Venture Capital in North American and European Healthcare Technology

By João L. Carapinha

October 18, 2023

For decades, North American and European nations have actively expanded their venture capital markets. In Canada, for instance, the amount of venture capital available to life sciences companies more than doubled from 2001 to 2010. While in Europe, the United Kingdom boasted the second largest venture capital market in 2009, representing 21% of all investments. In that same year, 20% of the UK’s £677 million in venture capital was invested in healthcare. So

Venture capitalists in 17 EU countries typically support innovative projects after the initial, riskier stages, data shows. This trend partly accounts for the Horizon 2020 Programme’s €320.14 million allocation in 2014 to assist innovative firms in accessing diverse risk financing. Venture capital typically intervenes after entrepreneurs develop their core idea, funded by governments, relatives, and ‘angels’. As such, venture capital provides both early-stage and late-stage financing, which precedes more substantial sources of capital like public markets.

Research in innovation policy suggests that ventures backed by venture capital tend to outperform those without such backing. Investors can identify undervalued firms, signal venture quality to third parties, and provide external resources and expertise. Policymakers, informed by this literature, rely on two strategies to foster the venture capital market. They offer subsidies and fiscal benefits to entrepreneurs to boost innovative firms’ birth rate and increase venture capital demand. Secondly, they aim to boost venture capital supply through co-investment schemes, launching government-owned venture capital firms, and capital gains tax benefits.

The non-liquid nature of the investment during the investment period makes venture capital a high-risk investment, as investors cannot easily withdraw these resources. A liquidity event like an acquisition or initial public offering typically occurs within five years. These exit events enable venture capitalists to recoup their investments and generate a return. Venture capital, however, is expensive and aims for high returns, despite most ventures failing.

Venture capitalists not only carefully select entrepreneurs but also engage in value-adding activities. These activities include coaching ventures with marketing and strategy support, professionalising management through seasoned manager recruitment, and facilitating industry alliances. Capital investors on the Board of Directors shape the governance and align tech developers to their vision.

Venture capital plays a key role in innovation systems, although it is not intended to address public health priorities. The rules set by these institutions have both constraining and enabling effects. For instance, regulatory agencies control the safety of medical devices but also provide economic worth to technology-based ventures by enabling market access.

VCs influence healthcare tech by investing in certain ventures, managing their growth, and controlling product progression. Institutional rules stabilise innovation systems, incentivise innovation, provide information, reduce uncertainty, foster cooperation, and handle conflicts. Without such rules, venture capitalists and tech developers couldn’t cooperate, develop, commercialise new medical technology, or convince physicians and patients of their trustworthiness.

Public policies push for venture capital-backed innovation in health, but fulfilling healthcare goals is not part of venture capitalists’ mandate or worldview. Clinical leaders and health services should play a more active role in innovation policy to increase its value.

We’ve recently written about VCs in health care. Read the article here to find out more. 

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