Background Questions
What is the Innovation Fund?
Like the California Health Care Foundation broadly, the Innovation Fund aims to improve health care access and to ensure high-value care for all Californians by partnering with emerging companies to bring the best innovations and technology to providers, health systems, payers, and patients. The foundation overall is especially focused on improving care for people with low incomes, people who are primarily served by the state’s Medicaid system.
The fund invests in early- through growth-stage companies, providing critical investment capital and network-building support to mission-aligned entrepreneurs. Our team brings deep knowledge in policy, delivery system partners, and reimbursement within Medicaid and California, which gives us a unique ability to help our portfolio companies navigate California’s complicated Medicaid ecosystem.
What types of companies or organizations does the Innovation Fund invest in?
We are currently focused on companies with artificial intelligence solutions. Health AI tools have the potential to increase health care access in multiple ways. For example, translation tools that truly work open the door for patients who do not speak English. Documentation support frees clinicians to be more present with the patient in front of them. These benefits are especially critical in safety net settings, where clinicians and staff are stretched thin caring for Californians with the greatest health needs. When designed and deployed thoughtfully, these tools can help close long-standing gaps in care.
In addition, we believe that technology solutions should be developed by the people in the communities they serve because no one has more insight into the challenges than the people who wrestle with them. These founders are critical partners because they are often able to tap their lived experiences to champion solutions that align with our mission of improving health care delivery to all Californians.
What value does CHCF add as an investor in emerging health care tech companies? How do you support the companies you serve?
The Innovation Fund brings deep knowledge in policy, delivery system partners, and reimbursement within Medicaid and California, which gives us a unique ability to help our portfolio companies navigate California’s complicated Medicaid ecosystem.
We support companies by staying actively involved after investing, including through our position on the company board and relationship with the executive team, and our hands-on work and network-building support to help companies get traction in Medi-Cal.
When surveyed, 100% of CEOs in our portfolio say their relationship with the fund is valuable. In addition, 93% recommend that other start-ups work with the fund to grow their business in California.
What does CHCF look for in companies it invests in?
There are three main components we look for in a company.
The first component is fit with CHCF’s mission. If a company does not align with our mission to improve health care access or value of care for people living on low incomes in California, it will not be considered for investment. To determine fit, we collaborate with CHCF program staff, grantees, and expert networks to explore demand for the product, whether it can be implemented, and its potential impact. The Innovation Fund identifies payers and providers interested in piloting and ultimately paying for the solution as a marker of mission fit.
Second, we look for whether CHCF can add value to the company. Our value as a partner comes from our understanding of the health care delivery and reimbursement systems and our relationships with health plans, provider organizations, regulatory agencies, and policymakers across California. We are not experts on US Food and Drug Administration (FDA) approval, reimbursement, or distribution channels for drugs and medical devices, so we do not invest in companies with those products. Instead, we focus on health care services and IT companies where CHCF’s networks and knowledge provide significant value.
The third component is business, financial, and legal due diligence. The Innovation Fund investigates whether potential investees have a strong market assessment, a credible business plan, an operational track record, an experienced team, and a well-articulated financial model. We work closely with the company’s current and potential financial investors to examine its business and financial position.
What impact has the Innovation Fund had on health care delivery?
In 2021, the fund’s portfolio of companies served over five million Medi-Cal enrollees at over 250 hospitals and 100 clinics in California.
For example, we supported Rubicon, which offers electronic consult capabilities to primary care providers. With our support, they now serve 40 plan and provider organizations in California, delivering more than 30,000 eConsults a month, and proof of eConsult’s value as CHCF works to secure reimbursement in Medi-Cal.
How much money can a company be awarded? What are the terms?
We will make investments of up to $3,000,000 over the life of a company, with the original investment likely between $50,000 and $250,000 for companies at the seed stage and up to $1,000,000 for growth stage.
For growth-stage companies, we also provide up to $400,000 of grant funding to help accelerate impact in California. While these grants do not go to the companies directly, we can offer grant support to delivery system partners, such as providers and payers, to support with adoption, scale, and evaluation of the technology.
As a private foundation, we can be flexible with our investment terms. We can offer both debt with warrant coverage or participate in equity funding rounds.
Mission Investing and the Innovation Fund Approach
What are “mission investing” and “program-related investment”?
Mission investing is the use of debt and equity investments by foundations as tools to achieve their philanthropic goals. CHCF uses a specific kind of mission investing called “program-related investing” (PRI), whose primary goal is achieving a program objective rather than a financial return.
PRIs are like grants in that foundations use them to give money for charitable activities. But when foundations give PRIs, they expect to get the money back by a specified time so the funds can be reinvested in other mission-related work. PRIs are valuable as a means of leveraging philanthropic dollars.
Why does CHCF have a mission investment program?
Working with for-profit companies increases the odds that the innovations we support will have broad, sustained social impact. These companies are built to grow and to tap larger-scale funding from private capital markets. Drawing on a wide range of innovators and investors also expands the talent and resources available to meet our mission. We align our impact investment strategies with CHCF’s broader program goals, so PRIs and grant-funded work reinforce each other.
Does CHCF profit on its investments?
Making a return is not our objective. When investees repay CHCF, or a company has a financial exit, that money goes back into additional mission-related activities. The goal of the Innovation Fund is to support and develop a handful of innovative companies that have a significant positive impact for Californians living on low incomes and the providers and plans that serve them.
To accomplish this goal, the companies we support must have the potential to scale across California and sustain themselves financially. We therefore consider the financial and business aspects of potential investments and look for partners that are investable from a venture capital point of view.
Sometimes our program-related investments fail — the portfolio company can’t find new customers, attract additional capital, or repay CHCF’s loan. This strategic risk is inherent in the program, which is designed to take chances other financial investors and grantmakers cannot.
A typical CHCF PRI is a five-year low-interest loan with warrant coverage, which is an option to buy a specified number of the company’s shares at a set price in the future if the company’s value appreciates. Investment terms vary with the investee, the risk of repayment, and how best to accomplish our program goals. We also can participate in a company’s equity fund raise.
How do we source company partners?
We source company partners in several ways. We often start each year with a few hypotheses about problems we think are meaningful opportunities for technology to solve in the Medicaid ecosystem. We then scan the landscape, identify the universe of companies working in this area, and sort out which (if any) has a business model that can work in Medi-Cal, have or are close to having paying customers, and are actively fundraising, interested in our terms and approach, and likely to be able to pay us back.
Otherwise, we are opportunistic, taking suggestions for company partners from our health plan and provider partners, and investor and entrepreneur communities.