Boston VCs See Madison Healthtech Play Following Nashville’s Path

There’s been plenty of rosy talk lately from entrepreneurs and stakeholders in Madison, WI, about the area’s potential for becoming a national hub for healthtech startups.

On Tuesday, Madison got an endorsement from Boston venture capitalists who are starting to take notice of the entrepreneurial activity happening here, including in health information technology.

Local optimists say that Madison’s health IT play will be anchored by nearby Epic Systems, the giant electronic health records company that hires talented software developers and other young professionals—1,200 of whom quit Epic each year and sometimes form or join healthtech startups. Madison’s other strengths include quality healthcare systems and a respected computer science program at the University of Wisconsin-Madison, supporters say.

The key thing that’s still missing is large sources of funding, particularly later-stage capital—a weakness that was acknowledged by supporters at a panel discussion in Madison on Tuesday featuring three Boston VCs.

The East Coast VCs indicated they are keeping an eye on what’s brewing here. The event was held at the new offices of Nordic Consulting, the Epic software consulting firm that has grown to more than 400 employees in four years, and organized by the Wisconsin Angel Network and 100health, a new healthtech incubator started by three ex-Epic employees. More than 20 people, mainly Wisconsin investors as well as local healthtech entrepreneurs and at least one hospital executive, turned out for the event.

“Where Madison is today is similar to where Nashville was 25 years ago,” said Peter Grua, a partner with HLM Venture Partners, a healthcare-focused VC firm with offices in Boston and San Francisco.

In Nashville’s case, companies there took advantage of the 1980s shift from inpatient to outpatient healthcare driven by payer reimbursement changes, Grua told Xconomy after the panel discussion. Companies like HCA grew successful, and some of their employees went on to sprout new companies, creating a thriving healthcare ecosystem, he said.

“It’s very likely the same events can happen here,” Grua said during the panel discussion, citing the entrepreneurship coming from Epic and the broader healthtech market trends.

In talking with people at the Healthcare Information and Management Systems Society conference in Orlando, FL, last month, 100health co-founder Luke Bonney got the sense that investors and healthcare professionals don’t know much about Madison, but they’re starting to hear about it.

“We look at Madison, and we see a certain amount of potential,” Bonney said during the panel discussion. “We’re at the very beginning of companies moving in that direction [toward healthtech]. That talent is starting to realize we can do something that typically has happened on the coasts.”

About 80 percent of HLM Venture Partners’ $400 million in total investments has gone to coastal-based companies, said partner Yumin Choi. But since HLM invested in Nordic in 2012, the VC firm has looked at several companies in Madison and Milwaukee, Choi said. (So far Nordic is HLM’s sole Wisconsin investment, but the state is “definitely on our interest list,” Grua told Xconomy.)

The event targeted Wisconsin early-stage investors, giving them an opportunity to hear what Boston VCs view as the hot trends in healthtech, what the sector’s drawbacks are, and how they source deals. A few takeaways:

—HLM is most interested in healthtech startups that optimize electronic health records software, help provide healthcare price transparency, perform healthcare data analytics, help coordinate the various activities and players along the continuum of healthcare, or provide transaction processing.

—It’s increasingly difficult for VCs to get in on investments in mid-sized healthtech companies, said Darren Black, managing director of Boston-based VC and private equity firm Summit Partners. That’s because many of those companies are either going public or being snatched up by larger healthcare firms, he said.

—The challenges for healthtech investors include convincing hospitals and other healthcare providers of the return on investment. “It’s not an industry that historically has spent a lot on IT,” Grua said. It’s also tough for investors to understand when and how to scale the companies, Choi said.

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