Venture firms generally have found that companies involved in healthcare information technology and health services are attractive for investment. Of $49.3 billion invested in venture funds in 2014, $6 billion went to biotechnology, $2.6 billion to medical devices and equipment and $356 million to healthcare services, according to the National Venture Capital Association Yearbook 2015.
Why are health system leaders starting venture funds? Ezra Mehlman, vice president of Health Enterprise Partners, a New York-based growth equity firm, said the past five years have been a time of immense change and uncertainty for hospital executives. So they're experimenting with new ways of doing business and seeking growth opportunities outside their core businesses, including launching strategic investment groups.
Health system venture funds typically act as co-investors or strategic investors, performing their own due diligence, while also relying on research performed by lead firms or large venture firms.
In the case of Ingenious Med, which automates the capture of physician charge data at the point of service, strategic investors include:
Ascension Ventures, a subsidiary of St. Louis-based Ascension Health, which has $550 million in capital under management. Its limited partners include Catholic Health Initiatives, Decatur Memorial Hospital, Dignity Health, Intermountain Healthcare, Mercy and Trinity Health.
Kaiser Permanente Ventures, the corporate venture capital arm of Kaiser Permanente in Oakland, Calif., which has invested in 55 healthcare health-IT, health-services and medical-device companies since 1997.
Heritage Group, a Nashville-based venture capital firm whose limited partners are a blend of not-for-profit and for-profit health systems, including Cardinal Health, Community Health Systems, Intermountain Healthcare, LifePoint Health, Memorial Hermann, Tenet Healthcare Corp., Trinity Health and UnityPoint Health.
Matt Hermann, senior managing director of Ascension Ventures, said investing in new technologies makes “a ton of sense” when a hospital group is enthusiastic about a particular technology, wants early access, and seeks to help guide its future.
Ascension's medical staff liked Ingenious Med's charge-capture product, which replaces index cards physicians carried in their pockets for recording encounters. “We got excited by other aspects of Ingenious and about their growth strategy to improve patient care and physician efficiency,” he said. “We shared their story with our physicians and IT organization.”
Roshen Menon, general partner at North Bridge, which has $3.8 billion of its capital under management with a focus on high-growth companies, said that when health systems serve as strategic partners as well as technology users, it helps open doors for technology developers inside hospitals. “That's an important value-add that hospital groups bring,” he said.
David Tamburri, general partner at Health Enterprise Partners, which has a $148.5 million fund with approximately two-thirds of it coming from healthcare organizations, said many strategic investors, including hospital-based investment funds, feel more comfortable investing alongside more traditional funds or serving as limited partners in a healthcare fund. Making direct investments requires expertise that hospital funds may not feel they have.
“Investing in a fund affords hospitals the ability to share in the upside they create through commercial relationships, while avoiding the challenges associated with managing a dedicated investment vehicle,” Tamburri said. “In addition, the right strategic co-investor can have a tremendous impact on the company's ability to accelerate its commercial efforts, while also providing additional credibility in the marketplace.”
Dan Burton, CEO of Health Catalyst, a Salt Lake City-based data warehouse and data-analytics startup, said strategic investors such as hospital funds typically will not lead an investment round.
“They'll tag along and often feel much more comfortable with a pure VC doing all the deep due diligence on a company, validating that they feel it's a good investment,” he said. “When they see someone like a Sequoia Capital or a Norwest Venture Partners leading an investment round, they'll often participate as a co-investor.”
Health Catalyst has raised $165 million in venture funding. Strategic investors include Kaiser Permanente Ventures and CHV Capital from Indiana University Health. In addition to venture groups, health systems such as Minneapolis-based Allina Health and Boston-based Partners HealthCare have invested directly in Health Catalyst. “Our mission aligns tightly with health systems' missions,” Burton said. “So having health system VCs invest in our company helps preserve that mission and orientation.”