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Providence Ventures is the investment arm of Providence St. Joseph Health
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh, how times have changed! While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
David Kereiakes is a partner at Providence Ventures.
Kereiakes joined Providence Ventures as a Partner in 2018 where he has helped lead the formulation of the firm’s medical device investment strategy. He also helps support investment strategy and decision processes in software and service focused businesses.
Prior to joining PV, Kereiakes worked for River Cities Capital Fund (“RCCF”), one of the most active and experienced growth equity funds in healthcare and information technology. David most recently was a Principal on the healthcare team having served on deal teams across all healthcare verticals. Additionally, he served as President and Board Member of Mid-America Health Investors Network (MHIN), where he represented over 60 active healthcare funds with offices spread throughout Middle America.
Kereiakes currently or previously served as a Board Director, Board Observer, or co-led financings for TailorMed, MacroHealth, OrthAlign Inc., Bolder Surgical, AVIA Health, Veran Medical (sold), NICO Corp., TissueTech (sold), and Advanced Practice Strategies (sold).
Earlier in his career, he served as a principal, sales associate, and investment advisor with American Financial Group and completed extensive financial, consumer branding, and sales and marketing training programs with Merrill Lynch and Procter & Gamble.
Kereiakes graduated from Indiana University’s Kelley School of Business and received his MBA with a concentration in finance from Xavier University’s Williams College of Business. He and his family remain active in the Seattle and Cincinnati communities supporting various initiatives targeting behavioral health, education and youth programs, veteran affairs, and medical research programs.
(Kereiakes will be joining Vator and UCSF Health Hub for an event later this month called "Primary Care and the New Medical QB," in which we will be talking to various stakeholders in the healthcare system, including providers, patients, and startups, about the evolving role the of primary physician and what the future of healthcare will look like. Get your tickets here!)
VatorNews: What is your investment philosophy or methodology?
David Kereiakes: Providence Ventures is a wholly owned investment fund or arm of Providence St. Joseph Health, which is the third largest not-for-profit in the country. Providence is a collection of 52 acute care hospitals, over 1,000 clinics and outpatient sites. We have 120,000 caregivers, 25.6 million total patient visits, and we have over 2 million covered lives in the state of Oregon. So, we are a payer, as well as having a large physician network in Southern California. The footprint spans seven western states, from Alaska all the way down to Texas.
They've allocated us capital in the form of two investment funds; the first one was launched about seven years ago and the second one was launched at the start of 2019. We look to invest in software, devices, diagnostic tools, or services that the system is using in some form, or could find a great use of. Given the variety of sandboxes that we have to play in within Providence, and being fee-for-service, at-risk, or value-based care, it provides a unique ecosystem for us to identify specific problems plaguing both Providence and, potentially, the US healthcare system, and assess best in class solutions for those problems. We give them the investment capital, the governance, the sales and marketing support and expertise, that an institutional investor can provide, but paired with the unique visibility of past sales cycles, a clear definition of the value prop, how it positions in the market, where we see the market moving as a big player in it, and we help position the company to rapidly grow within Providence, and certainly outside of Providence.
VN: Some corporate venture arms are given free rein to invest in what they want and some are very controlled by the parent company. Tell me about your relationship with Providence in terms of autonomy.
DK: We are very close with Providence. We've invested in 26 companies and Providence is a customer of all 26 of those businesses. It's not a mandate, but we would be remiss if we didn't leverage the unique perspective, unique access, and visibility that we have been afforded by Providence on what really can drive change within our system and how care is delivered nationally. So, we like to see Providence be a customer, but that is not a mandate or requirement.
We are returns oriented, we want to be good stewards of Providence’s capital and all the returns and the investment dollars will go to trying to deliver on our mission of caring for the poor and vulnerable, which is not always a positive margin.
VN: You mentioned you invest in software, devices, and diagnostic tools, so are there certain verticals that you like to invest in, like diabetes care or heart health, for example.
