Hot health­care tech scene bub­bling up north in the Twin Cities

Modern Healthcare - - NEWS - By Rachel Z. Arndt

If fund­ing were all that mat­tered, Kyle Rolf­ing would have based Bright Health some­where other than Min­neapo­lis. But for Rolf­ing, pres­i­dent of the con­sumer-ori­ented health in­sur­ance com­pany, suc­cess starts with tal­ent.

And Min­nesota—with a well-es­tab­lished med­i­cal in­dus­try led by in­sur­ance gi­ant Unit­edHealth Group in Min­netonka, the Mayo Clinic health­care sys­tem based in Rochester, and de­vice­maker Medtronic in Min­neapo­lis, among oth­ers—pro­vides both in­spi­ra­tion and man­power and is lead­ing the Mid­west in terms of ven­ture cap­i­tal fund­ing of health­care star­tups.

So in 2015, Rolf­ing and two oth­ers, all with ties to Unit­edHealth, launched Bright Health in the Twin Cities.

“We live here, is one thing,” he said of the de­ci­sion to start a com­pany in the area known as Med­i­cal Al­ley. “But we also have roots here re­lated to the en­tre­pre­neur­ial health­care side.”

In just two years, Rolf­ing’s startup has come a long way. Last year, Bright Health was the best-funded health­care startup in the state, draw­ing in $80 mil­lion, more than half of all the ven­ture fund­ing that went to the dig­i­tal health in­dus­try in the state. The com­pany last year part­nered with Cen­tura Health’s hos­pi­tals and doc­tors to bring in­sur­ance to the Colorado mar­ket af­ter Unit­edHealth­care and

Hu­mana an­nounced they would quit the state’s in­di­vid­ual in­sur­ance ex­change.

Bright Health’s suc­cess shines a light on the grow­ing health­care startup in­dus­try in Min­nesota— par­tic­u­larly in the Twin Cities. Though the coasts still dom­i­nate both the over­all and health­care startup scenes, Min­nesota has made a name for it­self, draw­ing not only on larger health­care com­pa­nies such as Unit­edHealth and Medtronic, but also on com­pa­nies with sci­en­tific bents, such as 3M.

“Min­nesota is a pretty in­cred­i­ble state in the health­care sense,” said Glafira Mar­con, chief fa­cil­i­ta­tor of Health­, which has more than 1,600 mem­bers who work in health­care star­tups and lo­cal health­care com­pa­nies or are en­thu­si­as­tic about health­care in­no­va­tion.

In Min­nesota, about 439,300 peo­ple are em­ployed in the health­care in­dus­try, ac­cord­ing to the U.S. Bureau of La­bor Sta­tis­tics.

Last year, 98 health tech­nol­ogy star­tups

in the state raised $420.3 mil­lion, ac­cord­ing to the Min­nesota trade group Med­i­cal Al­ley As­so­ci­a­tion, out­do­ing all of their Mid­west­ern neigh­bors. (BioEn­ter­prise, a busi­ness ac­cel­er­a­tor, puts that num­ber a lit­tle higher, with Min­neapo­lis alone rais­ing $422.4 mil­lion last year). The area hit a high point in 2015, when com­pa­nies raised $456.3 mil­lion, ac­cord­ing to Med­i­cal Al­ley, con­tribut­ing to nearly $2.75 bil­lion since 2009.

Most of the money is flow­ing into and around the Twin Cities, where health­care star­tups make a va­ri­ety of prod- ucts, in­clud­ing mo­bile apps, sleep-ap­nea de­vices and med­i­cal im­age-shar­ing soft­ware. They’re thriv­ing on the banks of the Mis­sis­sippi River thanks to an in­flux of ven­ture cap­i­tal dol­lars and a spirit of in­no­va­tion that’s stereo­typ­i­cally—and falsely—as­signed just to the coasts.

The state of Min­nesota also of­fers the Angel Tax Credit pro­gram, which gives in­vestors a 25% tax credit on fund­ing that goes to Min­nesota-based busi­nesses younger than 10 years old (or 20 years old for med­i­cal de­vices and phar­ma­ceu­ti­cals that re­quire Food and Drug Ad­min­is­tra­tion ap­proval).

The ma­jor­ity of money raised last year went to med­i­calde­vice star­tups, which re­ceived $252.2 mil­lion. That makes sense, given the his­tor­i­cal strength of the med­i­calde­vice in­dus­try in the area. Min­nesota ranks sec­ond only to Cal­i­for­nia in total med­i­cal-de­vice em­ploy­ment, which has been steady from 2012 to 2015.

Dig­i­tal health com­pa­nies in Min­nesota are hard on the heels of de­vice­mak­ers, with an 80% in­crease in fund­ing from 2015 to 2016, when they raised $127.3 mil­lion. It’s not just that there are more dig­i­tal health com­pa­nies—it’s that each com­pany is also rais­ing more money. The me­dian first round of fund­ing for dig­i­tal health firms was five times greater last year than it was in 2012.

Along with Bright Health, other dig­i­tal-health win­ners in Min­nesota last year in­cluded tele­health com­pany Re­traceHealth and Med­Net So­lu­tions, which makes soft­ware for man­ag­ing clin­i­cal stud­ies. Re­traceHealth found sup­port from both near and far, with a $7 mil­lion round of fund­ing from Min­nesota’s Lemhi Ven­tures, Blue Cross and Blue Shield of Min­nesota and HealthEast Care Sys­tem, as well as Cal­i­for­nia’s McKes­son Ven­tures. Med­Net, which works with Medtronic, No­var­tis and oth­ers, raised $16.5 mil­lion, led by Santa Mon­ica, Calif.-based Arrowroot Cap­i­tal.

