As health systems face numerous financial challenges coming out of the pandemic, some are relying on an innovative source of revenue to bridge the gaps: internal venture capital (VC) arms.
At least 23 health systems operate VC arms, according to a tracker from Becker’s Health IT, with the primary goal of generating additional revenue streams, Richard Gundling, SVP of professional practice for the Healthcare Financial Management Association, told Healthcare Brew.
“Certainly coming through the pandemic with lots of increased costs, both for workforce [and] supplies […] there’s going to be a lot of constraints on inpatient care in some of the traditional areas of hospitals and health systems in their revenue streams,” Gundling said. “[VC] is another opportunity to be able to have growth.”
Hospital VC arms invest in a range of both early- and late-stage companies, including digital health startups, therapeutics, and medical device companies.
But unlike a traditional third-party VC firm, a health system VC “wants more than returns,” Doug Hayes, executive director of New Jersey-based Atlantic Health Venture Studio, told Healthcare Brew.
“We want returns [...] we also want validated technology that we could use, that we could push out to our employees—sometimes as a benefit—and obviously, the major goal is that we could use in patient care,” Hayes said.
Andy Danielsen, chair of Mayo Clinic Ventures, told Healthcare Brew the goal of the system’s VC arm is not just to make money but also to advance the future of healthcare through discovering new products and therapeutics.
The profits health system VCs make are also typically invested back into the system rather than to partners.
“We’re all salaried, just like our physicians are all salaried, so there’s no incentive for the team that runs the venture fund,” Danielsen said. “It’s not about an individual’s compensation.”
Some health systems play a much more involved role in developing the companies they invest in compared to third-party VC funds.
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“We just don’t drop money in and let the company try to progress. We become active partners with the company,” Richard Mulry, president and CEO of Northwell Holdings, the New York-based health system’s VC arm, told Healthcare Brew.
Key successes
The success of health system VCs varies, but overall they tend to see “more success than not,” according to Gundling.
At the University of Pittsburgh Medical Center (UPMC), Jeanne Cunicelli, EVP and president of the system’s venture arm, UPMC Enterprises, said one of their key successes has been investing in health tech startup Health Fidelity, which generated “hundreds of millions in revenue” for the system’s health plan.
“To be successful, a health system VC has to be woven into the fabric of the system,” Cunicelli said. “Who better to generate ideas than the people who practice healthcare or create insurance plans for whole populations or make breakthrough discoveries in the lab?”
Todd Schwarzinger, a partner at Cleveland Clinic Ventures, said the health system is seeing a number of its portfolio companies begin to mature. One of the companies that’s working in cancer diagnostics, called Cleveland Diagnostics, recently closed a $75 million funding round—the largest single raise of a portfolio company to date, according to Schwarzinger.
“We’re bringing some of the most innovative companies into the ecosystem here at the clinic,” he said.
Gundling projected that hospitals will continue to operate in the venture capital space for the foreseeable future.
Schwarzinger added that healthcare startups are likely to benefit from the trend, as hospital VCs can sometimes support startups when a traditional VC cannot.
“This is one of the most challenging fundraising environments that I’ve seen in quite some time for healthcare, and that’s across all verticals,” he said. “In a lot of cases, nontraditional investors like ourselves are stepping up to support some of those companies, to help them bridge through this difficult fundraising environment.”