Ven­tur­ing into new health tech­nolo­gies

Hos­pi­tal sys­tems in­vest in in­no­va­tive star­tups whose prod­ucts they use

Modern Healthcare - - NEWS - By Howard Wolinsky

When the found­ing in­vestors in In­ge­nious Med, devel­oper of a pop­u­lar pa­tient-en­counter plat­form for clin­i­cians, re­cently cashed out, the com­pany’s ex­ec­u­tives re­cap­i­tal­ized with a tra­di­tional ven­ture cap­i­tal firm. But they also in­cluded cap­i­tal from ven­ture funds run by sev­eral not-for­profit health sys­tems that use the com­pany’s prod­ucts. S. Hart Wil­li­ford, CEO of the At­lanta-based com­pany, said he told North Bridge, the lead in­vestor, that he wanted to in­volve health sys­tem-af­fil­i­ated ven­ture funds in the re­cap­i­tal­iza­tion be­cause they truly un­der­stand healthcare. And he wanted to have his hos­pi­tal cus­tomers par­tic­i­pat­ing with their own in­vest­ments and mem­ber­ship on his com­pany’s board.

This in­vest­ment ap­proach is in­creas­ingly com­mon among not-for-profit health sys­tems. About 40 sys­tems have started ven­ture funds. The lure is the po­ten­tial for big pay­offs, as well as the prom­ise of get­ting in on the ground floor with ef­fec­tive new healthcare tech­nolo­gies and ser­vices. Some sys­tems have found ven­ture funds an at­trac­tive in­vest­ment ap­proach, given low bank in­ter­est rates and mod­est re­turns from se­cu­ri­ties. Over a seven-year hori­zon, it’s not un­com­mon for health ven­ture funds to triple their in­vest­ments, fund lead­ers say.

Still, MyCap­i­tal, a web­site con­nect­ing ven­ture cap­i­tal­ists and star­tups, cau­tions that 20% to 90% of port­fo­lio com­pa­nies fail to de­liver a re­turn on the ven­ture cap­i­tal­ist’s in­vest­ment. “There are no guar­an­tees,” said Dave Chase, who founded Avado, a pa­tient re­la­tion­ship soft­ware devel­oper sold to We­bMD in 2013 for an undis­closed amount. He warned health sys­tems that “any ven­ture in­vest­ing comes with risk.” That risk may be partly off­set by the fact that health sys­tems may ben­e­fit from us­ing the tech­nol­ogy prod­ucts de­vel­oped by the com­pa­nies.

Ven­ture firms gen­er­ally have found that com­pa­nies in­volved in healthcare in­for­ma­tion tech­nol­ogy and health ser­vices are at­trac­tive for in­vest­ment. Of $49.3 bil­lion in­vested in ven­ture funds in 2014, $6 bil­lion went to biotech­nol­ogy, $2.6 bil­lion to med­i­cal de­vices and equip­ment and $356 mil­lion to healthcare ser­vices, ac­cord­ing to the Na­tional Ven­ture Cap­i­tal As­so­ci­a­tion Year­book 2015.

Why are health sys­tem lead­ers start­ing ven­ture funds? Ezra Mehlman, vice pres­i­dent of Health En­ter­prise Part­ners, a New York-based growth eq­uity firm, said the past five years have been a time of im­mense change and un­cer­tainty for hos­pi­tal ex­ec­u­tives. So they’re ex­per­i­ment­ing with new ways of do­ing busi­ness and seek­ing growth op­por­tu­ni­ties out­side their core busi­nesses, in­clud­ing launch­ing strate­gic in­vest­ment groups.

Health sys­tem ven­ture funds typ­i­cally act as co-in­vestors or strate­gic in­vestors, per­form­ing their own due dili­gence, while also re­ly­ing on re­search per­formed by lead firms or large ven­ture firms.

