Why Startups Are Looking for VC Support from Health Systems

Why Startups Are Looking for VC Support from Health Systems

Compared to standard VC funds, health system VC arms seem to have a lot more to offer businesses. According to startup founders, because their tech pilots are more incentive-aligned, the ones they initiate with their health system partners prove to be more successful. Investing in a startup gives health systems the opportunity to shape the technologies that will eventually be implemented throughout their organizations to address problems like excessive hospital readmissions, burnout, and payment delays.

Health systems have been creating their own venture capital arms to assist health tech entrepreneurs over the last ten or so years. Currently, at least 23 health systems—mostly large organizations like Ascension, Cleveland Clinic, Kaiser Permanente, Mayo Clinic, and UPMC—have venture capital divisions.

A startup that gets funding from a health institution gets much more than just money. The business also gains access to industry knowledge, a behind-the-scenes look at the complexities of actual hospital workflows, and the perfect setting for testing digital products.

This month, MedCity News spoke with startup founders who stated that, in their opinion, cash from health system venture capital arms is far more important in the long run than funding from typical venture capital firms. Additionally, they claimed that because these tech pilots are more incentive-aligned, the ones they initiate with these health system partners ultimately prove to be more successful.

Investing in a health tech startup gives health systems the opportunity to shape the technologies that will eventually be implemented throughout their organizations to address problems like excessive hospital readmissions, burnout, and payment delays. In the absence of that, the creators develop technologies that compel medical professionals and others to modify their workflows, ultimately impeding adoption. Humans are habitual beings after all.

Greater than merely money

According to Tip Kim, the health system’s chief market development officer, when Stanford Health Care established its venture capital division in 2012, it assembled a group of individuals who were genuinely dedicated to assisting startups in comprehending how healthcare delivery systems operate.

He believes that as a result, health system venture capital arms can benefit businesses far more than traditional venture capital funds. Startups should have no trouble “making a left turn on Sandhill Road, where there is no shortage of professional investment firms where people make venture bets for a living,” Kim said, assuming money is all that they have in mind.

According to him, investors at Stanford aren’t just funding digital health startups because they believe the move will turn a profit; they also have an equal, if not greater, emphasis on actively participating in the validation and commercialization of the technology that the sector needs to improve people’s health and lower overall healthcare costs.

Stanford assumes the role of the company’s shepherd when it chooses to invest in a startup. According to Kim, the health system welcomes newcomers to the field of healthcare delivery and guides them through the numerous service lines, clinical and operational functions, and legal compliance procedures.

According to him, the likelihood that a tech pilot will succeed is significantly increased by this intimate involvement.

“Great ideas wither on the vine all the time because of things like compliance issues, data privacy issues, etc.,” Kim declared. “Those make it really hard for systems to be a meaningful and timely partner for startups.”

Atropos Health, which provides clinical data to doctors at the point of care, and digital health enabling startup Xealth are two businesses in Stanford’s investment portfolio. The health system currently makes use of the commercially available products from both companies.

Keeping everything in line

Another example of a health system having an investment arm is Memorial Hermann in Houston. The health system has invested in roughly a dozen startups in the last two years, including the data analytics company Clarify Health, the provider of care for polychronic conditions Monogram Health, the digital health billing startup Cedar, the revenue cycle management company EnableComp, and the vendor Laudio of nursing software.

A long-term partnership is intended to be established rather than just financial support when Memorial Hermann chooses to invest in a digital health business, according to Feby Abraham, chief strategy and innovations officer for the health institution.

Memorial Hermann ensures sure startups focus on important issues for the system in order to make sure it is selecting the correct businesses with which to pursue these strategic collaborations. According to Abraham, they include reducing worker burnout, maximizing healthcare costs, addressing socioeconomic determinants of health, improving patient experiences, and advancing precision medicine.

One Boston-based startup that Memorial Hermann is putting a checkmark next to is Laudio. The administrative activities that lead to frontline nurse managers’ burnout are automated by the company’s technology. These responsibilities include scheduling, quality and safety inspections, and patient rounds.

CEO Russ Richmond pointed out that Memorial Hermann is more than just a health organization that decided to test out Laudio’s software. The system benefits financially from the software’s success on the market since it is an investor in the startup’s technology. Thus, when Laudio started working with Memorial Hermann to organize the program’s pilot, Richmond knew right away that the healthcare system would need to dedicate time to directly collaborate with him to co-design the initiative and determine its strategic objectives.

He noted that health systems are frequently more cautious with the technology pilot design when they have an investment tie with a company. Memorial Hermann ensured that Richmond and his team have access to the appropriate people, prompt feedback, and the tools they required to gather information and assess the product’s effectiveness.

“Memorial Hermann put together a broad panel of executives to evaluate Laudio from across the enterprise. Out of the gate, stakeholders from across what is a very large and sophisticated organization — including acute care, ambulatory care, HR, nursing, different sites and different functions — were assembled. And then we all talked very carefully about where to begin. Together, we determined leadership and optimized criteria for success,” Richmond remarked.

Laudio is expanding and developing a range of point solutions. Richmond pointed out that in order to remain competitive in the market, it will eventually need to change course and become more of a platform-based business.

He noted that in order to implement this change, a startup requires guidance from clinical professionals with experience in the field in addition to funding. This makes having a long-term partner in the healthcare system quite beneficial.

“We’ve been in a situation where it’s been very easy for us to fundraise, so it’s not about finding investment dollars. It’s actually always one click deeper than that — it’s finding the right partner with the right dollars,” he said.

What the future may hold

One of the firms that Stanford has invested in, Atropos Health, has a close relationship with the health system, which is something that CEO Brigham Hyde prioritizes. According to him, the collaboration greatly facilitated Atropos’ ability to jointly develop pilot program objectives with Stanford.

General Catalyst advanced the concept of incentive-aligned technology pilots this month. The venture capital group declared its intention to buy Summa Health, an Ohio-based health system. With grand ambitions to provide the country with a model for what a fully tech-enabled health system should seem, General Catalyst intends to use the healthcare system as a deployment place for the technologies from its healthcare portfolio firms.

Hyde is uncertain about the outcome of this experiment. He acknowledges that the news highlights the necessity for more strategic technology pilots in the healthcare sector, though, and he questions whether there are any other cutting-edge methods.

“I’d like to see more institutional VCs collaborate. If I’m in North Carolina, I want to get in the door with all the five major health systems there, but do I have to go through every single VC door? Maybe they should all just collaborate on the things we all want to do?” he asked.

According to Hyde, it could be beneficial for health system venture capital arms to form such partnerships in order to expedite the release of novel goods.