FUNDING

Corporate Venture Capital Ups Investments in Health Deals

By Lori Solomon, Editor, Diagnostic Testing & Emerging Technologies

Health care corporate venture capital (CVC) is increasing across all sectors of the industry in terms of number of deals, dollars invested, and number of active CVC investors, according to a report released last month by Corporate Venture Action Group of the Health Evolution Summit.

The report, “The Rising Tide of Strategic Investing: Corporate Adventures in Health Care Venture Capital” resulted from a meeting of the Corporate Venture Action Group, a group of nearly 30 CVCs, including some well-known names like Google Ventures, Merck Global Health Innovation Fund, and UnitedHealth Group Ventures. Simultaneously, Health Evolution Summit conducted a survey of health care CVCs. This report synthesizes findings from both the survey and the CVC meeting.

The report defines CVCs as those that primarily invest in external companies run by unaffiliated entrepreneurs, not investments in internally generated ideas. Global Corporate Venturing estimates that CVCs made over $6.6 billion in health care-related venture investments in 2015. Furthermore, the PricewaterhouseCoopers National Venture Capital Association MoneyTree Report estimates that CVCs participate in in 21 percent of all venture capital deals and account for about 13 percent of all venture capital dollars deployed.

It is estimated there are more than 150 health-related CVC investors. Traditionally, this activity was limited to pharmaceutical and medical technology companies, but now health systems, payers, and health information technology companies have significantly ramped up their participation. Even companies, like consumer product companies and general technology companies that are outside the realm of health care, have stepped into investing in the sector. Health Evolution Summit’s Corporate Venture Action Group found that many new health care CVC players have emerged since the 2008 recession. Over 60 percent formed since 2008 and 27 percent formed in the past two years.

Health Evolution Summit’s survey revealed CVCs invest in three to five health deals on average per year with $25 to $50 million per new investment per year. Additional survey findings include:

  • A trend toward dedicated funds rather than deal-by-deal investments funded from corporate balance sheets. These dedicated funds, with set financing amounts, are controlled by investment teams rather than “the whim of the board.”
  • While financial return dominated as the primary goal of the venture strategy (46 percent) other key objectives include: innovation (19 percent) and support of corporate business strategy (16 percent).
  • The primary areas of investment seem to be emerging technology, the intersection of health information technology, and digital health services, as well as medical technology and personalized medicine. “This is an evolution from earlier days in the health care strategic investment world where the primary investment focus was on businesses that were directly in line with the current core business focus: payers invested in payer start-ups, pharmaceutical companies in new molecules,” the group writes. “Today everyone, it seems, is seeking ways to catapult their efforts ahead through new technological evolution.”
  • The majority of survey respondents said their primary investment focus is on companies that enhance the core business of the sponsor. Just over one third report willingness to invest in areas that are considered adjacencies. This, the authors say, suggests that shorter-term strategic return is a primary driver of CVC activity, rather than long-term business model evolution.
  • Lastly, there is a shift towards making direct investments into companies rather than as limited partners in external funds.
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