Hospi­tal-based ven­ture funds bet big on health star­tups

Modern Healthcare - - NEWS - By Dave Barkholz

When Viv­ify Health sought ad­di­tional cap­i­tal last year, the health­care soft­ware de­vel­oper had a mul­ti­tude of tra­di­tional ven­ture cap­i­tal funds to choose from.

The com­pany, which of­fers clin­i­cians re­mote mon­i­tor­ing of chron­i­cally ill pa­tients, was an at­trac­tive in­vest­ment. It al­ready had mil­lions in rev­enue, 500 hospi­tal cus­tomers and proven tech­nol­ogy and pro­cesses.

Rather than go with New York funds or one from Sil­i­con Val­ley, Viv­ify chose one of the hospi­tal sys­tem-based in­vest­ment funds that have sprouted in re­cent years. Be­sides money, the ven­ture arm of UPMC, the gi­ant Pitts­burgh-based health and hospi­tal sys­tem, of­fered to help Viv­ify scale up its oper­a­tions to reach even more cus­tomers, Viv­ify founder Eric Rock said.

More­over, UPMC, un­like many ven­ture cap­i­tal funds, promised to hold onto its Viv­ify eq­uity in­def­i­nitely rather than pres­sure the com­pany to sell it­self in two or three years so it can mon­e­tize its in­vest­ment, “It was not a fli­pand-turn ap­proach,” Rock said.

These are boom times for health­care star­tups, which are flourishing amid the his­tor­i­cally high in­vest­ment di­rected their way by ven­ture cap­i­tal firms. In 2016, ven­ture cap­i­tal fund­ing in health­care com­pa­nies sur­passed $5 bil­lion for the first time af­ter hit­ting $4.6 bil­lion in 2015 and $4.7 bil­lion in 2014, ac­cord­ing to Mer­com Cap­i­tal Group.

Each of those years saw a huge step up from 2013, when ven­ture cap­i­tal in­vest­ment reached $2.1 bil­lion; $1.2 bil­lion was in­vested in 2012, Mer­com re­ports.

What’s fu­el­ing the boom is the shift from fee-for-ser­vice re­im­burse­ment to value-based pay­ments that put providers and in­sur­ers at some risk for the cost and qual­ity of care.

Hospi­tals and physi­cian groups be­gan se­ri­ously hunt­ing for soft­ware tools and data an­a­lyt­ics around 2010. They needed new ap­proaches that would al­low them to im­prove their man­age­ment of groups of pa­tients and step up the clin­i­cal ef­fi­cacy and pro­duc­tiv­ity of their em­ployed doc­tors and clin­i­cians.

The in­vest­ment surge co­in­cided with pas­sage of the Af­ford­able Care Act, which brought the health­care in­dus­try to the re­al­iza­tion that value-based re­im­burse­ment was in­evitable. Providers rec­og­nized they needed to step up their in­no­va­tion ef­forts. “It cre­ated this en­ergy and move­ment,” said Matt Her­mann, se­nior man­ag­ing direc­tor of As­cen­sion Ven­tures, the en­ter­prise arm of 141-hospi­tal As­cen­sion.

As­cen­sion was one of the first hospi­tal sys­tems to plunge into the ven­ture cap­i­tal game by set­ting up a ded­i­cated fund and putting in place an or­ga­ni­za­tion with man­agers skilled at the art of in­vest­ing in health­care star­tups and tech­nol­ogy.

Since found­ing its ven­ture cap­i­tal di­vi­sion in 2001, As­cen­sion—with con­trib­uted cap­i­tal from other not-for­profit health sys­tems rep­re­sent­ing 500 hospi­tals—has raised $800 mil­lion and in­vested in 57 health­care com­pa­nies, Her­mann said.

As­cen­sion Ven­tures raised $255 mil­lion in its fourth fund in De­cem­ber. It al­most im­me­di­ately put a chunk of that cap­i­tal to work in Jan­uary by in­vest­ing $20 mil­lion in Rep­u­ta­tion.com, an on­line rep­u­ta­tion man­age­ment com­pany that helps busi­nesses re­spond to what cus­tomers are say­ing about them on so­cial net­works and re­view sites.

