Technology and Regulation

Governmental involvement in matters of technology tends to spur investment. Across sectors, the implementation of regulation and/or directives increases the number of dollars poured into a space.

Take healthcare. Healthcare and technology have always had a strained relationship. Physicians do not want to have the hassle of dealing with computers and in-office servers, no less electronic health records or demographic reporting. Hospitals lose enough money without having to spend more on technological infrastructure. The government, however, changed the game in February of 2009 when the HITECH Act was passed as part of the stimulus package. 

In order to increase the utilization of healthcare information technologies, the government allocated billions of dollars as incentives for those hospitals, systems and physicians that comply with certain standards of “meaningful use.” If a physician adopts a certified EHR by 2011, they will be eligible to receive incentive payments as it relates to their Medicare and Medicaid relationships. In addition, the government will impose penalties beginning in 2015 for Medicare, by decreasing reimbursements by 1% for each year until adoption of the EHR.

In dollar terms, these incentives and disincentives are not huge sums. The rate of new venture capital investment into the healthcare IT space, however, would have you believe the government was giving out million dollar bonus checks to those who comply. It seems that every day a new EHR company announces that they were successful in raising venture capital.

This anecdote is meant to show that when the government announces they will throw dollars at a problem, no matter how seemingly insignificant the amount, new companies and venture capital money will follow. 

As an associate at a Boston-based venture capital firm, I talk with companies in a variety of spaces and the thesis never seems to fail. After both 9/11 and Hurricane Katrina, the government established funding programs to increase the use of technology for disaster response and preparedness. Private equity investment in the space swelled accordingly. 

The government doesn’t even have to announce funding in some instances. By just mentioning the need for reform and making something a priority, investment dollars will follow. Take the Gulf Oil Disaster from several months ago. President Obama last night announced that he will be taking the crisis as a sign that policy measures need to be taken to swiftly pass a bill addressing America’s addiction to oil. Vinod Khosla, well-known cleantech investor, sees the disaster and the government’s response spurring cleantech innovation and investment.

This cause and effect are certainly not a bad thing. Savvy entrepreneurs and investors just need to take a step back and think about how much of the regulatory Kool-Aid they should really be drinking.