Health Tech

Why Startups Are Seeking Out Health Systems’ VC Arms

Health system VC arms appear to have a lot more to offer to startups than traditional VC funds. Startup founders say that the tech pilots they launch with their health system partners end up being more effective because they are more incentive-aligned. For health systems, investing in a startup allows them to have a hand in shaping the tools they will eventually deploy across their enterprises to solve issues like burnout, payment delays and excessive hospital readmissions.

In the past decade or two, health systems have been establishing their own venture capital arms to support health tech startups. At least 23 health systems currently have venture capital arms — mainly big institutions such as Ascension, Cleveland Clinic, Kaiser Permanente, Mayo Clinic and UPMC.

When a startup secures an investment from a health system, it receives a lot more than capital. The company also gets access to industry expertise, an inside look at the intricacies of hospitals’ real-life workflows, and the ideal environment to pilot digital tools.

In interviews conducted this month, startup founders told MedCity News that they find investments from health system VC arms to be much more valuable in the long-term than capital from traditional VC firms. They also said that the tech pilots they launch with these health system partners end up being more effective because they are more incentive-aligned.

For health systems, investing in a health tech startup allows them to have a hand in shaping the tools they will eventually deploy across their enterprises to solve issues like burnout, payment delays and excessive hospital readmissions. Absent that, founders create tools that forces clinicians and others to alter workflows, which ultimately stymie adoption. After all, humans are creatures of habit.

More than just capital

When Stanford Health Care launched its venture capital arm in 2012, it built a team of people who were truly committed to helping startups understand how care delivery systems work, said Tip Kim, the health system’s chief market development officer. 

Because of this, he thinks health system VC arms have a lot more to offer startups than traditional VC funds. After all, if money is all they’re after, startups should have no problem “making a left turn on Sandhill Road, where there is no shortage of professional investment firms where people make venture bets for a living,” Kim remarked. 

At Stanford, investors don’t provide capital to digital health startups just because they think the decision will end up generating a profit — they’re also equally if not more focused on being an active part in validating and commercializing the technology the industry needs to improve people’s health and reduce overall healthcare costs, he explained.

When Stanford decides to invest in a startup, it takes on the role of being the company’s shepherd. The health system welcomes startups to the world of care delivery and walks them through clinical and operation functions, various service lines and legal compliance processes, Kim said.

This close involvement greatly improves the chances that a tech pilot will be successful, he noted. 

“Great ideas wither on the vine all the time because of things like compliance issues, data privacy issues, etc.,” Kim declared. “Those make it really hard for systems to be a meaningful and timely partner for startups.”

Some companies in Stanford’s investment portfolio include digital health enablement startup AristaMD and Atropos Health, which delivers clinical data to physicians at the point of care. Both companies’ products have been commercialized and are currently used by the health system.

Ensuring alignment

Memorial Hermann in Houston is another example of a health system with an investment arm. Over the past couple years, the health system has made investments in about a dozen startups — including data analytics firm Clarify Health, polychronic conditions care provider Monogram Health, digital health billing startup Cedar, revenue cycle management company EnableComp and nursing software vendor Laudio.

When Memorial Hermann decides to invest in a digital health startup, it’s meant to create a long-term relationship with the company rather than simply provide funding, noted Feby Abraham, the health system’s chief strategy and innovations officer. 

In order to ensure it is choosing the right companies with which to pursue these strategic relationships, Memorial Hermann makes sure startups target key priorities for the system. They include alleviating workforce burnout, optimizing the cost of care, addressing social determinants of health, enriching patient experiences and driving precision care, Abraham said.

Laudio is one Boston-based startup that is checking a box on Memorial Hermann’s priority list. The company’s technology automates administrative tasks, which are major contributors to burnout for frontline nurse managers. These tasks include things like patient rounding, schedule making, and quality and safety checks. 

Memorial Hermann isn’t just a health system that agreed to give Laudio’s software a shot, CEO Russ Richmond noted. Because the system is an investor in the startup’s technology, it gets to enjoy financial upside if the software does well on the market. So, when Laudio began the process of planning its pilot with Memorial Hermann, Richmond quickly realized that the health system was going to take the time to work directly with him to co-design the program and agree on strategic goals.

When a health system has an investment relationship with a startup, they are often more careful with the technology pilot design, he pointed out. Memorial Hermann made sure Richmond and his team were connected to the right personnel, received timely feedback, and were given the resources they needed to collect data and evaluate the product’s performance.

“Memorial Hermann put together a broad panel of executives to evaluate Laudio from across the enterprise. Out of the gate, stakeholders from across what is a very large and sophisticated organization — including acute care, ambulatory care, HR, nursing, different sites and different functions — were assembled. And then we all talked very carefully about where to begin. Together, we determined leadership and optimized criteria for success,” Richmond remarked.

As Laudio grows, it’s continuing to build out a variety of point solutions. Eventually, it will have to pivot toward becoming more of a platform-based company to stay competitive in the market, Richmond noted. 

To execute this shift, a startup needs not just capital, but advice from clinical leaders who are familiar with the product, he pointed out. This makes having a long-term health system partner hugely valuable.

“We’ve been in a situation where it’s been very easy for us to fundraise, so it’s not about finding investment dollars. It’s actually always one click deeper than that — it’s finding the right partner with the right dollars,” he said.

What the future might look like

Brigham Hyde — CEO of Atropos Health, one of the startups in which Stanford has invested — values his startup’s close relationship with the health system. The partnership made it much easier for Atropos to collaboratively form pilot program goals with Stanford, he said.

This month, General Catalyst took the idea of incentive-aligned technology pilots a step further. The VC firm announced its plans to acquire Ohio-based health system Summa Health. General Catalyst will use the health system as a deployment space for its healthcare portfolio companies’ technology — with lofty promises to give the nation a blueprint for what a truly tech-enabled health system should look like.

Hyde is unsure how this experiment will play out. However, he recognizes that the news speaks to the healthcare industry’s need for more strategic technology pilots and wonders if there are other innovative approaches. 

“I’d like to see more institutional VCs collaborate. If I’m in North Carolina, I want to get in the door with all the five major health systems there, but do I have to go through every single VC door? Maybe they should all just collaborate on the things we all want to do?” he asked.

It might be a worthwhile idea for health system VC arms to do some consortium-building in order to bring innovative products to the market more quickly, Hyde declared. 

Photo: Topp_Yimgrimm, Getty Images