Karen Griffith Gryga is a partner and chief investment officer at Dreamit Ventures, one of the nation's largest accelerators for technology startups. The Philadelphia-based company also invests in early-stage health technology firms. A third of Dreamit's 80-plus companies are involved in population health management. Gryga was interviewed by finance reporter Dave Barkholz. The following is an edited transcript.
Modern Healthcare: What's driving the accelerating investment in healthcare technology startups?
Karen Griffith Gryga: Opportunity. The HITECH Act incentivized providers to invest in EHR systems and integrate technology into their practices. That created a tremendous opportunity for innovation. Because the opportunity was there, the venture capital dollars are there.
MH: Has healthcare lagged other industries in harnessing data?
Griffith Gryga: Absolutely. Healthcare was dramatically behind other industries in terms of leveraging information and technology to deliver better care. The incentive wasn't there to do it. When you're in a fee-for-service environment, you deliver your service and you get reimbursed for it. But now the whole landscape is moving to value-based care and population health, a dramatic shift that necessitates the leveraging of technology and data.
MH: How are hospital system venture capital funds affecting startups?
Griffith Gryga: They're having a big impact on the industry. They're now a significant percentage of the deals and a significant percentage of the dollars deployed. That's both a good thing and a bad thing.
The one big advantage is if an entrepreneur can get an Ascension or Providence to be both a customer and an investor; that's a strong signal to the marketplace. These corporate venture firms have sophisticated individuals who understand the healthcare marketplace and are very active in getting the companies exposed throughout their organization.
MH: What are the potential negatives to a startup relying on hospital VC sponsorship?
Griffith Gryga: Not all corporate venture capital players really understand what it means to be a startup company. Larger organizations can put the needs of their organization ahead of the needs of the startup. There have been cases where the startup companies have had a chokehold put on them by the corporate partners, who are very focused on their own needs and agenda. They don't necessarily understand the impact that has on the startup company in constraining their growth in the broader market.
MH: What about traditional VC funding?
Griffith Gryga: Traditional VC funds are driven by financial returns. They have to be passionate about the investment and passionate about the vision of the entrepreneurial team. But at the end of the day, it is a financial investment.
MH: Are hospitals being overwhelmed by all this new technology?
Griffith Gryga: Hospitals aren't really in the business of vetting new technology. You have a spectrum of hospitals that are more innovative and those that tend to follow along later. Most hospitals are not structured to continuously vet innovation. So these hospital systems are looking to partner with other players in the marketplace to help them vet these deals.
MH: How big does a startup have to be before it gets easier to get venture capital?
Griffith Gryga: Raising capital is never easy. The past couple years there has been an expansion within the seed stage. You have much more active individual angel investors and micro VCs. Where it's the easiest to raise money is at the growth stage. These companies have at least $5 million in revenue, maybe making a profit, and have nailed their target customer and their customer acquisition process. There's still execution risk in driving hypergrowth, but there's really no market risk, not a lot of product or IT risk or business model risk. It's been figured out.
MH: Do you see anything slowing the money going into these startups?
Griffith Gryga: If there are some dramatic shifts in regulation and reimbursement, you might see some pullback in strategic investment. Ironically, that's when these innovations to really help them deliver better care and more cost-effective care will be needed most. Traditional VC investing might be affected if the exit environment closed down dramatically. Then you'll see kind of a drop-off in the primary investment side.
When the exit environment becomes challenging, people tend to say, “I'm probably going to have to support my existing portfolio longer with more capital.” So they pull back a little bit and do less deals to have more reserves.