If you search on a map, whether physical or in cyberspace, you won’t find a clearly marked building called Texas Medical Center in Houston.
That’s because it doesn’t exist. And yet, as the owner of the land and operator of the multiple parking lots to one of the busiest medical hubs in the nation and the largest medical cluster in the world — the Texas Medical Center is looking to put the revenue from its holdings to good use.
Specifically, to encourage innovation and new company formation. That area of the Lone Star State has been long known for heavyweights like the MD Anderson Cancer Center, the Baylor College of Medicine and the Texas Children’s Hospital, but spurring innovation through a formalized institution like the TMC is new.
The TMC Innovation Institute was launched in 2014 and TMCx accelerator the year after. As such, runaway success stories may be a few years down the road. But a conversation with the current chief of the Innovation Institute shows how the TMCx accelerator, unhampered by traditional business models, is attempting to go places that other healthcare incubators/accelerators won’t or can’t go.
Erik Halvorsen, director of the TMC Innovation Insitute came on board in the Fall of 2015 and is intent on making both the accelerator and other TMC Innovation initiatives bridge the gap between startup entrepreneurs who dream up new technological solutions and the providers and health systems charged with practicing medicine.
The goal is to solve unmet needs within the hospital through technology, be a launching pad for innovative companies, and gain recognition for being a key innovation region.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
Many startup accelerators take an equity stake in the young companies that they accept into their programs. By contrast, TMCx doesn’t.
Another point of distinction is that not many provider systems (if you can call TMC that given that institutions like Baylor and MD Anderson are members of TMC but decisions are made independently by leadership at those entities) have accelerators attached to them. Cedars-Sinai is one that does, but it has hitched its bandwagon to the broader tech incubator TechStars as opposed to building something from the ground up.
Put this in the context of some high-profile departures in the world of healthcare accelerators. San Francisco-based Rock Health, which was among the foremost digital health accelerators, has since moved to becoming an investment fund. Chicago-based Healthbox, also a healthcare technology accelerator, has transitioned to becoming a facilitator between startups that are developing new technologies and healthcare organizations that are looking to adopt them.
Without naming names, Halvorsen said the weakness of certain accelerators lies in their business models.
“Their business models had a major flaw because while they were doing great things in terms of trying to support startup companies and build density and accelerate them toward a commercial launch and all of that, their underlying business model was predicated on the fact that they could give a small amount of money to a startup company and take a relatively significant percent of equity,” he said in a recent phone interview. “You saw these accelerators that gave you $50,000 and take 6-to-8 percent of your company.”
Halvorsen made the case that good companies that had already raised capital, even a seed round of funding, were hesitant to give up that much of ownership.
“Those companies would pass on going to the accelerators and those accelerators would then draw from the Tier B companies in a lot of ways,” he said.
That also meant these accelerators were dependent upon startup exits so they could recoup their operating expenses, he declared.
“It just became a vicious cycle of trying to take too much equity for too few dollars and not getting the right companies that they could get the exits from,” he said. “What you’ve seen some accelerators do is pare back their programming. They sort of dialed back their programming — either becoming a co-working space and charging rent or they’re an early stage investment fund.”
The criticism may not be wholly fair to at least Rock Health. Before it transitioned out of the accelerator business, Rock Health had given steam to the likes of Omada Health, which is among the more respected, clinically validated digital health companies out there and sort of the runaway success that accelerators dream of. Rock Health also invested in Lift Labs, which was later acquired by Google. At one time in 2012, Rock Health increased the money it gave selected startups to $100,000 from $20,000.
Back to the TMCx model.
TMCx, by comparison, subsidizes the cost of the startup accelerator program entirely. It gives no money to the startups and, as mentioned earlier, the startups don’t have to give up equity to participate. In fact, TMCx is apparently not designed to make money at all.
“Currently generating revenue is not a goal of the program,” he said. “Getting products on the market that can help people is our mandate.
Of course, other accelerators around the country don’t have the benefit of the parking lot that represents a steady revenue stream.
“Well, I mean you know, I sort of feel I should apologize and not apologize for having that,” Halvorsen responded. “It’s unique.”
He added that proper stewarding of that money is also on top of his mind, implying that no one is looking at the steady revenue stream as free money.
“It’s like the Spiderman quote: With great power, comes great responsibility,” he said.
TMCx’s current class of 24 digital health companies graduated on June 8 and the next class will bring forth a medical devices cohort. Since the first class of companies came in during Spring 2015 and including the class that just graduated, 66 startup companies have been part of the program. The program runs for about four to five months and digital health companies alternate with device companies in two classes in the spring and fall.
Other than the business model of TMCx accelerator, there’s another bit that’s interesting. Most healthcare accelerators focus on digital health technologies given that they don’t need to raise as much money as other healthcare verticals — medical devices or drugs — and may have a shorter regulatory or regulatory sans path to market. TMCx is one of the few accelerators in the country to also have an exclusive medical devices cohort.
The few device accelerators out there tend to focus exclusively on less clinically-burdensome technologies that do not require a premarket approval from the FDA, unlike TMCx.
For instance, Memphis, Tennessee-based Zero-to-510(k) is a device accelerator, which by its very name is focused on the path of least resistance through the FDA — the fast track, 510(k) framework. Then there is a Southern California medical device incubator Option 3 but it too focuses exclusively on startups developing devices that will need a 510(k) clearance.
“Our clinicians believe there is a lot of opportunity for better devices to be developed as well as connected devices,” Halvorsen said. “And I don’t mean the Fitbit type connected devices but smart surgical devices and implantables that are collecting information.”
Halvorsen candidly admits that he spends a lot of time reviewing accelerator models to pick the pieces that appeal to him the most. The parking lot gives him a leg up, but the wheels of history will determine how good TMCx is in picking winners.
