An insider shares insights about what makes Intermountain Healthcare's venture capital company tick.
Years after Intermountain Healthcare began funding outside ventures to spur innovation at the Salt Lake City-based health system, the approach took its own innovative turn. The organization created a separate company to manage its venture investments.
Launched in January 2019, Intermountain Ventures finds startups with solutions that address the organization's challenges, tests the entrepreneurs' products and ideas, and nurtures their growth.
While many larger health systems are engaged in similar activities, only a few have created and funded an outside entity to operate as a dedicated venture capital firm. A look at how Intermountain's approach evolved may help other organizations refine their own tactics and accelerate healthcare innovation on a grander scale, says George Hamilton, one of Intermountain Ventures' three managing directors and partners.
"There's a lot going on in the innovation space and in the venture space within health systems," says Hamilton, who joined Intermountain Healthcare nine years ago, in part, to explore the most effective way to conduct ventures. "It's interesting to see how everyone's approaching this, and we learn a lot from other health systems. I would never suggest that we've figured this all out; this is a journey. We're certainly learning, and we're excited by what we've done so far and where we're headed. There are others out there who are doing remarkable things as well," he says.
"I hope this collectively leads to an overall lift to other health systems that think, 'Oh, this is possible, we can do this too.' " Hamilton continues. "The results of this should be better solutions to solve problems to help our patients and those who care for our patients. If not, then we've missed the mark."
Hamilton previously shared with HealthLeaders why Intermountain formed an outside venture firm.
In part 2 of our discussion, he tells us what health systems can learn from their experience and offers six insights.
1. Establish a Stand-alone Investment Company
Intermountain created a separate investment company and operational structure with appropriate guardrails in place to invest in companies that have the potential to accelerate innovation for Intermountain Healthcare. By allowing this entity to operate independently, says Hamilton, the innovation cycle accelerates since it is not subjected to the traditional, slower approval processes of a clinical care organization.
2. Create and Commit to an Investment Fund
Intermountain Healthcare set aside dedicated funds for Intermountain Ventures and made a seven-year commitment to the initiative. "It's important to [communicate] to the market that you've set aside this funding," says Hamilton. That commitment sends a signal to venture partners who have been "burned in the past by more naive health systems or others who say, 'We'd love to be a part of that,' [but don't commit]. You can't really dabble in this. You have to be committed."
3. Include a Method to Develop Ideas From Within the Health System
In addition to seeking solutions to healthcare challenges from startups outside the healthcare system, it is also essential to provide a mechanism to inspire and develop ideas generated from within the system itself.
Intermountain Foundry was established to do just that long before Intermountain Ventures was created. Operation of the Foundry now falls under the auspices of the venture company with a focus on stimulating innovation from the 40,000 employees of Intermountain. Through a competitive process, the best ideas are subjected to a bootcamp, then further vetted in a Shark Tank-like contest. "If they really show merit," says Hamilton, Intermountain Ventures may "invest in them and help grow them as businesses."
4. Engage Clinical Personnel—And Compensate Them!
Making the leap into the clinical arena is essential to the innovation process, and physicians play a key role in testing and scaling innovations, says Hamilton. Intermountain Ventures has 30 Intermountain physicians across a variety of specialties who have agreed to participate in the evaluation and implementation process.
"The most important component of the pilot work we do is having a clinical champion," he says. "We need someone inside the clinical organization to be excited enough about the opportunity to pound the table for it and represent it. One of the key failure points for a venture is when there isn't anyone inside the clinical shop that's excited enough about it to push it forward. If someone isn't excited about the venture opportunity, it will just die on the vine. We draw from our pool, and if we can't enlist a clinical champion, we don't do the deal."
If a physician's services are enlisted, he or she is compensated through subsidies that are built into the venture firm's financial structure, Hamilton explains. "That serves two purposes," he says. "One, when we take their time away from their day job, that's lost opportunity for them. But also, if we're paying them, they're more invested in helping what we're doing. We had to figure out the right way to make that happen in a way that's fully compliant. They won't be part of the capitalization of the new company; we don't offer equity in exchange for their services … but we'll certainly pay for their time."
5. Communicate Clearly, Particularly About Risk
Communications between the venture company and the health system are essential, says Hamilton.
"You cannot communicate enough with the rest of the team to help people feel comfortable with what you're doing," he says. "We've spent a lot of time socializing the model and working with our clinical leaders, so they appreciate and understand this model."
The risk profile of a healthcare organization is very different from the risk profile of a venture fund, he says. Figure out how to bridge that gap and help the organizational leaders and trustees feel comfortable with the risks you're taking, Hamilton advises.
"Let them know you will be disciplined about your approach, but there will be risk, and indeed, some of these [ventures] will fail," he says. "Venture investing is inherently risky. Candidly, if you look at the structure of early stage venture investing, a lot of these don't work out. We have created guiding principles for how to manage a wind down. It's a very principled approach aligned with Intermountain's mission."
6. You're Not a VC Firm; Understand the Difference
The structure of Intermountain Ventures enables it to operate with more freedom than it would inside the health system, but it also has distinct differences from a typical venture capital firm, says Hamilton. It's essential to understand these variations, he says, which include mission, timelines, and exit strategies:
- Mission. The mandate of a pure venture fund is to generate a financial return for its limited partners, says Hamilton. "Bottom line, they're measured against their financial performance. That drives the decisions that they make and forces their timelines. That's their business model; ours is a little different." While Intermountain Ventures is expected to generate a financial return, any profits from a venture are returned to patient care to support the mission of the organization, he explains.
In addition, "We make decisions around patient care that would trump any financial decision," he says. Regardless of the potential financial return, if the innovation is not something the health system would adopt for clinical use or could perhaps negatively impact patient care, "We won't do it at all," says Hamilton.
- Timeline. Timeline is another variation. In the venture world, it may take only weeks between due diligence and writing a check, he says. This creates mismatched timelines because, Hamilton says, "Precious little inside a healthcare system is measured in weeks." One of the reasons Intermountain Ventures was carved out as a separate company was to give its managing partners the freedom to be nimble and act more quickly, says Hamilton.
"Some of our syndicate partners, who tend to be venture funds, really value the relative speed that Intermountain is operating at compared to other health systems where this structure may not be established."
Hamilton reports that the approach is working. "We've made [five] investments this year, and we've been able to do them rapidly."
- Exit Strategy. "If you're a pure venture fund, you tend to want to return capital in shorter periods of time," says Hamilton, "so they'll look for exit opportunities faster than we might." If another investor is ready to exit, he says Intermountain Ventures will determine whether to buy them out or invite others to invest. "It creates a bit of a potential mismatch in exit timelines," he says. "We have to be sensitive to that as well."
“There will be risk, and indeed, some of these [ventures] will fail.”
George Hamilton, partner and managing director, Intermountain Ventures
Mandy Roth is the innovations editor at HealthLeaders.
Photo credit: Photo Courtesy of Intermountain Healthcare
Healthcare organizations and venture funds have different tolerance for risk, but failure is part of the process.
In this type of investment structure, decisions that impact patient care trump financial returns.
If a clinical champion can't be enlisted, don't do a deal. Consider compensating physicians for their involvement.
This type of company has a longer-term strategy and mission than a typical venture capital firm.