Q&A: In-Depth Look at the Innovation Institute’s Partnership with an Equity Crowdfunding Portal
The institute is a for-profit operation owned by six non-profit hospital systems. It has three prongs: an innovation lab; a fund that it invested in; and a controlling interest in 15 enterprise development companies. These companies handle things aside from patient care, like biomedical engineering, medical facility design and construction management. They provide the economic engine to fund the innovation.
RedCrow, with HQ in Mill Valley, focuses exclusively on health care and med-tech; it may add more verticals in the future, like cybersecurity, fintech and VR.
RedCrow’s portal has two categories – discover supernovas and explore investments. The former is for startups undergoing due diligence. The latter is for those that have passed muster and are open to investments.
The crowdfunding portal was founded by Brian Smith (CEO), a former Morgan Stanley financial advisor, and Jerry Harrison (chairman), a founding member of the Talking Heads (and an inductee in the Rock and Roll Hall of Fame). Harrison, a serial entrepreneur, previously started the website, garageband.com, which also dealt with the power of crowds. It was an online community of independent musicians and music fans.
Stofko found he could relate to Harrison on multiple levels – regarding innovation and music. He had started a a punk and new wave band called Vex, where he played guitar and bass.
Below, he talks about the institute’s partnership with RedCrow.
OCSN: Why did the Innovation Institute partner with RedCrow?
Stofko: The RedCrow relationship helps us fill the void between our lab and our partner fund. It’s for those companies past the stage of an early idea, but not quite mature enough for institutional investment.
Our innovation lab is for very early-stage ideas, which are typically from people within our health care system who see a problem and have an idea of how to solve it. They submit an invention disclosure form and we assess it through our due diligence process. If it appears viable, we help take it to market.
The WingSling is a great example of this. It’s an arm sling developed by Mark Elzik, an orthopaedic surgeon at St. Joseph Health System, one of our partners.
(The WingSling elevates the hand and wrist following injury or surgery. The lab developed it and it’s now available at places like CVS pharmacies.)
For the fund, we invested $10 million in LRVHealth, with HQ in Boston. LRV will typically invest $2 million to $5 million in tranches.
(LRVHealth, formerly known as Long River Ventures, is planning to raise $100 million for its fourth venture fund. It was created in 2000 by a team of experienced healthcare entrepreneurs, operators and investors. It was the first institutional investor in companies like GetWellNetwork, Phreesia and Convergent Dental, according to its website. It typically leads or co-leads seed, Series A and Series B rounds.)
OCSN: What type of investors can invest through RedCrow?
Stofko: For now, it’s only accessible to accredited investors. Eventually, (in 2020), they plan on opening it up to non-accredited investors through a mechanism known as Title III crowdfunding. Title III, which became legal in 2016, gives unaccredited investors – those with net worths of less than $1 million – a chance to make an early investment in a private company.
(All types of investors, however, can weigh in and rate the startups undergoing due diligence. Along with RedCrow’s professional vetting process, this feedback helps promising startups hone their message and move from the discovery phase to the investment platform.)
OCSN: How will your partnership with RedCrow work?
Stofko: We have a “Members Only” area of RedCrow’s website featuring startups we refer to them. There’s a 60-day exclusivity period to start, when anyone affiliated with our health systems can invest, before opening it up to the general public.
Our member systems comprise more than 200,000 employees and 20,000 physicians – all of whom now have the opportunity to engage with companies that their peers have started.
OCSN: What startups have you referred so far?
Stofko: The first company we referred was CenterLine Biomedical, through our relationship with the Cleveland Clinic. (This company created a 3D visualization and real-time navigation system for endovascular procedures.)
It was not a fit for LRVHealth to invest in this company. So we referred them to RedCrow, which honors any referrals that come from our ecosystem.
Also a local startup – NuEyes Technologies, with HQ in Irvine – is in the discovery section. The institute learned about NuEyes through OCTANe, a tech and life sciences accelerator in Aliso Viejo. Then the institute made the referral to RedCrow.
NuEyes is looking to raise $5 million to develop NuLoupes, magnifying loops for medical purposes.
Another startup – Naveon— with HQ in Baton Rouge, LA — should be in the discovery section soon. It’s a communication and education platform serving three demographics: patients and families; doctors and nurses; and hospital systems.
They’re looking for about $600,000 to get to the next level, so we brought them to RedCrow.
OCSN: What does your pipeline to RedCrow look like?
Stofko: Since we started the institute more than six years ago, there’s been about 14 companies that would fit their criteria. About half of those companies don’t exist anymore. The rest we’ve either already referred to RedCrow or are in the process of vetting.