Exploring Captive Venture Capital Funds in the Health Care Industry: Models, Advantages, and Examples
Health systems are increasingly turning to captive venture capital investment funds as a strategic tool to navigate the rapidly evolving healthcare industry. With the COVID-19 pandemic accelerating changes in the sector, health systems are looking to establish their own venture capital funds to stay ahead of the curve.
One of the main reasons driving this trend is the uncertainty surrounding changing reimbursement models and industry alignments. As the shift towards value-based payment progresses and new players enter the market, health systems see the creation of their own venture capital funds as a way to actively participate in new healthcare lines of business. This strategy aims to create diversified revenue streams to counter downward pressures on reimbursement and position systems for evolving healthcare delivery models.
These proprietary venture capital funds offer several advantages to health systems, including local control over strategic investments and the ability to co-develop innovations that align with the system’s own service delivery model. By investing in ideas that address their specific needs, health systems can not only support their own operations but also potentially scale these innovations for external commercialization.
However, lessons learned from health systems that have suspended their venture capital programs emphasize the importance of aligning fund activities with the system’s overarching priorities and core business objectives. To ensure the sustainability of these funds, it is crucial for health systems to focus on investments that directly benefit their operations and long-term goals.
Various models for structuring captive venture capital funds are available, each with its own pros and cons. These models include direct investment, co-investment or side car, hosted fund or fund-of-one, and external models. Each model offers different levels of control, administrative burden, and potential for collaboration with external partners.
Examples of health systems successfully managing captive venture capital funds include Rex Health Ventures and UNC Health, as well as Winter Street Ventures and Commonwealth Care Alliance. These organizations have leveraged their funds to support innovations that align with their core missions and operational priorities, ultimately driving positive outcomes for their healthcare systems.
In conclusion, captive venture capital funds represent a valuable tool for health systems to drive innovation, diversify revenue streams, and stay competitive in a rapidly changing healthcare landscape. By aligning investments with their specific needs and priorities, health systems can not only support their own operations but also contribute to the broader advancement of healthcare solutions.