The Importance of Capital in Building Atlanta as the Center of Healthcare Technology

Many people in Georgia may not realize this, but we represent the largest cluster of healthcare information technology (HCIT) companies than any other region of the country, measured by revenues and market capitalization.  This includes Silicon Valley, Boston and Nashville, all of which are major geographic hubs for technology and/or healthcare companies.  Over the past ten years or so, Atlanta has become the hub for the HCIT community, a growing sub-sector of the healthcare industry that many consider to be one of the most critical and vital components to America’s future healthcare delivery model, based on where today’s system is currently heading.

Unfortunately, Atlanta’s leading role in what is turning out to be perhaps the most vital piece of the healthcare reform discussion and a major target of billions of stimulus dollars is new information to most within the North Georgia area, as well as outside this region.  What’s more, we are currently in one of the most pivotal eras of evolution for America’s healthcare delivery system, which means this is a great opportunity for Atlanta to emerge as one of the most influential places, in terms of the way healthcare is delivered in this country for decades to come.  Indeed, what Nashville has come to mean for the healthcare services sector over the past thirty years or so is what Atlanta could be and indeed should be to the burgeoning and rapidly growing healthcare technology industry.

With all of that in mind, there are some key questions that those of us within the Atlanta business community must address.  What is that holds Atlanta back from taking the lead on this critical front?  What’s preventing us from building on Georgia’s strong foundation that is already there in the HCIT sector and turning that into the next great economic cluster?  Why aren’t we leveraging our resources to bring significant value and economic growth to the region and throughout the healthcare market as a whole?  What is holding Atlanta back from being the next geographic commercial powerhouse, such as the San Francisco Bay Area, Research Triangle Park and Nashville?

While these are not questions that have single answers that one person could sufficiently respond to in a single sitting, there is at least one area that I believe we should be focusing on right now, in order to continue building our community’s prominence within the national HCIT marketplace.  Further, this is an issue that  we must acknowledge and overcome if we are ever going to lead Atlanta toward achieving its full potential within the HCIT sector.  Atlanta has developed a major gap when it comes to a strong foundation of capital to invest in and foster Atlanta’s emerging companies.  This lack of capital, I believe, is a significant component holding Atlanta back from reaching its full potential.

Just recently, I heard from an executive at a growing company that has been based in Atlanta for more than ten years, but recently decided to move their headquarters (and thousands of jobs) to another region.  This gentleman was lamenting about Atlanta’s faltering position within the burgeoning HCIT sector and the overall technology industry.  He essentially said that Atlanta could not compete with other tech-friendly regions because we lack the resources that are critical to a company trying to navigate through the various stages of the growth cycle.  Capital, he said, was the most important of those critical resources.  And of course, this has become an even greater acute challenge in recent years, as the economic downturn has made it even more difficult for companies to grow.

The type of capital this gentleman was speaking of is unique and and comes with plenty of unique challenges that essentially every private company faces regularly throughout their evolution.  As a company works towards accessing capital on the public markets (i.e., “going public”), most companies experience growth towards that point with private equity funding.  I could spend a lot of time here explaining in grave detail just what I mean by “private equity” and all of the various types of private equity capital; however, the simplest way to explain what we’re talking about here is to understand that private equity is to a private business what the public capital markets (i.e., stocks and bonds traded on Wall Street) are to a publicly-traded company.

With that in mind, it does not take much to realize how critical private equity is for a company seeking growth or a region that is working to foster companies within a certain sector.  Further, an “economic cluster” is a defined region – typically based on geography – that is home to a large concentration of companies operating within the same industry or sector, or perhaps have other defining characteristics in common, such as products, services and/or customers.  A few examples of economic clusters that most people are familiar with include Detroit in auto manufacturing, Silicon Valley for technology and Boston for biotech.  And while it is not as important for a public company to be geographically centered around Wall Street in order to access the global capital markets, the private equity capital market is a very different story.  Geographic proximity is one of the top issues when one considers what is needed to facilitate capital resources and foster growth for private companies within a specific market.

Private equity capital is a cornerstone to a burgeoning company’s growth.  Rarely does a company navigate through the many stages of growth to reach a point of significant size without some degree of private capital funding them along the way.  Within the healthcare industry, it is not uncommon for a company to have to raise more than $180 million in private capital and reach half a billion dollars in revenue before they can consider going public.  Throughout this period of growth that often lasts ten years or more of being funded by private capital sources, the private equity investors will typically need to have a much more detailed understanding of the companies they invest in, which often requires them to have geographical proximity as well.  Indeed, many investors will not consider investing in companies outside of certain regions or in companies that lack regional resources that can assist the company’s growth along the way.

