Community Hospital Joins Wave of New Strategic Venture Funds to Drive Disruptive Innovation

Editor's note: This guest post was written by Dave Chase, the CEO of Avado.com, a patient portal & relationship management company that was a TechCrunch Disrupt finalist. Previously he was a management consultant for Accenture's healthcare practice and founder of Microsoft's Health platform business. You can follow him on Twitter @chasedave.

This first part of a two-part series on strategic investors in healthcare focuses on the expansion of the venture business beyond traditional venture and large strategic investors. In the second part, I will outline the backdrop for the  investment thesis that strategic healthcare investors are (or should be) using to guide their capital allocation.

Healthcare providers are finding their "play it safe" culture isn't conducive to breakthrough innovation at a time when it is critically needed. Having spoken with several innovation groups in health systems, most examples of "innovation" are decidedly uninspiring. Primarily, it is due to the fact that virtually all of their decisions have to go through the prism of how new ideas will fit with current businesses — pretty much a guarantee that will doom so-called innovation to be little more than incremental improvements. Consequently, increasing numbers of hospitals and health systems are smartly allocating money to venture funds that have free reign to find truly disruptive new businesses.

Health systems have taken various approaches such as becoming a Limited Partner in venture funds like Health Enterprise Partners. Some of the larger systems, such as HCA, have their own venture arms. A new development is a much smaller organization establishing their own venture fund.

Rex Health Ventures is one of the only venture-capital investment funds in the country started by a community, nonprofit hospital (Rex Health Care). The fund is being launched with an initial $10 million investment from Rex Healthcare and will help finance the most promising innovations among new medical services, tools and technologies. They carved out money from their investment portfolio previously in the "alternative investment" category. Given the capital efficiency of startup technology businesses, for a small fraction of what they are paying legacy vendors for software licenses, they have an opportunity to have a stake in businesses that could help reinvent their industry. Even if these businesses don't succeed, the learning they will receive will outstrip other ways they could allocate money.

For Rex, it was an 18 to 24 month process from concept to announcement of their fund. David Strong (President of Rex Healthcare) was the driver and one of his mentors had been Doug French who is Ascension Health's CEO. Ascension has had success with their venture fund. It has proven to be effective at bringing about new ideas and companies into the Ascension fold.

In addition to their venture fund, they have additional programs to encourage innovation:

• Rex Impact Grants: a program to provide grants to a wide range of businesses and organizations that are working to help improve patient care or community health status.
• Rex Innovation Facilitator: a formalized way for Rex co-workers and thought leaders in the community to submit innovative ideas and receive technology commercialization and company-building services for promising concepts that could lead to new products or services.
• Rex Joint Ventures: a program to partner with thought leaders in the local and regional technology, research and entrepreneurial communities. The goal of such partnerships will be to team up to develop new products and services that can improve healthcare technology and delivery.

Rex Health Ventures (RHV) hasn't made any investments yet. They believe they are uniquely positioned for venture compared to their traditional venture brethren. A core reason they state is they can conduct due diligence since they have staff who would be the ultimate users of a new medical device or healthIT tool. After the investment, they can help with product development and services that fit community hospitals. It isn't unusual for products developed in academic medical centers to fall flat when moving out to a regular community hospital.

Investment focus and goals

RHV expect their investments will be a mix of pharma, device and IT related services. Rex also indicated they would look at new care delivery models such as Direct Primary Care (DPC) as University of North Carolina (with whom they are affiliated) is looking at new models of care delivery. Purely coincidental is the fact that one of the pioneers in exploding DPC model (Dr. Brian Forrest and the offshoot startup he advises — Physician Care Direct) is in the same locale.

RHV plans on being a seed and early stage investor. Most of the companies they invest in will be pre-revenue. They expect their deal size to initially be $250-500k in A round and they will allocate an additional $500-$1.5M. While they aren't purely driven by financial objectives, they are important. Rex's most important objective is they want to create a more innovative culture. They realize change is coming, particularly in the provider space. The fund is intended to help culture look differently at the world and to cause people inside the organization to look up from their day jobs.

The Rex Health Venture leaders such as Bobby Helmedag recognize that healthcare is entering a period that is likely to be deflationary. Thus, they believe that a core part of being innovative is to provide the same level of care for less money. Rex's leadership see that The Rise of Nimble Medicine may create challenges for their traditional business, however it creates even more opportunities for creative new startups. For example, telemedicine can cut healthcare costs 90% in some areas of care. Telemedicine is one example of how healthcare organizations are realizing that communication is the most important medical instrument of the future.

This is more good news for the rising healthtech startup community. Having smart money that knows the challenges and opportunities in healthcare can only help the ecosystem grow. One wonders whether future demo days of Blueprint Health, HealthBox, Rock Health and Startup Health will find as many strategic investors as pure financial investors. Gaining customer adoption is the biggest challenge for healthtech startups so this trend should help ignite their growth.