With health­care con­sumerism on the rise and more Medi­care pay pegged to pa­tient sat­is­fac­tion, hospi­tals and physi­cians are pay­ing at­ten­tion to re­views.

In fact, the 1,200-physi­cian Henry Ford Med­i­cal Group in Detroit is chang­ing com­pen­sa­tion next year for its pri­ma­rycare doc­tors so that 50% of pay will be pegged to how many con­sumers choose a par­tic­u­lar doc­tor as their pri­mary-care physi­cian, rather than have the bulk of com­pen­sa­tion based on through­put and the dif­fi­culty of care.

That will put a pre­mium on how good those doc­tors look on­line as pa­tients seek a pri­mary-care doc­tor for their pri­mary ac­cess to the sys­tem, group CEO Dr. Wil­liam Con­way said.

Un­til the ACA, most health sys­tems were sat­is­fied with oc­ca­sion­ally in­vest­ing in home­grown com­pa­nies that helped them solve a prob­lem, Her­mann said. Now, the in­vest­ment cri­te­ria have changed.

Hospi­tal-spon­sored ven­ture funds still need a re­turn on in­vest­ment. And they are still look­ing to ad­dress spe­cific prob­lems. But, Her­mann said, so­phis­ti­cated funds to­day are choos­ing emerg­ing tech­nol­ogy com­pa­nies whose prod­ucts and ser­vices can be scaled across large sys­tems, with man­age­ment that can ex­e­cute a growth strat­egy.

Dozens of hospi­tal-spon­sored funds that not only want a re­turn but the abil­ity to get first crack at tech­nol­ogy that the hospi­tals can widely de­ploy have sprung up along­side tra­di­tional ven­ture cap­i­tal funds in hot­beds such as New York and San Fran­cisco.

Ac­cord­ing to Ac­cent u re Strat­egy re­search ,60 hos­pi­tal­spon­sored or cor­po­rate ven­ture cap­i­tal funds are now ac­tively in­vest­ing in health­care star­tups. From 2009 through 2015, they in­vested a com­bined $10 bil­lion in health­care tech­nol­ogy com­pa­nies, with that in­vest­ment more than dou­bling in the past four years.

But trend watch­ers ex­pect hospi­tal sys­tems to take the lead in the years ahead. Hospi­tal-spon­sored in­vest­ment in health com­pa­nies is ex­pected to reach $7.5 bil­lion an­nu­ally by 2020, Ac­cen­ture said. In­vest­ment by cor­po­rate ven­ture cap­i­tal, by con­trast, was $3 bil­lion in 2015.

One hospi­tal sys­tem new­comer fu­el­ing the surge is Spec­trum Health in Grand Rapids, Mich. The mid­size sys­tem with 12 hospi­tals this year cre­ated a $100 mil­lion fund to in­vest in new tech­nol­ogy com­pa­nies.

Viv­ify Health has re­lied solely on hospi­tal-spon­sored ven­ture cap­i­tal and that of other health­care ven­dors such as En­vi­sion Health­care and Lab­o­ra­tory Cor­po­ra­tion of

Amer­ica to raise more than $25 mil­lion over its seven-year his­tory, said Rock, who pre­vi­ously founded and sold Med­host, a touch-screen soft­ware com­pany for man­ag­ing care in emer­gency de­part­ments.

Based in Plano, Texas, Viv­ify of­fers a cloud­based re­mote care-man­age­ment prod­uct that con­nects providers with their pa­tients via wire­less mo­bile de­vices. Rock said providers rep­re­sent­ing more than 600 hospi­tals and health plans use the tech­nol­ogy to en­sure that pa­tients at home are tak­ing med­i­ca­tion and stay­ing on their treat­ment reg­i­mens. Viv­ify Health has rev­enue of about $10 mil­lion.

When it was time to raise money be­yond the seed-cap­i­tal stage, Rock said he turned for cap­i­tal to As­cen­sion Ven­tures and the Nashville­based Her­itage Group, an­other fund cap­i­tal­ized by health­care com­pa­nies, for Se­ries A fund­ing in 2013. Then LabCorp and En­vi­sion Health­care funded the first part of a Se­ries B fi­nanc­ing in 2015 be­fore UPMC funded the sec­ond part in early 2016.

