Eleven Blue Cross and Blue Shield health plans have launched a venture capital fund and are making their first investment in a health informatics company amid a growing interest in the hot field of health information technology and healthcare innovation.
Blue Cross and Blue Shield Venture Partners is a $116 million corporate venture fund that will invest in companies focused on health IT, informatics, administration and back-office efficiencies, health programs, consumer-driven solutions and product extensions. The fund will not invest in medical devices, pharmaceuticals, hospitals or healthcare providers.
Launched quietly in August, the fund announced its first deal on Oct. 31, a $5 million investment in Initiate Systems, a data-management company that already counts six Blues plans among its clients.
The fund is viewed as an opportunity for participating Blues plans to reward innovation taking place in healthcare, said Paul Brown, managing director of the Chicago-based Blue Cross and Blue Shield Venture Partners. We are interested in investing in companies with a strategic importance to Blues plans.
Initiate Systems, Chicago, manages customer health records and other data for 177 clients, including Banner Health, Catholic Healthcare West, Walgreen Co. and WellPoint. The company started in the mid-1990s and has gone through numerous rounds of funding. In the last round that included the new Blues venture fund, Initiate raised $31 million.
The company is on track to post $70 million in revenue this year, has a compound growth rate of 50%, and is profitable, said Dan Kossmann, Initiates chief financial officer. The company plans to go public sometime in the near future, he added.
While Initiate Systems has also received investments from traditional venture capital funds, the Blues venture fund offers something more, Kossmann said. Its more than just getting money, Kossmann said. Now, weve got sort of a Good Housekeeping seal of approval from the parent Blues association. Its a calling card to attract more business.
The fact that Initiate Systems already counted Blues plans among its clients was evidence of strategic relevance to the Blues, Brown said. But thats not the reason we invested.
The venture fund, which is sponsored by the Blue Cross and Blue Shield Association, is co-managed by Sandbox Industries, a Chicago-based early-stage venture capital firm founded in 2003. The partnership gives the fund a triple management structure, Brown said, with Sandbox, the Blues venture fund and the 11 participating Blues reviewing potential deals. The fund will invest from the seed through growth stages of U.S. companies. The real sweet spot for us is the growth equity stage, Brown said.
Patricia Hemingway Hall, chief executive officer of Health Care Service Corp., which manages Blues plans in Illinois, New Mexico, Oklahoma and Texas, said startups have interesting capabilities and are good opportunities for investment. The venture fund is a more cost-effective way to get involved because we are collaborating with other Blues plans, Hemingway Hall said. I think its a sensible collaboration.
CareFirst, the Blues plan operating in the District of Columbia, Maryland and Virginia, agreed. As a not-for-profit, CareFirst doesn't have all the resources its for-profit competitors have to invest in promising new technologies, said Michael Sullivan, spokesman for CareFirst, in an e-mail. But together, the pooled resources of the plans create leverage through which we can address some major challengesparticularly on the information technology front.
Other participating include Blues plans in Idaho, Massachusetts, Michigan and Pennsylvania. Brown declined to say how much each plan was investing in the fund.
The fund has some competition in the area it is seeking to invest in. Other major venture capital funds targeting health IT and healthcare innovation include Health Evolution Partners, a $500 million San Francisco-based fund led by David Brailer, the former national coordinator for health IT under President George W. Bush. The fund launched last year and is financed by the California Public Employees Retirement System.
And Kaiser Permanente Ventures, the corporate venture capital arm of the Oakland, Calif.-based integrated health system, is investing in health IT companies and healthcare innovation services such as disease management, though it also has stakes in medical-device firms.
The Blues venture fund is looking for a positive return on investment, Brown said. But we dont have an invest-and-flip mentality.
Moreover, the fund gives the Blues plans a taste of the high-stakes world of venture capital funding.
This is one tool that Blues plans have to get a window on pretty rapid innovation happening in healthcare, Brown said.
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