DK: They span quite a large and broad array of solutions. There's no shortage of problems in healthcare, so we try not to limit ourselves in where we can drive meaningful change and innovation. We work very closely with our clinical and administrative colleagues to identify a problem, or understand one, and then leverage the other resources we have within Providence to see what the solutions they're utilizing to solve some of those problems. We can also use our external lens to bring in new technologies. A lot of our 26 investments have been in enabling a consumer within healthcare, so digitally enabling the patient, lowering the barrier of care, increasing access, and removing a lot of the friction that's naturally plagued healthcare for so long.
It is a software and digital health heavy portfolio, but there are also unique medical devices, there's unique services that we have found help Providence in delivering care more efficiently, making it better for the patient, and more aligned with the mission of Providence, which is, again, to care for the poor and vulnerable and to help ease the way of our caregivers and patients in the communities we serve.
VN: There's a lot that's been happening in healthcare, especially over the last year and a half to two years, since the beginning of COVID. There’s been the rise of telemedicine and virtual care and digital tools, which was happening before that very slowly but which really ramped up very quickly. So, talk to me about some of those trends that you've seen and the macro trends in healthcare that you're betting on now.
DK: There certainly was a huge disruption to healthcare. I always point to a report from seven or eight years ago from McKinsey on the digitization of industries, where healthcare was one step below government and was only above agriculture and hunting. I don't even know if prior to the pandemic healthcare would have even been ahead of agriculture and hunting anymore. Just out of necessity, the disruption that we were anticipating to come from big tech over a six, seven, eight, maybe 10 year period, came overnight, and it wasn't from those disruptors, it was a virus that brought us here. Fortunately, there were huge advancements and large investments that Providence had made ahead of time in the earlier, more innovative health systems to digitally enable the patient and our caregivers to deliver care in new and unique ways. So, those were able to turn on quickly and our communities were huge beneficiaries of that.
I also just continue to be in awe of the caregivers that work for Providence; the front line workers and those outside of Providence. To see what they have done and the burden and the struggles they've had to navigate ever since. So, our focus is trying to ease their way and try to help them and reduce some of the burdens that they have carried for all of us.
I'm happy to dive into specific verticals that I think will stick around, but that's just speaking a little more high level.
VN: If you want to talk about what the future of healthcare is going to look like, and what verticals you think you're going to emerge from this would be great.
DK: It's undoubtable there is a consumer in healthcare, whereas five or six years ago there was a provider, a payer, and a patient. Now there's a digitally-enabled, or just enabled, consumer and those new technologies to engage with them to deliver their care outside of the massive hospital towers that we have will not go away; they’ll be here for the long haul in how we deliver care. Our procedures, our care, continue to move aggressively into the outpatient and even into the home and that will continue to accelerate and probably for the better in terms of outcomes and care delivery. As I mentioned, there's no shortage of problems in healthcare and so the amount of resources that are now being deployed into healthcare is astounding from a new investment perspective. And with all that attention and resources, there's disruption and disruption can be a great thing.
VN: What is the size of your current fund and how many investments do you typically make in a year?
DK: We have been allocated $300 million from Providence, and that is spread across the two investment vehicles I mentioned, $150 million each. The fund was launched about seven years ago, and in some years it's been two to three investments, but since October of last year to now, so just over a 12 month period, we had seven new investments that we made, and that's separate from follow-ons. All of those are aligned with where we see the market moving in each respective business and how its positioned. We work closely with our colleagues on each one, all of which had a relationship with Providence prior to our investment, which helps quite a bit. So, it ranges. This was a very busy year.
VN: What stage/series do you invest in and how much is that in dollar amount for you?
DK: We do $5 to $15 million in a company, and it lenses to more commercial stage businesses, just simply having a relationship with Providence or having sold into Providence or being able to sell into Providence. So, our clinical administrative colleagues like to have something they can put their hands on or assess. Again, there's no mandate around that, but we like to try and get visibility that we really can be value added partners and if our clinical and administrative colleagues don't find use of something, it doesn't quite make sense for us to invest in it. So, if we do not have a relationship with them, we have a very strict conflict of interest policy in which we strictly adhere to and we can introduce and educate and allow the technology software service or device to be independently assessed, without our influence or us getting involved by our colleagues. So, we serve, again, as an external lens on innovation. We’re acutely aware of the problems that are plaguing various departments and we are constantly out looking at the market to see what might be potential solutions or leveraging the portfolio companies that we have or technologies within Providence.
