Innovation Institute LLC in La Palma plans to raise $150 million and take “meaningful” stakes in healthcare startups at “Series B and beyond” with investments in the $10 million to $12 million range.
“The fund is a platform for a (potential) unicorn company with creative confidence and moral imagination,” said Barry Didato, chief investment officer at the institute.
A “unicorn” company is a startup valued at more than $1 billion.
The institute launched the fund this month as the third part of its business model, which began in January 2013, to improve patient treatment and reduce healthcare costs. The three parts are:
• An innovation lab in Newport Beach that develops ideas from concept to final product.
• A portfolio of companies that sell products and services to healthcare providers and facilities.
• An investment fund backed by high-net-worth and family-office investors that takes stakes in startup firms.
It got the fund by buying 70% of investment manager TriStar Health Partners LLC in Nashville, Tenn.
The three core areas integrate research, startups and working firms “to support innovation for nonprofits,” according to Joe Randolph, president and chief executive of the institute.
Randolph said the institute expects to raise the first $65 million for the fund by the end of the year.
Randolph is a longtime Orange County healthcare executive.
He was executive vice president and chief operating officer, and before that chief financial officer, at St. Joseph Health System in Irvine, now Providence St. Joseph Health, one of five co-owners of Innovation Institute.
The other four are Children’s Hospital of Orange County in Orange; Franciscan Missionaries of Our Lady Health System in Baton Rouge, La.; Bon Secours Health System, in Marriottsville, Md.; and Avera Health in Sioux Falls, South Dakota.
The five combine for 23,000 physicians, 170,000 employees, 100 hospitals and 500 clinics.
Each system invested at least $10 million in the institute; CHOC, a single facility, put in $5 million.
“We’re in discussions with a couple health systems,” to fill two open ownership slots, Randolph said.
Institute owners are nonprofits with at least $3 billion in revenue and different specializations, and cover multiple states.
“They have to be like-minded and want to advance innovation,” Randolph said. “Innovation is taking a problem and finding a solution that you can bring to market.”
Moral Imagination
Didato said the Innovation Institute expects investors in the new fund to want not just “wealth preservation” but “purposeful partnerships (and) the desire for impact” by companies in which the institute invests.
The new fund is TriStar Health Fund III, so named for being the third that TriStar founding partners—Dr. Harry Jacobson, Brian Laden and Christopher Rand—have run. The three have helped grow two dozen companies across several funds since 2002.
Jacobson previously was vice chancellor for health affairs at Vanderbilt University and chief executive of Vanderbilt University Medical Center, both in Nashville.
Randolph said Jacobson and his colleagues will keep the focus of the new fund on “early-stage medical technology.”
Didato said he expects investments to center on device makers and information technology but be “very light” on drug developers, because it costs more and takes longer to bring such companies to market.
Enterprise Value
The fund complements the institute’s company portfolio and its lab.
The institute already has stakes in over a dozen companies under an “enterprise development group” generating cash flow in areas including biomedical services, staffing and executive search, medical coding, information technology, office design, and construction and property management—overhead services but no patient care.
The enterprise development group earned about $13 million before interest, taxes, depreciation and amortization on revenue of $165 million in fiscal year 2016, which ended June 30, up from $10 million on $125 million in revenue in 2015 and $3 million on $80 million in 2014.
“That’s the economic engine of the institute,” Randolph said.
Income supports the lab, which develops ideas of employees and doctors working for the health system owners.
“It’s an incubator for ideas from concept to prototype to marketable product,” Randolph said.
Most ideas from the lab will be licensing opportunities rather than complete companies, he said.
“If it’s a good idea, we’ll find a way to take it to market.”
