Published in Health Care
Clinical Director Scott Lancaster, M.D., left, and Executive Director Scott McLean, right, are helping put Spectrum Health Ventures “on the map” as an active corporate venture capital fund in the health care industry. Clinical Director Scott Lancaster, M.D., left, and Executive Director Scott McLean, right, are helping put Spectrum Health Ventures “on the map” as an active corporate venture capital fund in the health care industry. PHOTO: KATY BATDORFF

LEARNING TO CRAWL: Spectrum Health Ventures stakes out space in health care investing

BY Sunday, May 12, 2019 08:41pm

GRAND RAPIDS — Two years ago, the venture capital arm that health system Spectrum Health formed to back innovative health care startups had to go looking for deals because nobody in the field knew it existed.

Today, Spectrum Health Ventures LLC faces a much different situation. Investment prospects now often come from referrals by other large health systems across the U.S. that also operate venture capital arms and want co-investors for deals.

“Spectrum Health is now on the map,” said Scott McLean, executive director of Spectrum Health Ventures, which has forged connections across the U.S. and now is poised to become a more active investor in health care innovation.

“Once people found out what we were doing, we’ve been pursued in almost every case. It’s kind of the phone rings and, ‘Hey, this is the company we’re looking at. We’re already investors in it. What they need to go to the next level is some people who understand their business a little bit better. Would you like to take a look at it with us?’” McLean said.

Since forming in March 2017 with a $100 million commitment from directors, the venture capital arm for the Grand Rapids-based health system has partnered to invest $17.5 million in six deals. They include five direct investments in health care startups, plus committing $7.5 million to Chicago-based 7Wire Ventures, an early-stage health care venture capital fund.

Forty percent of the total committed to 7Wire has already been allocated, according to McLean.

Becoming an active venture capital investor has led to new partnerships and provided Spectrum Health an early look at emerging health care technologies.

The venture capital arm even led to Spectrum Health in January becoming a founding partner of Civica Rx, a consortium of large U.S. health systems that plan to produce their own generic medications used in their hospitals. Spectrum Health Ventures committed $5 million to Civica Rx, which could begin producing 14 hospital-administered generic drugs later this year with a goal of eliminating price spikes and shortages.

With the venture capital division, Spectrum Health aims to support innovations that can reduce cost, improve quality, and increase patient engagement and satisfaction, McLean said.

Spectrum Health Ventures invests in startups that are in the marketplace, generating revenue and need additional capital to grow. It will put up to $2 million into a company per investment round.

As an investor, Spectrum Health brings not only capital to a deal but also clinical and business expertise to help a startup refine its product design or service, or market direction.

“We provide a lot more than money, and companies find that very valuable as they’re continuing to develop their commercial presence,” McLean said. “People are looking for more than just money these days. Every deal we finalized, we were pursued by other investors in the deal because they knew we could provide more than just the money.”

Finding opportunities

The clinical and operational expertise Spectrum Health Ventures can bring to a startup has contributed to what McLean calls a “fantastic” deal pipeline. In two years, the organization has looked at more than 500 prospective deals.

As well, that in-house clinical and operational expertise has helped steer Spectrum Health Ventures away from an investment on occasion.

McLean recalls one instance in which Spectrum Health Ventures considered a co-investment with other health systems in a startup involved in research labs.

The prospective deal met all of the financial metrics for Spectrum Health Ventures “and I was very excited about the opportunity,” McLean said. But when the Spectrum Health clinicians looked at it, they “found a couple things that raised some red flags and allowed us to dig a little deeper.”

That led to Spectrum Health Ventures ultimately deciding against doing the deal, he said.

On the other hand, the health system also gets early access to innovations the venture capital arm backs. For example, Spectrum Health now does business with two of the startups that received investments.

McLean cites Gauss Surgical Inc., a Los Alto, Calif.-based company that developed a monitoring system to provide clinicians an accurate estimate of a patient’s hemoglobin and blood loss during surgeries and births. The system has been used at Spectrum Health hospitals.

“We can start telling other health systems about it. We can help inform Gauss Surgical about product development and any decisions they might need to be making. ‘Should we go down path one or path two, based on your perception as a customer?’” he said. “For these companies in their early stages, that’s almost more valuable than the money.”

Spectrum Health also is an investor and client of Lumere Inc., a Chicago-based startup that provides research and analysis for health systems to make decisions on surgical products based on evidence of what’s most effective. Lumere has since expanded into the pharmacy area to help health systems decide which drugs to use.