In the case of In­ge­nious Med, which au­to­mates the cap­ture of physi­cian charge data at the point of ser­vice, strate­gic in­vestors in­clude:

As­cen­sion Ven­tures, a sub­sidiary of St. Louis-based As­cen­sion Health, which has $550 mil­lion in cap­i­tal un­der man­age­ment. Its lim­ited part­ners in­clude Catholic Health Ini­tia­tives, De­catur Me­mo­rial Hos­pi­tal, Dig­nity Health, In­ter­moun­tain Healthcare, Mercy and Trin­ity Health.

Kaiser Per­ma­nente Ven­tures, the cor­po­rate ven­ture cap­i­tal arm of Kaiser Per­ma­nente in Oak­land, Calif., which has in­vested in 55 healthcare health-IT, health-ser­vices and med­i­calde­vice com­pa­nies since 1997.

Her­itage Group, a Nashville-based ven­ture cap­i­tal firm whose lim­ited part­ners are a blend of not-for-profit and for-profit health sys­tems, in­clud­ing Car­di­nal Health, Com­mu­nity Health Sys­tems, In­ter­moun­tain Healthcare, LifePoint Health, Me­mo­rial Her­mann, Tenet Healthcare Corp., Trin­ity Health and Uni­tyPoint Health.

Matt Her­mann, se­nior man­ag­ing di­rec­tor of As­cen­sion Ven­tures, said in­vest­ing in new tech­nolo­gies makes “a ton of sense” when a hos­pi­tal group is en­thu­si­as­tic about a par­tic­u­lar tech­nol­ogy, wants early ac­cess, and seeks to help guide its fu­ture. As­cen­sion’s med­i­cal staff liked In­ge­nious Med’s charge-cap­ture prod­uct, which re­places in­dex cards physi­cians car­ried in their pock­ets for record­ing en­coun­ters. “We got ex­cited by other as­pects of In­ge­nious and about their growth strat­egy to im­prove pa­tient care and physi­cian ef­fi­ciency,” he said. “We shared their story with our physi­cians and IT or­ga­ni­za­tion.”

Roshen Menon, gen­eral part­ner at North Bridge, which has $3.8 bil­lion of its cap­i­tal un­der man­age­ment with a fo­cus on high-growth com­pa­nies, said that when health sys­tems serve as strate­gic part­ners as well as tech­nol­ogy users, it helps open doors for tech­nol­ogy de­vel­op­ers in­side hos­pi­tals. “That’s an im­por­tant value-add that hos­pi­tal groups bring,” he said.

David Tam­burri, gen­eral part­ner at Health En­ter­prise Part­ners, which has a $148.5 mil­lion fund with ap­prox­i­mately two-thirds of it com­ing from healthcare or­ga­ni­za­tions, said many strate­gic in­vestors, in­clud­ing hos­pi­tal-based in­vest­ment funds, feel more com­fort­able in­vest­ing along­side more tra­di­tional funds or serv­ing as lim­ited part­ners in a healthcare fund. Mak­ing di­rect in­vest­ments re­quires ex­per­tise that hos­pi­tal funds may not feel they have.

“In­vest­ing in a fund af­fords hos­pi­tals the abil­ity to share in the up­side they cre­ate through com­mer­cial re­la­tion­ships, while avoid­ing the chal­lenges as­so­ci­ated with man­ag­ing a ded­i­cated in­vest­ment ve­hi­cle,” Tam­burri said. “In ad­di­tion, the right strate­gic co-in­vestor can have a tremen­dous im­pact on the com­pany’s abil­ity to ac­cel­er­ate its com­mer­cial ef­forts, while also pro­vid­ing ad­di­tional cred­i­bil­ity in the mar­ket­place.”

Dan Bur­ton, CEO of Health Cat­a­lyst, a Salt Lake City-based data ware­house and data-an­a­lyt­ics startup, said strate­gic in­vestors such as hos­pi­tal funds typ­i­cally will not lead an in­vest­ment round.

