Arboretum Ventures Rides an Investment Wave Created by Revolutionary Changes in the U.S. Health-Care System

Revolutionary changes are roiling the U.S. health-care system and opening new avenues of opportunity for both entrepreneurs and venture capital investors. That’s good news for Arboretum Ventures, an Ann Arbor-based venture capital firm that last year raised a $220 million investment fund ─ its fourth and largest ever in the 14 years since it was founded.

“Arboretum Ventures has a mission to find companies that will drive cost out of our health-care system but still provide great clinical care,” explains Jan Garfinkle, founder and managing director. “My original goal was to change health care for the better.”

The greatest change on the horizon, according to Garfinkle, is the transition in the Medicare pricing model from fee-for-service to value-based care, such as bundled payments. “Starting in 2017 with hip and knee operations, a hospital will get one payment from Medicare that it will use to pay everyone, including the surgeon, the anesthetist, the nurses, the imaging specialists and rehabilitation therapists,” she explains. “This is revolutionizing how hospitals think about doing procedures and lowering costs.” Another change on the front burner of U.S. health care is the movement to improve electronic medical records, which doctors complain are clunky and time-consuming.

“We’re looking for companies that can help to solve these problems and also address other issues related to mental health, care management, home health care and medical-device technology,” Garfinkle says.

Arboretum Ventures currently manages $450 million in capital and has invested in more than 35 companies specializing in medical devices, diagnostics, health-care IT and health-care-services. Half of those portfolio companies are based in the Midwest and 10 are located in Michigan. “We like investing in Midwest companies, because they are run by incredibly smart, hard-working people,” Garfinkle says. “Also, the cost structure of those companies is one-third less than the cost structure of companies located on the West Coast.”

She attributes Arboretum Ventures’ success to its stellar track record and its ability to deliver great returns to its investors. “We’ve had eight large exits, including six where we made four to 10 times cash-on-cash on our investments,” Garfinkle reports. “We are solidly in the top quartile [of VC performance] with our first two funds. This is the reason we’ve been able to raise ever larger funds.”

To date, Arboretum Ventures has invested a portion of its $220 million fund in five companies and is on track to place investments in 10 additional companies over the next few years. Among its newest portfolio additions are SI Bone, Pear Therapeutics, NVision and Strata Oncology, which are pushing the envelope of technological innovation in their respective therapeutic areas.

Garfinkle credits the Michigan Growth Capital Symposium for its 35 years of energizing and connecting the entrepreneurial ecosystem and the venture capital industry in the state of Michigan. “The symposium is the best meeting in the Midwest for bringing national-level venture investors together in our locale,” she says. “It’s a really good place for entrepreneurial companies to present to these investors. For us, the MGCS provides a valuable opportunity to network with other venture groups.”