When I speak with executives at healthcare technology companies in Georgia, the issue of funding and capital always comes up.  However, this discussion is typically a short one, because in most cases, I can count the Atlanta private equity firms that invest in these companies on two hands and I know almost all of them personally.  In most cases, I already know what the outcome was from a company talking to an Atlanta investor, because I’m aware of the types of companies and characteristics these investors are looking for when considering a new investment.  These companies almost always end up having to go outside Atlanta for capital, which is often the first step towards their ultimate departure from the region altogether.

And what can make raising capital even more challenging for Atlanta-based companies is that often times our local investors can only participate in equity funding transactions as a syndicate with other larger institutional investors.  The reasons for this can be because the local investor may not have sufficient levels of capital to meet the company’s needs for an equity raise, or some investors have just been forced to contract their risk profiles so much that they cannot take on the full risk of investing unilaterally in a target company.  Therefore, in many cases, our own local investors can only distribute capital to Atlanta companies if and when investors with larger war chests from outside the region decide to invest first.  Sometimes this can be beneficial for the company, in that it makes more capital available; however, this will often mean that the local Atlanta investor who participated in a company’s funding as a part of a larger syndicate from outside the area will not be able to have a sufficient influence on the company’s long-term growth.

The point in saying all of this is not to be critical of Atlanta or to dispute this region’s strength within the HCIT sector.  Indeed, it is difficult to dispute Georgia’s strong foundation within this marketplace, since the Atlanta metro area alone boasts more healthcare technology revenues than any other region, state or city throughout the country.  But, we have a major challenge to overcome before the rest of the country and the overall marketplace will acknowledge Atlanta as the leader in this market.  And while I don’t love the idea of having to prove Atlanta’s value to those in other cities or regions, when you look at the current capital dynamics within the Atlanta marketplace from an outside perspective and objectively compare our positioning with other regions that have built strong economic clusters, this challenge becomes much more apparent and acute.

I also want to point out that none of this is intended to criticize the private equity investor community that we currently have in Atlanta.  Since this community is relatively small, I know pretty much all of those firms and/or individuals here that manage private equity funds, especially healthcare-related entities and I believe that we have a strong foundation that have the quality and expertise to make Atlanta the “Silicon Valley of healthcare technology”.  Atlanta’s funds are all made up of extremely effective investors and experienced operators, which is much more critical for private companies than having financially-centered hedge funds buy your shares.  Moreover, I know many of Atlanta’s investors personally and all of them are extremely good people that any company would be lucky to have as a partner.

The problem we face is not the quality of the current investor community, but the volume of capital resources available.  Simply put, when the overall pool of capital is so low, there is only so much to go around.  Just as Napoleon knew that an army marches on its stomach and that you can never take troops too far away from its water source, capital is to a growing business what food and water are to an army on the move.  As such, companies must go where their “lifeblood” will take them.  So, unless we are able to reverse this challenge and provide the sustenance that growing healthcare companies need to stay in the region, it will be much less likely for Atlanta to achieve its full potential for becoming the largest hub of healthcare technology in the US.

So, what can we do?  Clearly, that is a much bigger question, which will take much more than one person at any one time to sufficiently answer.  The good news, however, is that there are people working to address this problem and to find a solution as to how we can reverse it.  Further, there are groups of people taking steps today in a direction that will drive Atlanta towards achieving its full potential down the road.

One place where you will find this type of collaboration, and be able to meet others working towards overcoming these challenges, will be at the 2011 Healthcare Technology Leadership Summit, which is a joint conference hosted by TAG Health, the Metro Atlanta Chamber and the Georgia Department of Economic Development.  This will be the second year that this event will take place, with last year’s summit being an overwhelming success.  The key message that came out of last year’s summit discussions was that we need to bring Atlanta’s HCIT community together and move quickly if we are going to truly achieve the level of potential that this region has.  Therefore, this year’s summit will focus on bringing those key stakeholders together to identify and develop those solutions that will foster Atlanta’s role as the leader in healthcare technology.

Most importantly, we need members of Atlanta’s healthcare and technology communities to participate in this discussion.  If you are in any way involved in the healthcare industry or the healthcare technology sector (or would like to be), this is a chance to be a part of this effort.  For more information about the 2011 Healthcare Technology Leadership Summit, visit the conference website or click here to register.

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