Spectrum Health VC arm eyes SE Mich. opportunity after Beaumont merger

The merger between Spectrum Health and Beaumont Health created a larger network from which Scott McLean can source deals.

From left: Matt Bower, Scott McLean

Spectrum Health Ventures often gets investment leads from within the health system. The Spectrum and Beaumont merger this year creating the largest in-state health system in Michigan, known as BHSH System, gives the venture capital arm that McLean runs a new source network to tap in Southeast Michigan.

“I can’t wait to start working with some of the Beaumont professionals. They have a great reputation and Beaumont has a great reputation in the clinical world, and we’re excited to have an opportunity to leverage that for our venture investments,” said McLean, the managing director at Spectrum Health Ventures. “The best pipeline we get is when someone inside of our system who has already identified a good strategic partner, who has already identified a need for our system or our patients, says: ‘We’ve identified this company as a partner. If there’s an investment opportunity, let’s take advantage of it.’” 

Deploying capital

Spectrum Health Ventures makes capital investments in companies with products or services that can reduce costs, increase patient and practitioner engagement, improve quality and health outcomes, or improve health and wellness.

The Grand Rapids health system formed the venture capital fund in early 2017 with a $100 million commitment.

In the five years since, Spectrum Health Ventures has deployed about half of the $100 million and committed another $25 million to investments with other funds. The fund holds positions in 33 portfolio companies either directly or indirectly through investment consortiums. It has another deal pending in a West Michigan company that McLean expects to close soon, and it has recorded two successful exits that generated strong multiples in returns on investments.

Most recently, Spectrum Health Ventures this spring closed on two new investments: KeyCare Inc. in Chicago and Atlas Healthcare Partners in Phoenix, Ariz. Spectrum Health Ventures made both investments alongside larger institutional investors and other health systems, McLean said.

KeyCare provides a telehealth platform that — unlike other telehealth providers — has an agreement with electronic medical records provider Epic Systems. That allows a doctor who is licensed in multiple states to access a patient’s medical records during a telehealth visit, as well as to update the records of their primary care physician.

“We’re providing a quality of care that we’ve not necessarily been able to provide due to all the red tape of the telehealth world,” McLean said. “You miss having the primary care physician in Michigan understand what happens during that visit, and you also miss that person doing the telehealth visit knowing all the history of that patient.”

Spectrum Health plans to pilot the KeyCare platform this year to augment its telehealth service, McLean said. The deal originated through a referral from Spectrum Health’s telehealth staff, he said.

Atlas Healthcare Partners develops and manages ambulatory surgical centers.

Other Spectrum Health Ventures investments include $1 million in the New Community Transformation Fund, a venture capital fund formed in Grand Rapids to invest in minority-owned businesses, as well as in generic drug maker CivicaRx. 

The fund also has invested in BioStar Capital, a Charlevoix venture capital fund that invests in cardiovascular and orthopedic medical devices. That’s a field Spectrum Health Ventures doesn’t directly invest in, “so we wanted to have a fantastic partner that has a good track record” in BioStar Capital, which as of 2021 had $157 million in assets under management.

The present deal pipeline for Spectrum Health Ventures is as large as it’s ever been, McLean said.

“I would say we are really hitting our stride,” he said. “We are not finding any shortage of opportunities.”

Part of the strong pipeline results from the fund’s maturation, increased awareness nationally in the field, and partnerships forged with large institutional investors such as the Heritage Group in Nashville, Tenn., Concord Health Partners in New Jersey, and 7wireVentures in Chicago, according to McLean.

Referrals from medical and operations staff internally at Spectrum Health for potential investments also contributed to solid deal flow, he said.

“I think the reason our pipeline is maybe as big as it’s ever been right now is because more people in our health system — whether it’s clinical or operational — know about our venture group. They’ve seen part of our track record, and they’re excited to bring opportunity to us,” McLean said.

Corporate venture capital

Spectrum Health Ventures is among a growing number of corporate venture capital firms, including five based in Michigan, that have been increasingly active in recent years. In addition to Spectrum Health Ventures, the others in Michigan are Battle Creek-based Kellogg Co.’s Eighteen94 Ventures LLC, Dow Inc.’s Dow Venture Capital in Midland, General Motors Ventures, and Troy-based Kelly Services Inc.’s Kelly Innovation Fund.

Spectrum Health Ventures differs from many corporate venture capital arms that seek investments that can potentially transition into an acquisition. Spectrum Health Ventures is not interested in making acquisitions, McLean said.

A recent report by New York City-based CB Insights indicated that the number of corporate venture capital arms globally grew to 221 in 2021 from a six-year low of 144 in 2020.

The number of U.S. corporate venture capital deals increased 37.5 percent from 1,248 in 2020 to 1,716 in 2021, according to CB Insights. The amount invested in the U.S. more than doubled last year from $40.5 billion to $86.9 billion and included four deals of $1 billion or more in U.S. companies in the energy, I.T., and health care sectors. Nearly half of the funding went to early-stage companies and 37 percent went to mid-stage firms, CB Insights reported.

Digital health care was among the hot sectors for corporate venture capital, attracting $16.6 billion in investments across 442 deals globally. The U.S. market accounted for more than half of digital health investments in 2021, according to CB Insights.

Five to 10 years ago, one or two out of 10 deals that attorney Matt Bower worked on for clients seeking capital involved a corporate venture capital firm in the mix. Today, corporate venture capital (CVC) firms are “always part of the mix of potential investors we think might be interested in a financing round,” said Bower, a partner who co-leads the emerging companies practice group for the Ann Arbor office of Varnum LLP.

“We’ve certainly seen increased activity,” Bower said. “Traditionally, it’s been a little unique to have a CVC in maybe a seed financing round, but we’re certainly seeing more of it today, at least more interest in an early-stage financing round.”

Bower also has seen corporate venture capital firms investing in earlier rounds. In addition to funding, a corporate venture capital firm can bring a network to a company to help them grow, vet a technology and bring an innovation to market, he said.

“It’s not just capital they bring to the table,” Bower said. “It’s often deep expertise.”