Rex to invest in start-up health-care ventures April 13, 2012 

Rex Healthcare is committing $10 million to create a new venture capital fund that will invest in fledgling health-care companies as part of a broader initiative to create a “culture of innovation.”

The Raleigh-based private, nonprofit, which includes the 433-bed Rex Hospital and is part of UNC Health Care, will announce on Friday the creation of Rex Health Ventures, which has the three-pronged mission of making money, improving health care and creating local jobs.

In addition to the $10 million that Rex has carved out from its $230 million investment portfolio, it’s also seeking an additional $10 million from outside investors that it also would invest in new ventures.

The thinking is that the process of being exposed to a variety of new ventures will keep Rex Healthcare abreast of the latest advances and get it to rethink how it delivers health care.

“There are a lot of changes in health care, and we are going to need to be more innovative in the future and deliver services in a quality and cost-effective way,” said David Strong, Rex’s president.

The move could be controversial as it comes at a time when Rex is in the middle of a heated dispute with WakeMed, which alleges Rex is leveraging UNC’s resources to unfair advantage. The dispute triggered WakeMed’s unsolicited bid to buy Rex for $750 million – an offer that was rejected by UNC’s board – and has drawn the attention of legislators who have proposed curbing Rex’s ability to grow.

But Rex executives say starting a venture capital fund doesn’t expand its core business in any way and aligns with UNC’s tradition of being an innovation hub.

“This is ultimately about improving health care,” said Lisa Schiller, vice president of marketing. “Hopefully what we’re doing here ... will benefit the health system throughout the state and throughout the country.”

Strong also noted that a few of “the most forward-thinking health systems in the country” – including the Cleveland Clinic in Ohio and giant Ascension Health in St. Louis – also have venture capital funds.

Rex Health Ventures is the most expensive component of a new initiative called Rex Strategic Innovations. Some details are still being worked out, but the pieces include:

• Rex Impact Grants. Rex plans to hand out three to five grants of $25,000 or more each year to local businesses and organizations focused on improving health care, said Merrette Moore, managing partner of Raleigh investment firm Lookout Capital and a Rex adviser. The money will have no strings attached although “certainly there is a relationship we hope is established,” Strong said.

• Rex Innovation Facilitator. Rex will offer mentoring and other services to Rex employees and outsiders who have a concept that has the potential to blossom into a health-care product or service. Initial services would be free, but down the road Rex could seek an ownership stake in exchange for services such as legal and intellectual property work.

• Rex Joint Ventures. Rex is looking to team with other health-care organizations in a variety of ways, both formally and informally. One possibility is joining forces with a drug development company to test experimental treatments.

James Rosen of Intersouth Partners, a Durham venture capital fund, said Rex Health Ventures should be able to find plenty of solid investment opportunities.

“We have a wealth of technology in the area, but it’s not matched with sufficient early-stage funding,” he said.

Although Rex is a novice in the venture capital arena, it’s compensating for that. Among other things, it has assembled an advisory board that includes Tom Darden, founder and CEO of Raleigh-based Cherokee, and Ted Zoller, director of UNC’s Center for Entrepreneurial Studies.

“They know what they know and what they don’t know,” Rosen said.

The average check written by Rex Health Ventures is expected to range from $250,000 to $500,000, although follow-up investments could raise the total investment in a single business to as much as $2 million, said Robert Helmedag, director of operations for Rex Health Ventures. Rex plans to keep its investments local, mostly in the Triangle and definitely within North Carolina.

Moore said the venture fund will take a different approach from traditional venture capital funds. Whereas funds typically go for grand slams – and strike out a lot in the process – Rex is focused on hitting “doubles and triples and an occasional home run.” It’s counting on its ability to tap into the expertise of its 5,300 employees to lower its risk at the outset.

And although Rex is a nonprofit, making money on its investments is important.

“All nonprofits need to make a profit,” said Strong. “All they do with that profit is reinvest” in the organization.

Ranii: 919-829-4877

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