MIT Sloan Health Systems Initiative
Gaye Bok : Investing in Digital Healthcare Solutions from a Corporate Venture Perspective
On March 9, 2023, Gaye Bok, an MIT Sloan alum, spearheaded the HSI lunchtime seminar, “Investing in Digital Healthcare Solutions from a Corporate Venture (aka Strategic) Perspective”. Bok heads up the Mass General Brigham’s (MGB) $30M AI and Digital Innovation Venture Fund (AIDIF), investing in commercial stage digital health companies working with the Mass General Brigham system. Prior to this position, Bok was a venture partner at an institutional venture fund where she was an integral part of the investment team and served as board director on several portfolio companies. Bok introduced her talk by noting that “both Institutional and Strategic venture investors seek venture returns on their investments, but are otherwise solving for different constraints.”
In the Institutional case, owners of the venture capital fund get a base compensation for overhead such as salaries, but the compensation really comes from the profit sharing once the first investor has been repaid. Often these are ten-year closed funds. Cash is deployed quickly and then the owners have a ten-year carry, that is, ten years to reimburse the fund and make a profit. The customers are not the companies the fund invests in. The customers are the private investors who are betting that the fund owners have the talent to locate and nurture potential companies in order to realize profits. The companies the fund invests in can be thought of as inventory. And the products the owners of the venture fund are selling are outsized returns on risky assets.
For the institutional investor, a venture fund may be a part of a larger investment strategy, for example, for a pension fund. The investor might take a small percentage of the funds under management and invest it in riskier assets that have the potential for a greater return than the safer investments. The motivation for the partners in a venture capital fund is to deploy money quickly and exit with maximum value. They want to build a successful track record so they can go out and raise money for another fund. Over time, the institutional investor can migrate to invest in an industry that has more opportunity for higher returns. They have to remain true to the offering memorandum, but in time, they can invest in any promising industry that is looking for their investment.
Bok went on to broadly outline the differences between these institutional funds and corporate or strategic venture partners. A strategic or corporate venture fund is different on almost every point. In this case the senior leadership of the company (or hospital) is making a bet that the company has insights or deep knowledge that can be used to create financial value. They use those insights to choose companies in their sector that they think will succeed. Bok called this, in a sense “betting on yourself.” A hospital is not going to invest in energy companies, for example, but only within healthcare, that is, where they have expertise. The strategic venture fund owner is also looking for a profit, although the return would be less than expected for an institutional fund. But dollars are not the sole objective. The strategic investor is looking for innovations that fit in with their strategy. They are getting a front row seat to future patient and healthcare company priorities, while making internal stakeholders aware of what’s out there. By collaborating with a start-up looking for funding, the strategic investor can influence the first iteration of the product. And, since there is no ten-year close, the strategic investor can be more patient, can nurture the innovation.
The differences between these two types of venture funds result in some substantial differences in what they offer start-up companies looking for a cash infusion. A company will choose an institutional investor based on its track record in relation to other firms of its type and based on the reputation of the CEOs of the other start-ups that are part of the portfolio. Institutional investors will be looking for a percentage of the start-up company in exchange for financing. The benefits to working with a strategic investor have more to do with relationships and introductions to other customers. These types of introductions are especially likely in an industry like healthcare, which has a tradition of sharing innovations. There may be opportunities for co-development as well. Strategic investors are not solving for a percentage of ownership as institutional investors do in their financing decisions.
Bok spent the remainder of time speaking about MGB’s innovation fund, AIDIF, more specifically. And fielding many questions from the audience, which seemed to be stacked unsurprisingly with a large number of entrepreneurs. The audience for this seminar was by far the largest of any HSI Lunch Seminar to date, reflecting the interest and enthusiasm that Sloanies have for topic.
Click Mass General Brigham Ventures to learn more about their investment in innovations. And click Gaye Bok to contact the speaker.