Working with startups such as Gauss Surgical and Lumere and gaining early access to their innovations was part of the allure for Spectrum Health to form a venture capital arm.

Spectrum Health Ventures gave the health system the ability to get involved with other large players and industry startups that are “trying to reinvent it and (to) be part of that discourse, which is very interesting,” said Scott Lancaster, M.D., clinical director for Spectrum Health Ventures.

“Some of the technologies that we’ve brought in and are utilizing now are on the forefront of the market-creating opportunities that need to be supported and implemented by systems of our size,” Lancaster said. “To be part of that innovative process is what’s appealing to the system as a whole.”

Filling a gap

Nationwide, corporate venture capital has been on the rise the last several years. In 2018, corporate venture capital arms participated in 1,443 deals, or 16 percent of all VC deals in the U.S., the highest percentage in more than a decade, according to an annual report by Pitchbook and the National Venture Capital Association.

The 2018 corporate venture capital deals had an aggregate value of $67.7 billion, a 15-year high.

Spectrum Health Ventures is one of five corporate venture capital arms of Michigan-based corporations, along with Dow Venture Capital, General Motors Ventures, Kelly Services, and the Battle Creek-based Kellogg Co.’s Eighteen94 Capital.

In addition to Gauss Surgical and Lumere, Spectrum Health Ventures has invested in:

  • Orig3n Inc., a Boston, Mass.-based biomedical research company involved in genomics and genetic medicine.
  • Ciitizen Corp., a consumer health records management firm based in Redwood City, Calif.
  • Arivale, a Seattle-based wellness company that abruptly shut down its consumer program in late April. Spectrum Health Ventures was involved in the company’s last investment round, “so we will not be as adversely affected as other investors,” McLean said.

Through 7Wire Ventures, Spectrum Health Ventures also is involved in Livongo Health Inc., a digital health startup that developed a chronic disease management platform. The company initially focused on diabetes and has since added hypertension, weight loss, diabetes prevention and behavioral health to its offerings.

Based in Silicon Valley and Chicago, Livongo has been the subject of speculation that it may pursue an initial public offering that would generate a return well above Spectrum Health Ventures’ more than $400,000 investment, although the company has not filed.

'Be judicious'

At two years old, Spectrum Health Ventures has “just gotten past crawling,” McLean said. The company now looks to accelerate its investment pace to $10 million to $15 million annually, although persistent high valuations could continue to curtail deals, he said.

“Putting a lot of money to work in a market that may or may not be a bubble, it’s maybe not the right decision. Fortunately we’re a small group. We’re have pretty low overhead. We can afford to be patient,” McLean said. “We’ll pace ourselves according to what the market bears.

“Are valuations going to continue to be at astronomical highs? If they are, I think we’ll go slow. If we start to see the market dip a little bit and we see a lot of opportunities or opportunistic pricing come up, we will absolutely be aggressive in going after those, especially if they’re a great strategic fit for our system.”

Spectrum Health Ventures initially moved cautiously, McLean said. In its first six months, the fund focused on developing an investment policy “and the way we were going to look at deals and decide what we were going to do and not do — what guardrails did we need to put up that were going to help us be smarter about the types of investments we made,” he said.

“We’re stewards of the public’s money and the community’s money, so need to be very wise about how we do this,” McLean said. “We need to be judicious about how we evaluate companies.”

In identifying where it would invest, Spectrum Health Ventures has deliberately steered away from medical devices implanted in the human body and pharmaceuticals. Those are areas that carry too much regulatory risk.

“We’re not interested in molecules,” Lancaster said. “We’re not investing in big pharma.”

As well, Spectrum Health Ventures has worked in its first two years to build ties within the health system.

Spectrum Health Ventures taps its in-house base of experts not just when reviewing investment prospects but also to find out how they’re hoping to improve medical processes, procedures and care delivery in their practices. The feedback from within the health system can guide the venture capital arm in the kinds of investments it pursues and considers.

“We can have that opportunity to have a bi-directional lens on what’s going on outside of our four walls and bringing that information back to the system, and then taking the learnings from within the four walls of Spectrum and reverting back out to the startup community,” Lancaster said.

Editor's Note: This story has been updated to reflect that Livongo Health Inc. has not filed for an initial public offering.

Read 4512 times Last modified on Monday, 13 May 2019 11:42