Is Venture Investing a Good Fit for Your Health System? Considerations for Provider Funds (Part 1 of 2)
Recently, many health systems have invested in digital health companies. These investments have been made through multiple vehicles, including but not limited to balance sheet investments, in-house venture programs, and both single- and multi-LP venture funds. This has led to an increase in the number of digital health startups receiving funding. According to Rock Health, nearly $6 billion was invested in almost 600 digital health deals in 2017. They also report continued growth across the number of active investors, with nearly 20% of all 2017 digital health investors being new to the space. Health systems in particular have become more active in the space: according to Accenture, there are now 60 hospital-sponsored or corporate venture funds. Within the last few months alone, several firms including LRV Health, 7Wire Ventures, and Aspire Ventures have announced new digital health-focused strategic venture funds.
In this article, part one of two we’ll outline a few of the factors motivating the recent influx of strategic capital into healthcare and help those considering their own investment programs think about whether they should undertake these efforts internally or work with a third party. In a forthcoming second article, we’ll look at the various models from which investors can select if they choose to partner with an external group to manage their strategic investments.
Why the Sudden Drive to Invest?
Given the continued growth in healthcare venture investing, we examined some of the primary benefits that health systems reap from participating in venture programs. Having spoken with dozens of health systems through our own investment activities, we’ve identified three main reasons behind the recent increase in investing among provider organizations:
- Early access to new solutions: Because investors typically review around 100 deals for each one they invest in, building a venture program means your organization will thoroughly survey the market in parallel with making investments. Partnering with early-stage companies will also allow your organization to play a role in developing the solutions of the future.
- Development of innovative programs: Working with groundbreaking technologies will help your health system expand its offerings and create value, helping you provide better care with fewer resources.
- Compelling strategic and financial returns: Venture programs help health systems identify early-stage companies or ideas that could be impactful internally and put these new technologies into active use, creating rapid strategic impact. Over time, these programs can deliver strong financial returns as well.
Putting it Into Practice
If you’ve determined that you’d like to help your organization engage in venture investing, there are two ways to launch: (1) you can run a program in-house or (2) partner with an external fund manager. While both in-house and external venture programs are great ways for your health system to get involved with early-stage companies and put some capital to work, you must decide which option is best for your organization when thinking about how to begin. Keeping the fund in-house means the team managing the fund will be well-equipped to connect with your clinicians and administrators for diligence work. If the fund team is hired internally, they will know what your areas of strategic interest are from day one. You will also retain the decision-making authority on each deal you review. However, you may find there are some significant challenges associated with running an internal venture fund. Your fund team might have limited knowledge of market trends and comparable deals, which will make it challenging to identify a good deal when it comes up. Your fund team may also struggle to move at market speed and execute deals if they lack experience in these areas. When deciding which strategy to pursue, you should consider some of the benefits associated with external venture fund management:
- Ability to operate at market speed: To ensure you are able to participate in the best deals, you need to move at ‘venture market speed’ rather than ‘health system market speed.’ For example, health systems typically take 12 to 18 months to contract with vendors while venture processes run for about two to three months. To match this quick pace health systems must have well-defined frameworks for making decisions or rely on a fund manager to help guide them through the process. Matching this speed will also ensure your health system maintains a vendor-friendly reputation and attracts the interest of top startups.
- Access to a relevant network within the ecosystem: In the venture world many opportunities spread via word of mouth; without the right connections, you might find yourself learning about deals only once they’ve closed. Hiring a third party with a history of working with startups and other venture firms will help you avoid this issue. It will also provide you with a built-in sourcing funnel to help you hit the ground running. Partnering with a group like Healthbox that has built connections in both the healthcare and venture worlds will allow your system to gain access to the best deals from day one.
- Readily-available operational experience: Because there are so many early-stage healthcare companies seeking funding, it can be difficult to assess them systematically and sort through the weeds to find the companies with the best opportunities for growth. Using a repeatable method to evaluate these companies will help you quickly identify the deals you want to pursue and pass on the ones you don’t. This approach will also be advantageous when it comes to managing portfolio companies post-investment. Partnering with a fund management team that has this type of operational experience can make your foray into venture investing run much more smoothly.
If you decide that partnering with an external fund manager is the best way for your organization to launch a venture program and would like to further explore strategies for doing so, be sure to look out for the second article in this series where we’ll explore various venture investing models and help guide you to a decision about which may be best based on your priorities.
If you’re interested in learning more about how Healthbox works with health systems to manage venture funds, please contact us at firstname.lastname@example.org.