“They’ll tag along and of­ten feel much more com­fort­able with a pure VC do­ing all the deep due dili­gence on a com­pany, val­i­dat­ing that they feel it’s a good in­vest­ment,” he said. “When they see some­one like a Se­quoia Cap­i­tal or a Nor­west Ven­ture Part­ners lead­ing an in­vest­ment round, they’ll of­ten par­tic­i­pate as a co-in­vestor.”

Health Cat­a­lyst has raised $165 mil­lion in ven­ture fund­ing. Strate­gic in­vestors in­clude Kaiser Per­ma­nente Ven­tures and CHV Cap­i­tal from

“Ev­ery ven­dor has a so­lu­tion for you and it’s hard to sep­a­rate the wheat from the chaff. Hav­ing a method­ol­ogy by which you can re­ally eval­u­ate tech­nol­ogy, for me as a CEO, is es­sen­tial.”

Dr. Rod Hochman CEO Providence Health & Ser­vices

In­di­ana Univer­sity Health. In ad­di­tion to ven­ture groups, health sys­tems such as Min­neapo­lis-based Al­lina Health and Bos­ton-based Part­ners HealthCare have in­vested di­rectly in Health Cat­a­lyst. “Our mis­sion aligns tightly with health sys­tems’ mis­sions,” Bur­ton said. “So hav­ing health sys­tem VCs in­vest in our com­pany helps pre­serve that mis­sion and ori­en­ta­tion.”

He said in­vest­ments by health-sys­tem ven­ture groups and health sys­tems cre­ate “an­chor cus­tomers” for new tech­nol­ogy and helps shorten the sales cy­cle. “It aligns us with these im­por­tant an­chor cus­tomers in ways that are just very pro­duc­tive for ev­ery­one in­volved,” Bur­ton said.

For ex­am­ple, Al­lina re­cently signed a $100 mil­lion con­tract with Health Cat­a­lyst. Bur­ton said he would not have a di­rect re­la­tion­ship with Al­lina’s top ex­ec­u­tives with­out the Al­lina in­vest­ment in his com­pany. “That re­la­tion­ship is prob­a­bly the sin­gle big­gest ben­e­fit to me,” he said.

About two years ago, not-for-profit Providence Health & Ser­vices, which op­er­ates 34 hos­pi­tals on the West Coast, started Providence Ven­tures to ex­tend its core mis­sion and cre­ate a plat­form to help eval­u­ate new tech­nolo­gies, said CEO Dr. Rod Hochman. Providence ear­marked $150 mil­lion to in­vest over five to seven years in in­no­va­tions to im­prove pa­tient care.

The Providence Ven­tures fund fo­cuses on early to mid-stage com­pa­nies in­volved with online pri­mary-care ac­cess, care co­or­di­na­tion and pa­tient en­gage­ment, chronic dis­ease man­age­ment, clin­i­cian ex­pe­ri­ence, data an­a­lyt­ics and con­sumer health and well­ness ser­vices. Providence hired Aaron Martin, a for­mer ex­ec­u­tive with Ama­zon’s Kin­dle group, to lead the fund.

Hochman and Martin have spo­ken to other hos­pi­tal groups about es­tab­lish­ing ven­ture funds. Hochman noted that health sys­tems of­ten feel over­whelmed by en­trepreneurs’ pitches for new tech­nolo­gies. “Ev­ery ven­dor has a so­lu­tion for you and it’s hard to sep­a­rate the wheat from the chaff,” he said. “Hav­ing a method­ol­ogy by which you can re­ally eval­u­ate tech­nol­ogy, for me as a CEO, is es­sen­tial.”

For in­stance, Seat­tle-based Swedish Health Ser­vices, a Providence af­fil­i­ate, needed rapid ac­cess to a larger pool of med­i­cally trained lan­guage in­ter­preters, es­pe­cially for the emer­gency depart­ment. Providence’s ven­ture fund team rec­om­mended in­vest­ing in Seat­tle-based In­De­mand In­ter­pret­ing, which pro­vides online, round-the-clock ac­cess to med­i­cally trained in­ter­preters in 200 lan­guages.

