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How To | Capital Finance

8 hallmarks of a successful healthcare venture capital program

How To | Capital Finance

8 hallmarks of a successful healthcare venture capital program


Developing innovative venture capital projects is rapidly becoming an essential element of the U.S. health system’s strategy to ensure long-term financial viability.

In the past five years, healthcare venture capital programs and innovation labs have become essential tools for health systems. These programs can be used to respond to market disruption, as well as to pressures to control cost and the shift to value-based payments. They will become even more important in the wake of today’s COVID-19 pandemic, when health systems will need to double down on new revenue approaches that can be scaled to rebuild their balance sheets.

As health systems move into the realm of venture capital projects, whatever their strategy, they can benefit from applying eight core principles and lessons learned from organizations that have achieved success with value-added venture capital management. (See the sidebar, “3 strategies for venture capital investing.”)

1. Make venture capital a health system strategic priority

The most successful healthcare venture capital players develop a clear strategy that links their investments to key organizational priorities such as improved patient care or greater operational efficiency. Many health systems also see venture capital as an organizational priority critical to dealing with externally driven pressures on their cash flows.

Ascension Ventures, for example, which was launched in 2001, focused on medical devices, technology and healthcare services. The venture fund, which is an important contributor to the revenues of St. Louis-based Ascension, currently manages $550 million in assets invested in early- to late-stage companies with more than 300 hospital and health facility investing partners. It shares its portfolio companies’ solutions with its investing partners while generating financial returns that support its mission to support care for the poor and vulnerable.

Given the slim margins earned by most health systems, developing venture capital investments is simply a prudent strategy.

2. Clearly align corporate and venture capital investment goals

Aligning corporate goals with investment goals is critical. Organizations therefore should develop a consensus around an investment approach in which venture capital investments conform with the parent organization’s overall business strategy. Most investors will choose between primarily strategic goals, such as the improvement of patient care, and more financially focused venture capital goals, such as investments aimed primarily at revenue diversification.

Strategic investments are generally qualitative in nature and tend to focus on funding startups with new business processes and/or technology to improve the efficiency and effectiveness of clinical operations.

For example, Kyruus is an industry-leading provider of search, scheduling and data management software that matches patients with the right providers to optimize patient experience across all channels of patient access. Providence St. Joseph Health — headquartered in Renton, Washington, and Irvine, California — invested in Kyruus in 2015 and has since rolled out the software throughout its system.

Financial goals can include a focus on monetizing internal intellectual capital, such as inventions developed by researchers or practitioners or resources developed through investments. Because innovation generally emerges in a space removed from the investment arena, it also is important to create a consensus on how investment and clinical goals are to be aligned.

3. Make collaboration and coinvesting key parts of the strategy

Whether the objectives of venture capital investments are strategic or primarily financial, most successful programs put a premium on collaboration and coinvesting. Relatively few health systems take the lead in investments, relying instead on outside venture capital firms to help in sourcing deals, due diligence and contracting. Health systems often coinvest with at least one like-minded organization on investments of any size, thereby allowing for diversified risk and a broader customer base for startup.

4. Separate venture investing from operations

Venture capital units typically are organized in teams of four to 10 professionals separate from line operations. The teams should safeguard their ability to review projects independently, have frank discussions on the trade-offs of various project merits and weigh their potential contribution to overall corporate goals. If their venture capital program is large enough, some health systems differentiate venture units based upon the types of investments they manage. 

Intermountain Healthcare in Utah, for example, has an accelerator program that supports early-stage in-house ideas. This program has an “innovation fund,” which invests in and manages syndicated ventures, and a separate business development unit, which spins out new companies and provides opertional oversight to new initiatives within the system. 

Creating defined, separate venture funds is another way to protect venture investments from fluctuations in operating income, and it is useful for recruiting high-quality investment professionals.

Not all health systems have defined venture funds. The Cleveland Clinic, for example, believes a fund structure places artificial constraints on its investments (e.g., the need to invest all funds and liquidate investments in three to seven years). Instead, it funds investments directly from its balance sheet to avoid these fund constraints. In 2000, the Cleveland Clinic launched a formal venture investing unit called Cleveland Clinic Innovations, which has issued more than 1,000 patents and licenses and helped launch more than 70 companies. In 2017, the Clinic created a separate unit, Cleveland Clinic Ventures (CCV), to manage its venture investments. About 90% of CCV’s portfolio is invested in the health system’s own intellectual property.

5. Build a culture that is reasonably tolerant of failure

Despite the allure, venture financing can be an unforgiving world, with at least 30% of early-stage companies going out of business within two years, according to a 2016 hfm article.[a]  The authors stressed that “a corporate venture capital fund can thrive only if its parent organization is one that is reasonably tolerant of failure.” Each project proposal should include analysis of the expected benefits of the investment and the project’s fit within the overall corporate strategy, as well as estimates of the expected strategic qualitative benefits, projected financial returns and operational and cash flow time horizon.

6. Make sure to groom 'venture champions'

The most critical role to fill within the venture team is the venture champion, or executive sponsor of each venture capital initiative. Without appropriate internal leadership, venture deals have a far lower chance of success.