So, the stage is commercial. In my career, I've invested in a first institutional round, a Series A, in a business that was doing $20 million in revenue, and I've invested in a Series B, C, or D companies that were doing just a few million in revenue. So, I guess by the traditional metrics, which I don't always think fit, we're probably a Series A or Series B or later, but something that a provider can utilize and get value out of, which, again, lenses to the commercial stage.
VN: What traction does a startup need for you to invest? Do you have any specific numbers you want to see?
DK: It is, on the low end, a few million in revenue. So, having a few customers. For us, it's nice when Providence isn't the first or only customer just because of our size and scale. We do find Providence is one of the earlier adopters, and we're fine taking on that early adoption risk, but we like to try and get visibility into the market size or size potential because what might work for a 52 hospital, massive, integrated, delivery network may not be appropriate for a community hospital in the middle of the country or an academic center.
VN: When I talk to VCs, they always tell me that the team is the most important thing. So, what do you look for in entrepreneurs and founders? What do you want to see from the team to make you want to invest?
DK: It absolutely is the team, so I'm glad that I'm not saying anything different there. It’s intellectual curiosity, it’s leadership, it’s work ethic, it's a thirst for knowledge, a willingness to listen, and heed advice and change practices based on that. An ability to hold steadfast but also be flexible and adapt when appropriate. Above all, just their ability to communicate and communicate a vision. So, one thing that I tend to look for is, and I’m fortunate to invest in the commercial stage where I can watch the founder or CEO, who often is the best salesperson for the company, distill down the value prop and make it such that they're able to communicate that knowledge to anybody off the street. I try to put myself as a sales rep or as one of those less informed people to see if I can sell it; can they communicate the value proposition in a way that that knowledge share is transferable across anybody? And I’ve found that to be a really unique skill set that can translate to great upside potential for business.
VN: What about the product? What are you looking for there?
DK: We’re looking for a unique technology that has a distinct competitive advantage and it varies. So, software is different from medtech and services but, generally speaking, can we see a benefit directly attributable to that technology? With all the noise surrounding the implementation and the use and the variants in who's using it, is there consistency and is there a value prop and ROI directly attributable to that technology? With that, you can position a product or a service, or whatever it might be, for success.
VN: Do you like to try the product out first? Maybe that's easier on software than a medical device, but do you like them to have a demo or something like that, just to just know that it works?
DK: For me, I have a broader medtech investing background and that seems to make sense to me a little more than software, because you can see it and you can see how it's used and you can feel it. So, I often go to YouTube, I often audit procedures, and I look to see how it's used. If I'm able to figure it out, then I have no doubt a neurosurgeon or an orthopedic surgeon or an interventional cardiologist can figure it out, given the volume that they do. Just being able to see a procedure, see how it is used, either through YouTube or in the surgical suite, that's incredibly helpful.
Software getting a demo certainly is interesting and can be valuable, but I'm likely not the one that's going to be using it every day and there's workflow and integration challenges or influences that may impact the software that I can’t account for from where I sit, ultimately.
VN: After the team and the product is the market; those seem to be the three things that investors look for, though maybe not in that order. So, talk to me about the market. What do you want to see? Especially in the early stages, it's almost like you're betting on a market that's maybe going to be there down the road, but maybe isn't there currently. Is that how you view it?
