Key Takeaways
- • Nonprofit hospital systems collectively held over $283 billion in investment assets as of 2019, increasingly deploying capital into venture investments as an alternative revenue strategy to address budgetary pressures.
- • Cone Health's $12 million investment in Wellsmith, a diabetes management smartphone application, demonstrates the execution risk: despite clinically promising results (user weight loss and improved blood sugar levels), the company was shut down due to market saturation and the health system's inability to become a paying customer.
- • Hospital systems of all sizes are expanding venture capital activity beyond the traditional dozen or so giant systems that historically participated, seeking dual benefits of financial returns and clinical innovation, but facing unforeseen challenges including budget constraints, organizational restructuring, and clinician adoption resistance.
- • Key tension exists between nonprofit missions and financial returns: health systems have experienced setbacks when long-term VC investments collide with hospital budget pressures, corporate reorganizations, or when sponsored innovations fail internal adoption despite external promise.
- • Market dynamics present structural headwinds for hospital-backed health tech ventures, as competitive crowding in digital health and other sectors limits differentiation and exit opportunities, creating tension between investment thesis and market reality.
Summary
Nonprofit hospital systems are aggressively pursuing venture capital investments as a revenue diversification strategy, leveraging their substantial asset bases to fund healthcare startups and innovations. According to KFF Health News, nonprofit hospital systems collectively held more than $283 billion in stocks, hedge funds, private equity, venture funds, and other investment assets in 2019, representing a significant pool of capital increasingly directed toward healthcare venture opportunities.
The strategic rationale is straightforward: hospital executives contend these investments simultaneously serve nonprofit missions while generating financial returns through new medical devices, software, and innovations that can be deployed across their own clinical operations. However, real-world execution has proven substantially more complex than anticipated.
Cone Health's experience with Wellsmith illustrates the fundamental tensions at play. The North Carolina-based nonprofit invested $12 million over several years developing a smartphone-based diabetes management system that delivered measurable clinical benefits—users demonstrated weight loss and improved blood sugar control. Yet despite promising initial results, Cone shuttered the company after concluding the crowded digital health marketplace offered insufficient differentiation to justify continued investment or generate meaningful financial returns. Jeanne Teshler, the entrepreneur and CEO who developed Wellsmith, summarized the dynamic bluntly: "They did us a tremendous favor in funding us, but the one thing we needed them to be was a customer and they couldn't figure out how to do it."
Health systems across all size categories now face recurring operational challenges with venture investments. When hospitals encounter budget pressures or undergo corporate reorganization, their commitment to long-term venture positions falters. Additionally, innovations that appear promising in development frequently encounter internal adoption resistance from clinicians due to skepticism or institutional habit. The gap between portfolio company potential and actual market dynamics—as evidenced by oversaturation in digital health—has forced several hospital systems to reassess whether venture capital activity genuinely aligns with their institutional missions or simply represents a poorly-timed capital allocation strategy.
The strategic rationale is straightforward: hospital executives contend these investments simultaneously serve nonprofit missions while generating financial returns through new medical devices, software, and innovations that can be deployed across their own clinical operations. However, real-world execution has proven substantially more complex than anticipated.
Cone Health's experience with Wellsmith illustrates the fundamental tensions at play. The North Carolina-based nonprofit invested $12 million over several years developing a smartphone-based diabetes management system that delivered measurable clinical benefits—users demonstrated weight loss and improved blood sugar control. Yet despite promising initial results, Cone shuttered the company after concluding the crowded digital health marketplace offered insufficient differentiation to justify continued investment or generate meaningful financial returns. Jeanne Teshler, the entrepreneur and CEO who developed Wellsmith, summarized the dynamic bluntly: "They did us a tremendous favor in funding us, but the one thing we needed them to be was a customer and they couldn't figure out how to do it."
Health systems across all size categories now face recurring operational challenges with venture investments. When hospitals encounter budget pressures or undergo corporate reorganization, their commitment to long-term venture positions falters. Additionally, innovations that appear promising in development frequently encounter internal adoption resistance from clinicians due to skepticism or institutional habit. The gap between portfolio company potential and actual market dynamics—as evidenced by oversaturation in digital health—has forced several hospital systems to reassess whether venture capital activity genuinely aligns with their institutional missions or simply represents a poorly-timed capital allocation strategy.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.