Rock said the health­care-based ven­ture cap­i­tal funds were will­ing to not just solve pop­u­la­tion-man­age­ment prob­lems by in­vest­ing in star­tups, but were ea­ger to of­fer man­age­ment re­sources to re­fine the prod­uct.

Tal Hep­pen­stall, pres­i­dent of UPMC En­ter­prises and trea­surer of the in­te­grated health sys­tem, said its plan for in­vest­ing in Viv­ify and the other 15 com­pa­nies in En­ter­prises’ ven­ture port­fo­lio is to grow the com­pany, not sell it.

The fund likes to hold its stake be­cause the goal, be­sides even­tu­ally mak­ing a re­turn on in­vest­ment, is to gain tech­nol­ogy that solves prob­lems con­fronting UPMC and other hospi­tals and sys­tems. Be­fore UPMC of­fi­cially cre­ated the En­ter­prises di­vi­sion about two years ago, the sys­tem had suc­cess­fully grown sev­eral busi­nesses, in­clud­ing a health plan that now has about $8 bil­lion in an­nual rev­enue.

More re­cent home­grown com­pa­nies that are grow­ing rev­enue with cus­tomers be­yond UPMC are Cu­ravi Health, a telemedicine so­lu­tion for nurs­ing homes, and Prodigo So­lu­tions, a soft­ware com­pany that di­rects hospi­tal sup­ply buy­ers look­ing to pur­chase prod­ucts and ser­vices to ven­dors where volume dis­counts are avail­able.

While Hep­pen­stall de­clined to de­tail the size of UPMC’s in­vest­ment port­fo­lio or its re­turn on in­vest­ment, he did point to one big suc­cess—its 20% stake in Ev­o­lent Health. That stake was pur­chased for about $38 mil­lion in 2011 and 2013 eq­uity fi­nanc­ings when the pop­u­la­tion health man­age­ment com­pany was still in its in­fancy. But af­ter Ev­o­lent Health went pub­lic in 2015, that stake bal­looned in value to $300 mil­lion, with UPMC re­al­iz­ing $76 mil­lion on the sub­se­quent sale of some of its shares and it’s still hold­ing nearly $200 mil­lion worth of shares.

Of course, there are sub­stan­tial risks for hospi­tals get­ting into the ven­ture space that may leave sys­tem lead­ers re­gret­ting their plunge into in­vest­ing. Tra­di­tional ven­ture cap­i­tal­ists have long rec­og­nized that many in­vest­ments don’t pan out, said Ben Fos­ter, a prin­ci­pal fo­cused on health­care at KPMG.

With­out point­ing to any spe­cific cor­po­rate ven­ture funds, Fos­ter said hospi­tals are re­ally good at pro­vid­ing care. As a gen­eral rule, their per­for­mance in other busi­nesses of­ten tails off the far­ther they get from care pro­vi­sion, he said. “There are much bet­ter things to do with the lim­ited cap­i­tal they have,” Fos­ter said. Her­mann at As­cen­sion Ven­tures said a “gold rush men­tal­ity” has fil­tered into startup in­vest­ing as funds have piled in look­ing for fi­nan­cial re­turns and the lat­est tech­nol­ogy. Whether new ven­ture cap­i­tal en­trants see ei­ther prob­a­bly won’t be known for at least an­other five years. “Af­ter five or seven years, I think folks will be able to do a look-back and see if they were able to de­liver on the value.”

Cu­ravi, a home­grown port­fo­lio com­pany of UPMC En­ter­prises, of­fers a telemedicine op­tion for nurs­ing homes.

Viv­ify Health has de­vel­oped soft­ware and work­flow that al­low clin­i­cians to mon­i­tor pa­tients at home. Pa­tients can choose their pre­ferred re­mote de­vice to give clin­i­cians med­i­cal up­dates or be re­minded of their care reg­i­men, in­clud­ing med­i­ca­tion ad­her­ence.

—Ac­cen­ture Strat­egy

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