The rise of hospital-backed venture capital funds

In September, Seattle-based Providence Health & Services announced the launch of a venture capital fund designed to help early- and mid-stage health IT companies bring their products to market.

The fund, Providence Ventures, will invest $150 million over five to seven years to foster new IT products designed to improve care coordination, patient engagement, data analytics and other pressing areas for the healthcare industry.

While Providence Ventures is one of the most recently announced health system venture capital funds, it is far from the only one. Big-name health systems like Mayo Clinic, Dignity Health, Geisinger Health System and Cleveland Clinic all have venture capital funds, and many have similar goals — get innovative, beneficial technology on the market, and create an additional revenue stream for the health system.

One of the first health systems to jump into the venture capital space was MemorialCare Health System in Fountain Valley, Calif. with six hospitals and more than 200 healthcare sites in Los Angeles and Orange counties. The health system began making venture capital investments in technology companies more than a decade ago, though Brant Heise, the fund's senior managing director, says it was more of an evolution than a conscious decision to start a venture capital fund.

Like many hospitals and health systems, MemorialCare had opportunities to start related healthcare businesses in areas like home health and billing services. "We started running a variety of businesses and over time we began to think that maybe there was a better way of doing this," says Mr. Heise. "Rather than operating all these tangential companies, it seemed to make more sense to bridge the gap to entrepreneurs and innovators in healthcare services." So MemorialCare began investing in outside healthcare startups, many of which were technology companies. Resulting products are piloted at MemorialCare, giving the startups experience and exposure and giving MemorialCare Innovation Fund a rich portfolio of innovative companies, as well as access to new products that can improve patient care.

One of MemorialCare Innovation Fund's success stories is Care Team Connect, a mobile platform used to monitor and engage patients post-discharge. Shortly after becoming a customer, MemorialCare Innovation Fund became one of Care Team Connect's first investors, and was able to provide the company with feedback from clinicians about what worked and what didn't about the platform.

"We figured, what was working for MemorialCare could likely work for other health systems as well" says Mr. Heise. Care Team Connect soon gained traction in the marketplace and in October 2013 was acquired by The Advisory Board. "They're doing fantastic," he says. "It's great to see that full cycle."

In April, MemorialCare expanded its venture capital activities through a strategic partnership with Los Angeles-based Cedars-Sinai Health System. The new fund, Summation Health Ventures, is backed by both of the health systems and is designed to find new technology to implement at the health systems while achieving a good financial return on investments. The fund's portfolio is dynamic — the fund doesn't own companies but rather helps them grow and find their footing in the marketplace. The fund's goal is to support between 10 and 15 companies at a time.

Summation Health Ventures' investment strategy is similar to MemorialCare Innovation Fund's — if a product works for the fund's backers, this time both Cedars-Sinai and MemorialCare, it's likely to do well in the market. "MemorialCare and Cedars-Sinai are different types of organizations, and if there's a product or technology we both find attractive and that we see a value proposition in, others probably will, too," says Mr. Heise. "Basically, what's works for both Cedars-Sinai and MemorialCare may likely be good for healthcare in general."

The venture capital funds have proved beneficial to first MemorialCare and now Cedars-Sinai, along with the patients they serve, says Mr. Heise. "It's brought in new and better ways of delivering care," he says. "We're really pleased with the results."

Christopher Coburn, vice president of innovation at Partners Healthcare in Boston, has been tracking what he calls an "explosion" of hospital-backed venture capital funds in recent years, and isn't surprised to see a growing number of healthcare organizations launch or expand venture capital endeavors. "It's obvious why hospitals are doing this, they're driving new technology into clinical use and there's the potential for financial rewards," he says.

Partners' own venture capital fund has been operational since 2007. Partners Innovation Fund focuses on new products and ideas that originate within the Partners health system. "From our viewpoint, with $1.5 billion in research every year, there's a huge amount of opportunity tied to our hospitals ," says Mr. Coburn. "Our staff comes up with over 600 new inventions every year, as we see each of those inventions are a possible investment... we feel like we have more than enough for ourselves [within the system]."

The fund selects the innovations it will fund on two criteria: strategy and finance. The fund wants to invest in and launch as many promising companies as possible and expand its portfolio while maximizing return on investment. These two goals don't always work in tandem, however. "There's definitely a dynamic tension for any corporate venture fund," says Mr. Coburn, "in our case it is how much we advance the technology versus the financial return."

But the current health IT market has allowed for bullish investing, and Partners Innovation Fund has been able to meet both goals. Although the fund's investment figures are not public, Mr. Coburn says returns have been "terrific," and have allowed Partners to significantly grow its portfolio. He expects even more positive results after an Epic EHR is deployed systemwide and clinicians and researchers have more access to data from across Partners.

"This is a period of substantial change in the provider world; the same forces that are putting pressure on health systems are also creating new opportunities around venture capital and investing in the health IT realm," he says. "From that standpoint, it's a great time to be a part of the venture capital community."

More articles on venture capital in healthcare:

Providence launches $150M IT-focused venture capital fund
6 recent health IT funding announcements
Google Glass healthcare startup raises $8.4M

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