Orange County Business Journal | Innovation Institute Scales as Incubator/Investor

By Sherry Hsieh

Hospitals are tasked with making care more accessible, efficient and affordable. One way to do that is through health tech.

La Palma-based Innovation Institute, a for-profit LLC owned by six nonprofit health systems, was founded five years ago as an incubator to commercialize internal medical innovation by hospital doctors, nurses and other staff in its health system network. Its business model also has a cash-generating enterprise arm that owns a portfolio of companies to fund the incubator, and a fund vertical to invest in outside opportunities.

It recently announced it’s working with LRVHealth in Boston. “It’s the fourth fund LRVHealth has launched, and we’ll be a co-GP,” said institute Chief Executive Joe Randolph.

LRVHealth is an “inside healthcare” venture capital platform, according to its website. It collaborates with healthcare providers, insurers and vendor organizations to identify early-stage targets. LRVHealth plans to raise $100 million for the fund, and eight health systems have signed on as investors, all undisclosed except McLaren Health Care, a 12-hosptial system in Grand Blanc, Mich.

Randolph said the fund is targeting a second close in April of $60 million to $75 million and will likely cap at $125 million.

The institute’s health systems are: Avera Health in Sioux Falls, S.D.; Bon Secours Health Systems in Marriottsville, Md.; Children’s Hospital of Orange County; Baton Rouge, La.-based Franciscan Missionaries of Our Lady Health System; Mercy Health in Cincinnati, Ohio; and Renton, Wash.-based Providence St. Joseph Health.


It makes sense to include providers when it comes to selecting investment opportunities, when, after all, they’re the end users.

“The team at LRVHealth is very similar [to us] in terms of their focus,” Randolph said, “focused on those [innovations] from the inside and advance those concepts.” The fund will invest across the healthcare spectrum, including medical devices, diagnostics and healthcare IT. The institute “will assist in vetting investment opportunities, piloting solutions and helping grow early-stage companies,” he said.

The fund will invest in 20 to 30 companies.

Digital health investment reached new heights worldwide last year. The sector fetched over $11.5 billion across 794 deals, surpassing 2016 by nearly $8 billion, according to a digital health funding report by Startup Health.

“We are looking to de-risk our overall business structure,” Randolph said. He said the company’s three-pronged model generates returns at different time horizons. Its enterprise business provides immediate cash flow, the incubator five to seven years, healthcare 10 years.

It also expanded into crowdsourced funding in January, partnering with online equity investment portal RedCrow Crowd Inc., which matches investors to investments. RedCrow will enable its early-stage companies to secure “post-seed funding needed to get to the next level, as well as provide individuals in the healthcare ecosystem an exciting opportunity to invest in their peers,” according to the institute.

Real Estate Play

Part of healthcare cost control involves real estate as hospitals shift from traditional inpatient facilities to invest in lower-cost sites like outpatient clinics and surgery centers.

Randolph said The Institute struck a relationship this year with Bridge Investment Group out of Orlando, Florida to “have another real estate fund” that will focus on “medical office buildings adjacent to hospital sites.” The investment group specializes in medical properties, senior housing, multifamily units, affordable housing and office space.

Randolph said it also has an existing fund focused on outpatient centers and medical office buildings. “If we see something that Bridge Investment Group is not interested in, we can invest in it with this smaller fund.” The strategy frees financial resources for healthcare providers.

Genomic Medicine

Personalized medicine is also a hot topic, and the institute is exploring opportunities in genomic medicine.

Avera, one of its health system owners, launched GeneFolio in July, a test designed to provide more precise information on which medications work best for a patient.

Three out of four people have genetic variations that determine how their bodies process medication, according to Avera. The simple blood test is used to study DNA to understand how the patient will metabolize certain medications. It doesn’t tell doctors what to prescribe but provides insights on various risk levels.

Randolph said the institute has hired a geneticist and is exploring other opportunities around personalized medicine with Avera. It’s working with an international university to commercialize the school’s genomic data bank.

Room for Growth

He said he has room for one more health system but that he’s in no hurry, as the institute is reporting year-over-year growth. It generated $205 million in revenue last year from 15 portfolio companies.

Its incubator has over 300 ideas in the active pipeline, 39 of them in development and seven in commercialization.

Exerpt from the Orange County Business Journal