the total amount of investments in the healthcare industry segment.

Total venture investment in healthcare companies fell 7% in 2010 to $7.4 billion for 702 deals, compared to $8 billion for 722 deals in 2009. As usual, biopharmaceutical companies claimed the largest proportion of investment in the healthcare industry, with 317 deals raising $3.4 billion. However, that was a 20% decline from the $4.2 billion for 302 deals in 2009.

According to Dow Jones VentureSource, healthcare services, the industry's smallest sector, saw the strongest growth. A total of 54 healthcare services companies raised $1.2 billion, a 29% increase in deal activity and more than triple the capital raised in 2009.

Growth in venture investment in 2010 was driven by capital commitments outside of the IT and healthcare industries, which are traditionally venture capitalists' comfort zones. Over the year, 2,799 venture deals raised $26.2 billion, a 6% increase in deals and an 11% increase in capital invested over 2009, when 2,636 deals raised $23.6 billion, according to Dow Jones VentureSource.