This week we announced the close of Flare Capital Partners II, L.P. with a total of $255 million of committed capital.
This fund is considerably larger than our prior fund, which in large measure reflects what continues to be an extraordinary market opportunity as the “business of healthcare” is transformed. Industry dynamics today demand innovative business models and novel technologies that will leverage advanced analytics and mobility to enable value-based healthcare. The overarching pressures for better outcomes at lower costs will create important and valuable new companies.
Blah, blah, blah. Many of us already know all of that. Here is why the fund’s timing is so propitious. Adoption of healthcare technology solutions is accelerating. Many companies launched earlier this decade can now point to measurable impact on outcomes and costs (see IPO pipeline of healthcare technology companies). Companies more often than not are able to claim real attribution for the successes of their products and services; that is, they are able to calculate an ROI with actual data. Repeatable business models are now better understood (product development timelines, successful “go-to-market” strategies, etc.) and more predictable. What this really means is that entrepreneurs are able to consistently build big businesses. The sector is reaching an important threshold level of maturity.
When we closed the last fund in 2015, according to Rock Health data, the digital health sector saw approximately $4.6 billion invested, which stayed relatively constant into 2017. The investment level in 2018 spiked to $8.1 billion and the year-to-date investment pace suggests that 2019 will be even greater. In addition to a number of large and transformative M&A transactions over the last two years which redefined the landscape, an exciting bullpen of private healthcare technology companies are emerging which should be well-received by public company investors (see Livongo, Health Catalyst, Phreesia, etc.).
As a point of comparison: the U.S. advertising industry is approximately $200 billion in size, and as that industry was profoundly re-architected over the past 20 years, arguably several trillion (with a “T”) dollars of market capitalization was created (Google, Facebook, Apple, Netflix, Twitter, etc.). Important companies were created, consumer purchasing behavior and entertainment choices were forever changed.
Now turn your sights to healthcare. The U.S. healthcare industry is 15x as large as the ad industry. And while it may be harder, and there will be fits and starts, there is a sense of inevitability that enormously important and valuable healthcare technology companies will be created as this industry is transformed. There is no denying that scaling healthcare technology companies is hard, at times frustratingly and quixotically so, but the pressures are simply too great for industry participants to not embrace innovative new solutions. That is the essence of our investment thesis.
Core to our success has been the level of engagement with our investors. We initially set out to raise $200 million, the same size as the prior fund. It was gratifying to see both the level of investor interest and understanding of the market opportunity. As such, we are excited to welcome a number of new strategic and financial investors as partners of the firm, who will further strengthen our franchise and reputation in the market. Given the industry complexities, our strategic investors are particularly helpful to our portfolio companies as co-investors, channel partners and customers.
While this is an important milestone for Flare Capital, we will continue to be heads down assisting our entrepreneurs to build important and valuable healthcare technology companies. We expect to close the first investment out of the new fund within the week.