A new venture capital gold rush is on, one that brings opportunity but also risk to the nation’s hospitals. Recognizing the need to make health care more accessible, efficient and affordable ― as well as the equally critical imperative of improving outcomes ― venture capitalists, along with hospitals and health care systems, are plowing money and resources into health care start-ups, particularly companies focused on health tech. More than $6 billion was committed during the first half of 2017, according to Startup Health Insights, a pace that will easily set a new annual record.
Large hospitals, including those that are publicly traded, now routinely have venture funds that are investing millions upon millions in early-stage technology, fueling fledgling businesses they hope will advance care and also turn a nice profit. While they are providing venture capital, hospitals sometimes are missing the opportunity to offer something even more valuable: strategic capital, their hands-on knowledge of the business of health care and the answers to its shortcomings.
It’s encouraging to see so many entrepreneurs dedicating themselves to the health sector, and exciting to see meaningful investments supporting those dreams. But the fact is venture investing is inherently risky business. About three of every four venture-funded start-ups fail to return their investors’ capital, according to a Harvard Business School analysis, and there’s no reason to believe the failure rate is lower in health care than any other industry, the need for innovation notwithstanding. Accenture studied nearly 900 digital health start-ups and found just over half were “zombie start-ups, at risk to die.” While entrepreneurs proudly tout each round of capital they raise, even with financial backers and good ideas, most health care start-ups are going to fail.
That is not a pleasant thought for hospitals investing in health care start-ups, no matter how noble a venture’s objectives. Hospitals are not go-go investors on the hunt for high risk, high return opportunities; their risk profile is drastically different than that of aggressive investors willing to take big gambles that may or may not pay off. Cash is precious for hospitals, even the most renowned, especially in an age of declining insurance reimbursements, deep uncertainty about public health care policy, and a changing payment structure that will require hospitals to assume financial risk for patient care. So it makes sense, particularly in today’s environment, for hospitals to be conservative with their investments.
Hospital venture funds can significantly lower standalone financial risk and boost their chances of success by investing strategic capital in the form of experience, know-how, data and intellectual property, all of which can play a more meaningful role than venture capital alone in improving our health care system. Hospitals can contribute sweat equity — expert advice, collaboration, and knowledgeable human capital that can boost the value of an idea or technology behind a start-up and help it succeed. While venture capitalists have plenty of cash to deploy, the front-line, day-to-day experience of health care providers can be invaluable to start-up entrepreneurs trying to figure out how to transform their ideas into truly useful products or services that fill needs and improve processes so that the marketplace will demand them.
After all, hospitals are one of the major customers many health care start-ups seek; the hospital can be a living lab for a fledgling health tech firm. Partnering with promising entrepreneurial ventures in this way allows hospitals to stretch their capital, making a $500,000 investment worth $5,000,000. By offering their vast experience and insight to start-up health care enterprises, hospitals increase both their chances of success and the odds of earning a strong return on investment.
Over the last year, Hospital for Special Surgery has leveraged its expertise, without initially spending an investment dollar, to nurture healthcare start-ups in return for equity positions that are now quite profitable. We have made it a practice to invest intellectual capital and sweat before risking cash.
Docent Health was at a concept-stage when its founders first approached HSS with an idea about improving patient experiences utilizing data, insights and increased personalization. Approximately two years later, Docent Health is a leading innovator in delivering satisfying consumer experiences in healthcare. HSS provided its patient care expertise, policies, pathways, procedures and data to help Docent Health build a digital platform that could mimic HSS's patient relationship management framework. We then partnered with Docent Health to further develop their technology and push it out onto the market in return for an equity position in the company. Today, Docent Health is a successful company that helps major hospital systems including HSS, Dignity Health and Intermountain Healthcare improve their patient relationships through leveraging their platform with customized research, data analytics and customized support throughout the patient journey.
Similarly, HSS also worked with Boston Biomotion, a performance training and recovery robotic technology originating from MIT engineering. Their technology, Proteus, was redesigned with HSS to meet the real-world demands of elite athletes. Proteus when released to market will be a novel hardware and software to allow athletes to train and recover in ways not currently available on the market.
These are but a few examples of how hospitals can utilize their expertise, knowledge, research and data to gain a foothold in promising health care start-ups, play a role in ensuring their success and even generate a strong return on investment at minimal financial risk. It makes tremendous sense for hospitals to invest sweat equity in health start-ups, because medical and administrative professionals at hospitals have inside knowledge of market needs, can guide entrepreneurs to accurately target and satisfy those needs, are able to test new products and services and are well positioned to suggest improvements and help eliminate kinks in technology. Contributing their expertise to health care start-ups can ensure that hospitals invest smartly while reaping the benefits of health care innovations.
