Rising costs, shrinking reimbursements, limited access, middling quality, poor interoperability, ineffective documentation, increasing consumer expectations – without a doubt, healthcare providers have a growing need for innovation. While some hospitals and health systems have focused on developing home-grown solutions to these hurdles, others are increasingly engaging with the early-stage market through the creation of venture capital funds, joining the $11.5 billion that poured into the digital health market in 2017 alone.
Venture funds can help providers maintain a pulse on upcoming market disruptions and capitalize on a first-mover advantage, while ideally yielding a positive financial return. Veterans in the space include Kaiser Permanente Ventures (~$400m under management) and Ascension Ventures (~$800m under management), each investing for more than ten years with multiple successful exits. However, as this particular path to innovation becomes more popular, it is increasingly important to consider the flip-side of the coin.
What value does a provider-sponsored venture fund bring to a start-up?
The early-stage healthcare market is abundant with capital and investing experience, and health systems must be able to successfully compete with existing investors to have a seat at the table. Capital alone is not enough to make a valuable partner, especially for either a hot, new, intriguing startup entrepreneur or veteran entrepreneur with a retinue of potential investor suitors. While a single customer relationship with the sponsoring provider may add value, it is often an insufficient bargaining chip without a deeper collaboration.
Which means that health systems must provide differentiated value compared to other healthcare investors in order to access competitive deals, set favorable terms, and augment the success of their portfolio companies.
Uniquely positioned at the last mile of healthcare delivery, health systems do have the opportunity to establish themselves as effective allies. A provider-sponsored venture fund can distinguish itself (and is most likely to be successful) by adding strategic value through the following avenues:
Validation – Adoption and integration of provider-facing technology have required a progressively higher degree of clinical validation. Hospitals and health systems are the gateway to clinical trials and often (especially in the case of academic medical centers) house the thought leaders and brand recognition that drive adoption of a novel technology.
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.
From my summer working at Healthbox with the Intermountain Healthcare Innovation Fund, it was clear how much the health system’s brand resonated with emerging digital health companies, especially those focused on healthcare quality and safety.
Scale – A fund’s network can consist of hospitals formally associated with the primary health system or affiliated systems, occasionally even investing as limited partners in the fund. That creates a door to growth opportunities for the startup. For instance, Ascension Ventures boasts a network of 15 health system partners and facilitated Reputation.com’s expansion into the healthcare vertical by leading a $20m investment round in the online reputation management platform.
Collaboration – A financial investment aligns the soft, difficult-to-contract incentives behind collaboration. Health systems can be a resource of knowledge and support they may be hesitant to offer through only a customer relationship (e.g. access to clinicians, utilization of house IT staff, EHR data, and others). Hospital for Special Surgery successfully facilitated the growth of Boston-based Docent Health by providing such services in exchange for an equity stake in the firm – notably without a direct financial investment – suggesting the significant inherent value of this relationship
Whether or not to create a provider fund will depend on a host of factors and health systems should carefully consider their core capabilities before creating a venture fund. They might well find that they are able to achieve their goals through other means. An aggressive and focused business development team or a partnership with a healthcare innovations firm could provide the desired market insight and productive customer relationships without the high risk of a venture investment. But a provider with the appropriate assets and activity streams for nurturing young healthcare companies can effectively compete in the venture market and at least take their shot at reaping the prospective strategic and financial gains.
And be a boon for healthcare startups looking to nudge their way into clinical workflows and see wider adoption of their novel technologies.
