January 2022
Future Returns: Impact Investing Through Healthcare Venture Capital
Alice Pomponio thinks it's sensible for an organization like the American Cancer Society to be involved in venture capital. “We have the knowledge, the insights, the data, to do things that others can't,” says Pomponio, the managing director of BrightEdge, a donor-funded, philanthropic impact fund.
By Rob Csernyik - read the article at(https://www.barrons.com/articles/future-returns-impact-investing-through-healthcare-venture-capital-01642532178)
Since 2018, BrightEdge has complemented what the conventional venture capital community is doing, Pomponio says. Returns on investments are put back into the American Cancer Society to sustain access and research programs.
The American Cancer Society is no stranger to venture capital, but its prior role has mostly been funding initiatives, which grantees commercialize. Using the private market database Pitchbook, the American Cancer Society estimates that in the last 2.5 years, its grantee-founded companies raised a total of US$5.4 billion in major oncology deals alone.
Pomponio says BrightEdge, which is headquartered in Atlanta, was born out of a business objective to diversify and modernize the nonprofit’s revenue base. “There are people who recognize that startups and innovation ecosystems in a competitive market-based model actually drive discoveries to commercially available products and services in a much more focused way,” she says.
The fund has made 17 investments into for-profit, cancer treatment-focused companies (with two IPOs to date). Companies in BrightEdge’s portfolio include immunotherapy drug developer Checkmate Pharmaceuticals, early detection biotech Freenome and patient financial navigation software firm TailorMed. Pomponio says on the surface, aside from the cancer focus, BrightEdge’s portfolio may not look that different from other VC investors and anticipates market rate returns.
BrightEdge, which is about US$70 million in size, acts as a follow-on investor and board observer, targeting individual investors and family offices, as well as foundations and companies. So far, US$3 million has been donated by individual donors via tax-deductible major gifts. Its current fundraising target is US$100 million.
Pomponio thinks the VC community is waking up to impact investing. Presently there are several funds similar to BrightEdge, such as the American Medical Association's Health 2047 fund or the Cystic Fibrosis Foundation's venture philanthropy fund, innovating healthcare venture capital.
It’s good timing to marry philanthropy and venture capital in this sphere. Silicon Valley Bank reports that 2021 was a record-breaking year for VC investment in healthcare, with more than US$80 billion invested, including US$28.3 billion in venture fundraising—almost double 2020 levels. SVB anticipates this activity will slow closer to 2020 levels in 2022.
Pomponio recently offered Penta three tips on impact investing in healthcare venture capital, and BrightEdge’s approach to mission-focused, venture capital investing.
Avoiding “Impact-Washing”
Pomponio says for investors looking to invest in impact it’s essential to know “that the organization is credible and trustworthy, but also may have direct experience in delivering impact solutions.” It’s also key that the investing is evidence-driven and guided by experts.
Not unlike greenwashing in environmental investing, Pomponio notes that there’s plenty of talk about creating impact when not true, which can be confusing for investors. But philanthropic impact funds offer security in that mission.
“We started as an impact organization, we have invested resources to conduct research around some of these fundamental problems, but also breakthrough science and discoveries,” Pomponio says. It’s not a PR play for an organization like ACS, which publishes cancer facts and figures, and has detailed data from its granting.
Even if investors don’t understand the machinations of a specific investment, BrightEdge’s overall portfolio focuses on a clear concept: the eradication of cancer, in one way, shape, or form.
“Going to an organization that is trusted and is known to be patient-centric—at the end of the day, the patients are our limited partner, even though they may not write the check.”
Research History Helps Derisk
Despite the healthcare sector being generally defensive, investments targeted by VCs, such as cancer therapeutics, face special risks. These include the potential for regulatory issues or the uncertainty of performance in clinical trials.
Pomponio says though health science investments are risky, BrightEdge’s American Cancer Society affiliation helps take some risk out of investments. The American Cancer Society is not only an early stage grantor for research, and closely follows not only scientific discoveries but the competitive landscape is unique.
“We're the ones who have the legacy, the deep experience, but also can see around the corner and we can anticipate downstream risks,” Pomponio says. “I think that's one of the key things that our sector has completely neglected.”
She uses the example of new drug creation. Most that are launched by large pharmaceutical companies get acquired from small biotech firms. Many early stage VCs “lack experience commercializing and launching products as well as direct insights into where the healthcare systems are going.”
But BrightEdge can assist in early stage deals as a voice in the room informing product design at a time when it's cost-effective to do so, while offering a signal to other investors about the firm’s potential.
A New Kind of ESG Investment
Investing in a fund like BrightEdge isn’t simply a healthcare investment, it’s also one that touches on several environmental, social, and governance criteria. “Essentially everything that we do is ESG, right? It's not just one component and one metric,” Pomponio says. “If the fund does well then we help diversify revenue for the American Cancer Society, we build resilience—all of that goes straight to impact.”
BrightEdge describes its investment philosophy as aiming for “3-D impact” in the areas of science, social impact, and sustainability. This means it invests in infrastructure other investors or companies invest in alongside treatment. Pomponio notes for instance that early detection, prevention and screening can improve patient outcomes and lower healthcare costs.
Philanthropic impact funds like BrightEdge also have their own additionality criteria. BrightEdge’s include the total number of lives touched and addressing health inequities and populations with the greatest needs.
“These are population-level and market-level approaches that can make broad and lasting impact,” she says.