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April 22, 2005

Hybrids From Silicon Valley, Not Detroit

Sarah Lacy

Venture capitalists have gotten lots of wins out of high tech. And they’ve gotten lots of wins out of healthcare. Two great tastes that go great together? If you look at the recent track record, hardly. But that might be changing.

TargetRx, for one, announced a $15 million venture deal today. It’s a late-stage company, generating revenue and this is its fourth round of funding. President and CEO Michael Luby started the company because he worked at a big pharmaceutical company and was irritated he could only judge the sales’ force performance in hindsight. His company has a database of 60,000 paid physicians who regularly comment on how a sales force is doing. If their pitch is convincing, how annoying they are, etc. TargetRx then crunches the data and presents analysis to big pharmaceutical companies on how their sales forces are executing—while there’s still time to make adjustments. It must be working because 90% of their customers have renewed contracts, according to the company. If you think about how many drugs each pharmaceutical company is pushing—there’s a big market opportunity there.

The company is a rare survivor of a wave of IT-healthcare hybrids that emerged in the 1999/2000 era. Why has it made it so far? Luby credits it to a focus on improving sales and marketing, not, say, coming up with a techy software program to sell into a lab. Venture capitalist Bill Ericson at Mohr, Davidow Ventures agrees it’s the way to go. He’s not an investor in TargetRx but was one of the few who kept ferreting out hybrid deals long after many VCs had fled.

Funding companies that follow a traditional enterprise software model won’t work, he says. Funding companies that leverage the Internet or some kind of algorithmic software to give healthcare companies proprietary analysis are a smart bet. And, he thinks, an area where you could build a big standalone company. “The sweet spot is not to try to sell information technology solutions into health care enterprises,” he says. “It’s very hard to do and the sales cycle is long and messy.”

If some of the class of 1999 and 2000, like TargetRx, continue to do well, will it spur more hybrid deals ala today’s dot com resurgence? Experts disagree. For one thing, it’s hard to find the right executive team. Ericson says most of the ones he sees are IT folks who’ve migrated into healthcare, while Luby came from the pharmaceutical side and as such had an acute sense of the market need. Either way, a management team needs a combination of healthcare and tech smarts.

That’s part of the reason Ericson doesn’t think there are many good deals out there but when he finds them, he pounces. He says other VCs are pouncing too these days. If TargetRX and others start going public—you can bet even more will pay attention.

08:08 PM


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