Confidence in ‘selecting the winners’
Catholic-sponsored Ascension was among the first health systems to set up a venture capital arm to invest in health technology companies. Since 2001, Ascension Ventures has raised $800 million with hospital partners to nurture startup companies. Today, more than 60 health systems have their own venture capital units. Modern Healthcare Southern Bureau Chief Dave Barkholz spoke with managing director Matt
Hermann about the promise and pitfalls awaiting hospital systems just getting into the venture capital game. The following is an edited transcript.
Modern Healthcare: Are these funds a wise use of hospital capital?
Matt Hermann: Yes. But you’ve got to tie all your tactics to the strategies of the organization. We have 13 health systems that are limited partners in our funds. There’s a wide range of reasons as to why they partner with us. For some, they view us as an extension of their team and as their innovation investing arm. For some that have decided to do it themselves, they view us as a complement to their innovation investing arm.
MH: What should a hospital system of $ 4 billion to $ 5 billion in annual revenue consider before opening their own fund?
Hermann: This business is getting more difficult. We believe there’s value in a collaborative model that includes the best thinking from many systems. When there are more than 40 systems already doing it, you need to ask, “How is your initiative going to be unique?”
MH: With so many startups to choose from, are there going to be losers whose technology doesn’t pan out or scale up?
Hermann: We have seen a bit of a gold rush mentality in healthcare that’s been driven by everyone seeing the opportunity, everybody seeing the demographics, everybody thinking that they’ll be able to disrupt healthcare. We have confidence that we have a higher probability of selecting the winners, given the input from our 13 great health system partners.
MH: What’s a good return on a health venture capital investment?
Hermann: It’s difficult to predict. Folks think that the return thresholds need to be north of 10%. Some earlier-stage funds would tell you they’re targeting 30%.
MH: Aren’t you looking for a return beyond just financial?
Hermann: Definitely. In some instances, there’s identifying a company that ends up getting adopted and standardized by one of our health system partners and alerting folks that this company exists and it can help solve this pressing need.
Our team canvasses the early-stage landscape. We act as an extension of the innovation or strategy groups (inside health systems). We get phone calls about companies that our limited partners have seen. They ask us, “What do we know about them? What about that problem they’re trying to solve? Are there better companies out there that they should talk to?”
MH: Are some hospital systems starting their own funds going to be sorry they got into that game?
Hermann: I don’t know. It gets back to the reason why they’re creating the fund. In this business you can assess how you’re doing over a fiveto seven-year period. After that many years, folks will be able to do a look-back and see if they were able to deliver on the value.
“We have seen a bit of a gold rush mentality in healthcare that’s been driven by everyone seeing the opportunity, everybody seeing the demographics, everybody thinking that they’ll be able to disrupt healthcare.”