Early Promise, But Also Skepticism

What Rock Health may need to overcome is a disconnect between two industries that don't always play well together. Whereas tech companies are accustomed to iterating and pivoting, the health care industry tends to innovate in baby steps, with long regulatory cycles and slow technological evolution. "We're serving one of the slowest industries [for innovation], and it's not just FDA or HIPAA that makes it slow. It's cultural," says Tecco.

As appealing as the confluence of trends may be for some venture investors, there are those who express caution. Excel's Petrillo, for one, says some statistics showing growth in health care IT investment may be inflated by a few late-stage mezzanine fundings and private equity investments in more mature companies, but earlier-stage investment has maintained a relatively constant level of interest. He describes the current environment as more of a "rotation": for each new investor whose interest has been sparked by health care IT, another has lost enthusiasm for the sector.

Although Excel holds a stake in Providence, RI-based Shape Up The Nation Inc., an employee health and wellness start-up that incorporates social networking dynamics, Petrillo says broad enthusiasm for social networking could prove "troublesome" to the health care industry. With companies such as group buying service Groupon Inc. and short-form communications platform Twitter Inc. gaining mass appeal, riffs on those ideas could easily lead to clumsily built health care applications with poorly considered business models. "A finite number of companies will flourish," he predicts, while a glut of companies without savvy business models seeking to position themselves where trends intersect will fall by the wayside.

Overall, the success of venture deals is measured by exits, and with IPOs scarce, the presence of acquirers will make or break many VC investments. Companies such as Oracle Corp. and Cisco Systems Inc. provide integrated health care systems and software suites to providers, while Aetna and United Healthcare Services Inc. have taken the lead as ACOs. Where they elect to buy rather than build will likely drive the payoff for VCs who have increased their bets in a challenging area whose time may, finally, have come.

Health Care Information Technology: Venture's New Darling?

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