DK: Market size is important, but I may take a different perspective than other investors: I'm comfortable in a $150 million market. A lot of investors say they have to see a billion dollar market, but there aren't that many; when you actually boil it down and do a deep dive in it, with an analytical, honest assessment of the market size, it often is well below a billion dollars. Where an entrepreneur really can get into trouble with their corporate finance strategy is raising too much money or bringing a misconception of the market size, and if you miss calculate that it can have huge repercussions down the line on the business. Corporate finance can drown a business and an opportunity, and I've unfortunately seen that a lot in companies I've looked at over the decade or so I've been doing this. So, I have no problem investing in $150 or $200 or $300 million markets. In fact, those are great markets to be in because the big incumbents or big software companies, big medtech companies, don't pay attention to those business lines or they don't innovate there. And so, for a nimble management team with a unique technology, they can quickly dominate a market of that size and the larger medtech or larger software companies will quickly write a check and not think twice about it because they don't have to put their careers on the line for a $100, $150, $200, $300 million acquisition. It's the billion-plus acquisition that you really have to have somebody step up and say, “I'll put my career on this. We should be spending this money here to acquire this technology.”
That's where I typically love to play, but, to your earlier point, market can have a huge influence on the success of a company. So, picking the right market, and understanding how your technology or software or service can win in that market is critical, but raising the appropriate amount of money, knowing that that money needs a return, and has a cost of capital tied to it that's appropriate for that market that you're going after.
VN: It's interesting you talked about going after some of those smaller markets within healthcare. Do you think that it's because you have backing from Providence? Does that allow you to go after some of the smaller markets, where if you had traditional LPs investing in your fund, maybe you wouldn't be able to go after those smaller markets because they'd be looking for a larger return?
DK: No, because that was a model I did in a traditional growth equity fund and you can easily put $10, $15, $20 million into a business and get $60 million or so out when you sell it for $150 million or $200 million, if the capital is spent efficiently. That's where the misconception is and, in order to get to a billion dollar exit, you traditionally have to raise hundreds of millions of dollars because it is a first mover market, it is a competitive dynamic where you're competing against strong incumbents that have greater resources and there is more money at play in the market. And so, the competition can appropriately be fiercer, I guess.
As I mentioned from the beginning, we are returns oriented, so we are driving returns similar to external venture and growth equity funds. The two funds that we have are generating great returns for Providence, so the strategy is working and when you look at trying to drive meaningful change in healthcare, there isn't a one size fits all. There isn't one software or device that can solve a billion dollar plus problem; it's these $150, $200, $300, $400 million problems that add up to billions of dollars in waste and challenges and struggles for patients, providers, and payers. So, by attacking these markets, and focusing on them, you can win and you can meaningfully move those markets, drive change, and be positioned then to expand into other markets which, collectively, will turn you into a much bigger company.
VN: We talked a little bit about what's been happening in healthcare over the last 18 months, with the rise of interest in the space. There's now record amounts of capital being invested into healthcare now, with round sizes and valuations going up. What does that mean for the companies themselves to be taking those larger rounds at larger valuations?
DK: Valuations are the highest I've ever seen in my career and that's not a surprise and it's not new to anybody. More companies are getting funding and that can be a good thing. When you look at the pace of what we we’re able to accomplish in getting a vaccine done and completed, with two of them being as effective as they were, that's a reflection of, if you put the smartest people and entrepreneurs together in a room toward a problem, and you give them the resources, good things can happen. We had all of those and we had that great success. We had plenty of failures, though, in developing that vaccine and a bunch of companies that didn't end up finding a viable solution to it, so the tide goes out, but it comes back in, and it's a cycle. If entrepreneurs are directed toward a problem and given resources to solve it, those problems will get solved. So, the problem is not that everybody will generate a return or find success, which can be a good thing.
VN: Talk about some of the downsides, though. Obviously getting more money at higher valuations earlier means you have to prove that out the next time you have to raise a funding round and not every company is going to be able to do that. And so, if they can't, then they have to take down rounds, which is not so great.
