By Don Ross, Managing Director & Founder, HealthTech Capital

Early-stage investors in traditional healthcare companies are certainly having a tough time these days. Many biotech, diagnostic and medical device firms have simply become too risky, as the current uncertain FDA regulatory environment increases cost and time to exit. In fact, venture funding for these companies fell during the fourth quarter of 2010 to the lowest level since 2003, and the number of deals dropped further in the first quarter of 2011, according to PricewaterhouseCoopers.

This overhanging “exit challenge” is leading many angel investors and venture capitalists to seek new types of investments – companies with lower capital requirements and faster exits. Nowhere was this quest more evident than at the 2011 Angel Capital Association Summit, a premier angel investor event, held last month in Boston.

During the event, I participated on the “Future of Life Science Investing” panel, where the discussion quickly left traditional life sciences and zeroed in on what is emerging as the next big investment opportunity arena: healthtech.

Healthtech companies use mobile, cloud, and other information technologies to increase healthcare delivery efficiencies and deliver consumer-centric applications. Unlike traditional “health IT,” healthtech companies target applications everywhere along spectrum of health and wellness—from in-hospital workflow to in-home monitoring to consumer wellness applications.

Healthtech markets are propelled by technical advancements, an aging population, and government regulations and subsidies to drive adoption of electronic medical records. And, although the FDA is turning its attention to healthtech, most companies in this sector are expected to face comparatively low regulatory requirements.

How big is the healthtech opportunity? Data from the Centers for Medicare & Medicaid Services (CMS) show that the U.S. spent $2.5 trillion on health care in 2009. Of this, 84 percent was spent on healthcare delivery, which includes costs associated with clinicians and insurance companies. In contrast, only 16 percent was spent on therapeutics, including medical devices and drugs. Although venture investors traditionally have put their money into therapeutics rather than delivery, the balance is shifting.

In fact, healthtech was a “star” topic at the recent J.P. Morgan Annual Healthcare Conference in San Francisco, where panelists included Eric Schmidt, Google’s then-CEO, and other technologists not typically associated with health care. Further evidence of the shift in investor attention towards healthtech is the recent establishment of HealthTech Capital, the first angel investing group to focus exclusively on this space. Barely a year old, the group’s membership already is larger than many long-established angel groups and includes individual investors, VCs, corporate venture arms, and healthcare providers.

Healthtech is a complex domain, with several factors that can make or break a company. Existing contracts and relationships may have locked up a market segment. Standards of proof are much higher than in the tech world. Lack of reimbursement can kill a company. A sale often must address a multi-part customer with separate value propositions for the patient, doctor, hospital, and insurance company. Improving patient care alone is insufficient. One physician put his requirements for new technologies to me succinctly: “Will I get paid, and will I get sued?”

Melding a deep understanding of the staid healthcare world with the fast moving technology world is a key to success. Healthtech investors are particularly interested in applications of new technologies to solve old problems in innovative ways. Here are a few examples:

• Consider a person struggling with alcoholism who feels a compulsion to drink. Traditionally, this person might call a sponsor for support. In today’s world, SMS enables instant support messages from everyone in his or her support network (OneRecovery).
• Disease outbreaks will be tracked through social media and proximity information in mobile phones (FluPhone).
• Doctors who work as independent contractors for multiple hospitals will carry a mobile tablet to enter patient data, bill faster and more accurately, and interface with different hospital systems.
• New mobile applications will untether clinicians from their institutions by sending critical patient information directly to the clinicians’ mobile devices (Airstrip Technologies).

Extension of health monitoring into the home, engagement of seniors with social media and interventions to encourage changes to more healthful behaviors are other healthtech areas receiving strong investor interest.

The burgeoning health and wellness monitoring field relies on wireless connectivity and mobile interfaces. For example, mobile technology enables adult children to remotely monitor their aging parents—especially those living in another city. But to be successful, technology must be combined with a thorough understanding of healthcare issues and multiple customer motivations. Adult children worry about the safety of their parents, aging parents worry about “big brother” monitoring them, and professional caregivers must be able to give and receive relevant, accurate and timely patient information in compliance with HIPAA requirements. GrandCare Systems, for example, offers separate value propositions for each.

Mobile technologies and social media are beginning to address the isolation that many seniors experience as health limitations shrink their physical world. Except for the 18-24 age group, adults aged 55 and over are the fastest-growing Facebook demographic. As tech-savvy baby boomers age, expect to see assisted living facilities become technology centers, with mobile devices providing access and windows to the world.

Public health experts have identified improving consumer health behaviors as key to combating chronic diseases. I expect that companies using game technologies will have the greatest impact in achieving this goal. Psychological research shows that intermittent reinforcement—occasional, rather than constant or no rewards—best engages and retains attention. Consider, for example, the popularity of Angry Birds, which has sold more than 12 million copies through Apple’s App store. Successful health-focused games will likely enable health behaviors to improve as an “accidental byproduct,” as users pursue fun and entertainment.

Historically, IT companies mining for gold in healthcare dollars have often limped away with broken picks. They understood how to build great technologies but failed to understand the arcane world of health care. Today, healthtech companies that combine IT with deep healthcare domain expertise are expected to become the big success stories of the future. As our healthcare system evolves and adapts, healthtech companies will be center stage.

Don Ross is managing director and founder of HealthTech Capital, an angel investing group that funds and mentors early-stage companies in the emerging healthtech domain.