The venture champion role is critical for managing transitions given that the strategic and financial goals have different timelines. All systems feel pressure to make investment decisions efficiently, which includes having the patience to gather all the customer input they need to properly evaluate deals. It therefore is critical that investment objectives be clear and supported from the top down to ensure investment champions have the guidance they need to foster successful venture innovations.

7. Focus on scale and implementation from the start

Venture activities are generally integrated into operations first by performing dry runs through pilot programs, allowing innovation projects to demonstrate their ability to create greater systemwide value. However, although pilots are essential for testing and refining ventures, organizations should be careful to avoid letting pilots run longer than is necessary. A significant fraction of new deals, of course, will not make it past the first or second round of funding. Thus, most mature venture funds avoid early-stage investments and focus on investments in products they can use and scale internally. In short, if you can’t imagine the large-scale rollout of a venture activity, don’t bother to pilot.

8. Engage health system leadership

It is essential that line managers be involved along with senior leadership in the venture selection process and in investment decision-making. Investment objectives that are clear and supported from the top down are critical for providing venture champions with the organizational direction and backing they need to succeed with innovative ventures. 

Senior executives play a critical role in ensuring the venture investment approach stays within the framework of the organization’s overall business strategy (e.g., risk tolerance, readiness to embrace disruption and level of startup investing deemed best based on the organization’s circumstances). 

Finally, scaling investments through partnerships, planning product rollouts and managing key development transitions such as capitalization or syndication requires engaged leaders. Senior executives should be prepared to devote considerable time to identifying new approaches to extend the health system’s brand into adjacent industries, new ways of investing in startup businesses and the potential ROI of every inch of hospital space that could support a venture capital project.  

Checklist for an effective venture capital process

  • Do we have diverse ventures from multiple channels?
  • Are line managers involved in the selection process?
  • Is there a clearly defined vetting process for deals?
  • Do we have a process for identifying and grooming venture champions?
  • Are there frequent forecast updates to support tactical shifts?
  • Is there a process for addressing pilot pain points?
  • Is there a roll-out plan for implementation that balances need and speed of execution?
  • Are we developing a culture of continuous improvement?

3 strategies for venture capital investing

According to the American Hospital Association, as of 2017, 72% of the large 400+ bed hospitals in the nation had innovation centers to support venture investing or were planning to do so.[b]

The Silicon Valley Bank, one of the largest players in the healthcare venture funding market, reports that U.S. healthcare venture fundraising reached an all-time high of $10.7 billion in 2019, a 10% increase over the previous year.[c] Venture investments in the “Healthcare Tech” sector were particularly robust, cementing its position as the fastest growing sector in healthcare, with growth largely attributed to alternative care and provider operations.

Traditional strategies. Traditionally, venture investing has predominantly been the domain of large academic medical centers, such as Johns Hopkins Medicine, Stanford Health Care or Partners Healthcare (now Mass General Brigham), the Mayo Clinic and the Cleveland Clinic. These organizations have developed commercialization programs for internally developed intellectual property and invested primarily to “monetize” staff and faculty inventions and to provide seed money for promising start-ups.

"Outside-in" strategies. An emerging approach to developing innovation opportunities involves sourcing diverse deals from various channels. Recently, some health systems have pioneered an outside-in investment strategy, which involves developing a corporate venture capital program run by outside investors that looks for innovations to test, refine and scale with the goal of bringing them to market. These corporate venture offices are staffed by investment professionals, and their goal is to create beta environments in the health systems to stimulate innovation and then to be the initial customers for the new technologies they are testing.

Organizations pursuing this strategy include Ascension, Providence St. Joseph Health, Dignity Health, Intermountain Healthcare, MemorialCare and Cedars-Sinai.

Other strategies. Other organizations are exploring innovative investment opportunities that are internally generated. For example, NewYork-Presbyterian Ventures seeded the development of NYP OnDemand to transform its clinical delivery systems through the widespread use of telehealth visits. Likewise, Houston Methodist’s Center for Innovation has created a “Technology Hub” in the wing of a clinical building that provides a comprehensive environment to test innovations such as voice technology and natural language processing, with the long-term goal of offering the hub to vendor partners and researchers who want to collaborate in new health technologies.

Footnotes

[a] Potter, M.J., Wesslund, R., “Provider venture capital funds: Investing in innovation,” hfm, May 2016.

[b] AVIA and American Hospital Association, Digital Innovation Survey: Executive Summary, 2017.

[c] Norros, J., Vig, D.K., and Harris, K., Healthcare Investments and Exits: 2020 Annual Report, Silicon Valley Bank, 2020.

About the Authors

Steve Weylandt, MHA,

is a director leader of the health enterprise strategy practice, BDC Advisors, Houston.

Dudley E. Morris

is a senior advisor, BDC Advisors,  Los Angeles, and a member of the Southern California Chapter of HFMA.

Alan Trimakas, MBA,

is a manager at BDC Advisors, Miami, and a member of the Florida Chapter of HFMA.

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