Though Med­Net’s fund­ing oc­curred in the fourth quar­ter of the year, over­all in­vest­ments slowed in the pe­riod com­pared with the pre­vi­ous year, likely due in part to the post-elec­tion uncer­tainty around the threat­ened re­peal of the Af­ford­able Care Act. Fourth-quar­ter in­vest­ments in Min­nesota’s health­care com­pa­nies were $83.7 mil­lion in 2016, down 57% from $194.6 mil­lion in that quar­ter a year ear­lier.

There are sev­eral draws to at­tract tal­ent to Min­nesota. For one, Health­’s Mar­con said, it’s po­lit­i­cally pro­gres­sive, and the cost of liv­ing is rel­a­tively low, at least when com­pared with other startup hot­beds, such as Sil­i­con Val­ley. Ac­cord­ing to Med­i­cal Al­ley, av­er­age com­pen­sa­tion in the health tech­nol­ogy in­dus­try as a whole was $122,000 in 2015. But the cost of liv­ing in Sil­i­con Val­ley, where the av­er­age health­care startup salary is $104,000, ac­cord­ing to An­gelList, is 65% higher than in Min­neapo­lis.

John Robert­son, CEO of Med­Net So­lu­tions, said lo­cal tal­ent has pro­vided his com­pany with ex­cel­lent, rel­e­vant work ex­pe­ri­ence gained while work­ing at other Twin Cities-based health­care com­pa­nies. “It’s given us a great re­source pool,” he said. In­deed, in Min­nesota, Medtronic em­ploys more than 9,000, Bos­ton Sci­en­tific has about 8,000 work­ers, and St. Jude Med­i­cal has about 3,000. 3M Health Care, Smiths Med­i­cal and Op­tum also em­ploy sig­nif­i­cant num­bers of science- and tech-savvy folks.

The usual tra­jec­tory is from larger com­pa­nies to smaller, more en­tre­pre­neur­ial ones, Rolf­ing said, not the other way around. But some­times peo­ple end up back in big­ger en­deav­ors when star­tups are ac­quired, as was the case when Rolf­ing’s in­sur­ance com­pany Defin­ity Health was bought by Unit­edHealth in 2004 for $300 mil­lion.

Smaller or­ga­ni­za­tions

also can lever­age their tal­ent to serve larger com­pa­nies. For ex­am­ple, Tree­House Health, a health­care in­no­va­tion cen­ter started by for­mer Unit­edHealth ex­ec­u­tive Dr. John Blank; his son, Jef­frey Blank; and Joe Whit­ney in 2013, has part­nered with Blue Cross and Blue Shield of Min­nesota to both share and gain in­sights into the trans­form­ing health­care in­dus­try.

“The ecosys­tem that we have in this mar­ket­place, I be­lieve, ri­vals that of the coasts,” said Lau­rie Healy, di­rec­tor of mar­ket­ing and com­mu­ni­ca­tions of CoCo, a group of cowork­ing spa­ces that are home to about a dozen health­care star­tups in the Twin Cities. “There’s a re­ally strong en­tre­pre­neur­ial back­bone here to help th­ese com­pa­nies grow.”

In the Twin Cities, “there are in­dus­try lead­ers in vir­tu­ally every sec­tor of health­care,” said Jef­frey Blank, man­ag­ing di­rec­tor of Tree­House Health, adding that his goal is to cre­ate an ecosys­tem. The group’s port­fo­lio com­pa­nies in­clude app cre­ator Pops Di­a­betes Care and soft­ware firm Car­rot Health. Last Au­gust, Tree­House an­nounced a part­ner­ship with con­sult­ing firm Ac­cen­ture that will help guide Tree­House’s star­tups.

Min­nesota may lead the Mid­west in fund­ing health­care tech star­tups, but it’s still a small mar­ket com­pared to Sil­i­con Val­ley and Mas­sachusetts. Yet what it lacks in the num­ber of com­pa­nies, it makes up for in the con­cen­tra­tion of patents: Min­nesota leads the coun­try for health tech­nol­ogy patents per capita, with 55.72 patent grants and ap­pli­ca­tions for every 100,000 peo­ple, fol­lowed by North­ern Cal­i­for­nia, ac­cord­ing to Med­i­cal Al­ley.

Min­nesota also makes up for it in ex­per­tise, Jef­frey Blank said. “Many of the en­trepreneurs that we work with of­ten­times have deep sec­tor ex­per­tise and un­der­stand how health­care is de­liv­ered and paid for.

“There’s not nec­es­sar­ily the same vol­ume of health­care com­pa­nies as in other mar­kets,” he said, “but the qual­ity of com­pa­nies that are com­ing out of here is as good as any­where.”

CoCo runs a group of cowork­ing spa­ces in the Twin Cities that house about a dozen health­care star­tups.

Health­ has more than 1,600 mem­bers who work in health­care star­tups, lo­cal health­care com­pa­nies or are pas­sion­ate about health­care in­no­va­tion.

Kyle Rolf­ing and his co-founders de­cided to launch Bright Health in the Twin Cities be­cause of the area’s deep tal­ent pool and en­tre­pre­neur­ial roots in health­care.

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