Investors bet big on Nashville's young health care firms

Young health care companies around Nashville received more than $940 million from 2005 to 2015, an explosion of venture capital investment that aligns with both the city’s rise to national prominence and the implementation of the Affordable Care Act.

Health care investments accounted for about 60 percent of the $1.6 billion in Nashville-area venture capital investments over 11 years, according to a report from the Nashville Capital Network and Nashville Health Care Council.

Since 2010, $627 million has been invested in 239 separate health care deals, highlighting how startups in the greater Nashville area have prospered in the shadow of federal health reform efforts, which compel providers to do more with less money. There were 51 deals totaling $315 million from 2005-2009, according to the report.

The increase stems from “so much health care entrepreneurship, so much change happening as a result of the ACA” and other factors impacting the sector, said Sid Chambless, executive director of the Nashville Capital Network

For years, the health care services industry dominated the region’s health care industry, which was born in the late 1960s when HCA was a start-up. But the report shows that has shifted, with more capital flowing, in the last five years, to health care tech firms that are in large part trying to help the legacy companies operate more efficiently.

Investments in health care information technology, or HIT, surpassed those in the services subsector in 2012 — hitting a peak of $62.5 million in 2014, up from $2 million in 2009.

Services companies have been the "bread and butter" of the locally based health care industry and will always be a part "of the Nashville story and Nashville ecosystem" but the shift toward tech firms is important to the longevity of the industry in Middle Tennessee, said Hayley Hovious, president of the Nashville Health Care Council.

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The interest in HIT companies is not expected to wane as the industry tries to better harness tech solutions to streamline traditional, often-clunky processes. Companies that focus on technology and user-friendly products more easily lend themselves to venture capital-sized investments compared to services companies, which often require significant overhead and logistics costs.

“This is a pretty big beginning to what I think is going to be a bigger trend,” said Vic Gatto, CEO and founder of Jumpstart Foundry, adding “we all need better health care at a lower price and health care needs to be improved.”

Gatto said a differentiating, and key, factor between the tech start-ups in Nashville versus those on the East and West coasts is that companies in Tennessee are working with the established industry “as opposed to someone on the coasts who may want to disrupt and replace a doctor with a smartphone.”

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Sustaining the vibrancy

Nashville, and the surrounding counties, benefit from the start-ups. Small companies account for a large percentage of all net new jobs.

Gatto said large companies hire sporadically but also lay people off so “kind of tread water” in terms of overall employment, while small companies account for a large percentage of all net new jobs.

Change Healthcare, a start-up acquired by Emdeon that ultimately became the corporate brand, went from fewer than five employees to more than 200. The combined company employs 7,000 employees around the country with more than 900 in Nashville.

"(Venture capital) is extraordinarily important to the vibrancy of Nashville's economy," said Matt Wiltshire, director of the Mayor’s Office of Economic and Community Development.

The report points out a limitation to venture capital investment in Middle Tennessee — something companies who go shopping for money already know: There is a plethora of angel investor or seed money for the youngest companies, but the local investment community lacks deeper pockets for larger investments.

“There’s nice access to angel and early stage seed money but as you start to outgrow those funding needs, your options start to narrow,” said Paul Ketchel, CEO of MDsave, a company he started in response to the rise of high deductible plans under the ACA.

Chambless wants to make sure that local wealth, from individuals, accelerators, programs and funds such as Heritage Group, continues to flow to the very youngest companies.

“There’s a question in my mind, ‘are we going to be able to maintain this level of seed investment activity,’ and can we continue to have a healthy continuum,” said Chambless.

The state's $200 million TNInvestco program helped get buzz about Nashville's opportunities and helped get money flowing in the second part of the study, experts said. The creation of the Nashville Entrepreneur Center has been critical to showcasing the local start-up community to out-of-town investors.

There has been an uptick in investments from funds from the coasts and across the country. MTS Health Partners, UnitedHealth Group Ventures and Oak Investment Partners are a few of the active investors that "weren't here five years ago," said Chambless.

As a native Nashvillian who’s looked for capital here before, Michael Rosen, CEO of ProviderTrust said he’s proud and excited about how the venture community has evolved. The reputation of the city has grown and getting local recognition such as NEXT Awards by the Nashville Area Chamber of Commerce and the Nashville Entrepreneur Center is enough to bring some investors calling.

Yet, venture capital in Nashville is still dwarfed by the money that gets spent in Boston, New York and Silicon Valley, evidenced by a new study from the Kauffman Foundation.

The greater Nashville area is widely recognized for its concentration in hospital operators, services, insurance and senior care companies. Industry officials are hopeful the recent years point to a sustainable, and successful, future as a leader in trusted health care technology and innovation.

Investors that have traditionally ignored Nashville are looking toward the Southeast and trying to figure out what the city is going to become, said Rosen.

Gatto, Wiltshire and others visit investors to pitch Nashville and sometimes the conversation is more of an introduction.

“I have realized there is not as much appreciation for Nashville on the coasts as I think there should be, which is discouraging in some ways and encouraging in some ways,” said Wiltshire. “As much as I love Nashville, it’s still not the deepest market. There is a lot of work left to do.”

Reach Holly Fletcher at 615-259-8287 or on Twitter @hollyfletcher.

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