DK: You nailed it, and that's where I was leading to earlier in saying that the corporate finance strategy can be toxic and ruin great technologies that should have a right to win, or have a dramatic influence on management success, if they don't appropriately navigate that. So, you are exactly right: with each capital raise, that capital has a cost to it, and there's new milestone and new watermarks that have to be hit. If you cannot efficiently spend those dollars, those resources, that capital, to drive greater value, then you will find yourself below that watermark and if those investors who put up that money at that valuation don't want to continue to put their money at that valuation or above then, yes, you do have that dynamic that can limit the potential success of a business. That certainly will happen here, but it will take some time. Just the sheer volume of new funds being raised and the dry powder that they have and the obligation to put it to work will outlast, or extend past, whenever the market pullback will be. But that is certainly a risk and we have not hit that yet.
VN: Venture is a two-way street, where investors also have to pitch themselves. How do you differentiate your fund to entrepreneurs?
DK: Our LP, which is one of the most innovative health systems in the country is our advantage. Getting visibility into being able to work with those clinical administrative colleagues that we have is a key differentiator for us. We all have success in venture and growth equity investments and so we can bring a similar perspective around governance and how to institutionalize a business and build good go-to-market strategies and sales and marketing teams, as well as all aspects of business formation and beyond. But our key differentiators are the unique access that we have to Providence and to many hospital systems and healthcare providers across the country, even outside of Providence. So, getting the voice of the customer intimately can really move the needle for a lot of companies and be a big differentiator for us.
VN: What are some of the investments you’ve made that you're super excited about? Why did you want to invest in those companies?
DK: I'll just go to some of the more recent ones that we've done. There's a company called TailorMed, which helps providers and patients realize financial risk that they have for their care and automates the process of finding available funding for their care. So, it helps to support uninsured or underinsured patients, and automates the process for financial centers and medication assistance teams to enroll them in copay assistance, medication assistance, in Medicaid during open enrollment periods, in better unique plans for them, in local, state, federal funding sources, in disease specific foundations, and helps offset the cost of their care so they can have greater adherence to their care.
Some statistics that are really troubling are that 16% of cancer patients quit their treatment plans, often life saving plans because they can't afford the cost of the chemo drugs, 72% of patients with incomes less than $40,000 cannot afford a $500 medical bill, and 65% of individuals filing for bankruptcy attribute it to their financial distress from medical debt. So, we're failing. The cost of care continues to go up and it shouldn't be that a parent should have to decide whether they pay for themselves to survive or put their family in bankruptcy. So, TailorMed is helping to address that with available funding out there. For us, uniquely, it moves the rev cycle from a reactive, where the patient may have had to drop their care program in collections and debt obligation, to a more proactive, earlier engagement with the patient, with an ability to drive greater adherence and lower their cost of care.
There's also a company we invested in called MacroHealth, which helps risk bearing entities, so provider sponsored plans, regional payers, and self insured employers, customize their network to drive lower costs of care. So those are two care costs specific ones. Cost is a big, big concern for patients.
VN: Tell me about yourself, how you got into VC, and some lessons you’ve learned.
DK: I'm always learning. What's fascinating about this business is that you were never an expert.
I have spent over 10 years direct investing. I knew it was an area that I wanted to get into because I love healthcare. I come from a family of physicians; I considered becoming one but I felt that I can have a greater impact on the delivery of care and patients' lives from the position I'm in now, and being able to help enable entrepreneurs and technologies to disrupt and advance care delivery. So, that's what really drives me. It's being able to work with incredible people and solve problems and equations that are very difficult to solve. That's what's intellectually fascinating with the job that I have. I also have the ability to talk to and work with physicians and caregivers and really try to help them. Again, having a family of providers and physicians, I've seen the burdens that they carry and the stress that they may have in their job, and I'm always trying to have an impact on that. So, over those 10 years, I've made quite a few investments. I've been fortunate to have some success and have some of those investments generate investment returns, and not only that but have a meaningful impact on how care is delivered and the problems that they were addressing.
VN: What excites you the most about your position as VC?
DK: It's something new every day. It’s having the ability to explore and be intellectually curious and have a meaningful impact on a particular space by being able to work with, and enable, leaders and the entrepreneurs that I'm fortunate to work with.
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