“If some­body walks in speak­ing Rus­sian and we need to be able to take care of them, the care­giver brings out a lap­top, se­lects a gen­der and lan­guage and there is a Rus­sian-speak­ing in­ter­preter right there on the screen,” Martin said.

Ear­lier this year, Providence Ven­tures co-in­vested along­side Health En­ter­prise Part­ners in In­De­mand In­ter­pret­ing, which serves about 500 healthcare fa­cil­i­ties daily. The two groups have in­vested a com­bined to­tal of $10.4 mil­lion in the com­pany. “If we’re go­ing to work with a com­pany that we think has value, it would be a good thing to be in­vested in it as well,” Hochman said.

While Providence of­ten gets in­volved with tech­nol­ogy de­vel­op­ers out­side its own health sys­tem, Mayo Clinic Ven­tures in Rochester, Minn., is fo­cused pri­mar­ily on bring­ing tech­nolo­gies to mar­ket that Mayo clin­i­cians and sci­en­tists have de­vel­oped or en­hanced.

James Rogers, chair­man of Mayo Clinic Ven­tures, a $100 mil­lion ven­ture and growth fund, said Mayo never serves as a lead in­vestor. As a co-in­vestor, it looks for part­ners to com­mer­cial­ize prod­ucts.

“There has to be a Mayo value-added com­po­nent so we’re not just ven­tur­ing for the sake of ven­tur­ing,” he said. “We’re not ven­tur­ing other peo­ple’s money. It’s our own money. It al­lows us to be at the ta­ble and put some in­vest­ment into the com­pa­nies as we’re mov­ing the com­pa­nies down the road.”

A re­cent suc­cess story is Menlo Park, Calif.based Nevro Corp., which man­u­fac­tures the Nevro Senza high-fre­quency spinal-cord stim­u­la­tion de­vice to treat chronic pain. The de­vice uses Mayo-de­vel­oped tech­nol­ogy, and Mayo Ven­tures pro­vided seed fund­ing to start the com­pany. The Food and Drug Ad­min­is­tra­tion ap­proved the Nevro Senza sys­tem in May to help man­age chronic in­tractable pain in the trunk and limbs. Nevro went public last month, at a val­u­a­tion of more than $1 bil­lion.

“It’s just a great story,” Rogers said. “We’ve got mul­ti­ple oth­ers like that.”

Rogers said Mayo likes to start small in in­vest­ments and set mile­stones. His fund has dropped some tech­nolo­gies that didn’t meet its goals. For him, the ul­ti­mate de­ter­mi­nant of a suc­cess­ful in­vest­ment is a prod­uct that pro­vides value in healthcare de­liv­ery.

Avado founder Chase said health sys­tems that don’t get into the ven­ture-cap­i­tal game risk miss­ing out on trans­for­ma­tional care-de­liv­ery ad­vances that are com­ing in the next few years.

“The big­gest blind spot I see with health sys­tems is not in­vest­ing in break­through new healthcare de­liv­ery mod­els such as di­rect pri­mary care,” he said. “To my sur­prise, many health sys­tem ex­ec­u­tives are blind to those com­pa­nies, while they fo­cus on tech­nol­ogy in­vest­ing. So far, the most dis­rup­tive com­pa­nies I’ve seen aren’t tech­nol­ogy com­pa­nies.”

He said provider firms such as CareMore and Healthcare Part­ners are achiev­ing ex­cel­lent re­sults in im­prov­ing care and re­duc­ing costs. “It’s easy to dis­count com­pa­nies when they are small, but they build up a head of steam that be­comes un­stop­pable,” he said.

“There has to be a Mayo value-added com­po­nent so we’re not just ven­tur­ing for the sake of ven­tur­ing.”

James Rogers Chair­man Mayo Clinic Ven­tures

Nevro Corp.’s de­vices use Mayo Clinic

Ven­tures-de­vel­oped tech­nol­ogy. Mayo

pro­vided the seed fund­ing to start the

com­pany.

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