Venture Capitalists Put Their Money on Shift to HMOs : Finance: An Irvine firm is helping doctors band together so that they can wield greater power.

By DON LEE

May 31, 1995 12 AM PT

TIMES STAFF WRITER

IRVINE — Venture capitalists, betting on the growing shift toward health maintenance organizations, are starting to target companies in the forefront of that trend, and that’s benefiting entrepreneurs like John Seitz.

Seitz’s firm, Cornerstone Physicians Corp., helps doctors band together to form medical groups so they can become more efficient and wield greater power in the new arena of HMOs and other managed-care plans.

“We’re turning them into better business machines,” Seitz says of doctors. “We’re empowering them.”

Cornerstone recently got a big boost when two venture capital firms, Crosspoint Partners and Interwest Partners, invested $2.25 million to help the 4-year-old Irvine company grow.

Managed care “is clearly an area that’s coming of age,” said Don Milder, general partner at Crosspoint in Irvine, which has recently funded four other managed-care services companies. “We’re looking to do more in this area,” he said.

Cornerstone also took advantage of the rebirth in venture capital funding, which last year totaled a record $4.2 billion nationwide.

In Southern California, Cornerstone was one of 25 enterprises that raised a total of $92.5 million from venture capitalists during the first quarter of this year, according to a nationwide survey by Price Waterhouse, a Big Six accounting firm.

That was down from $141 million raised in last year’s fourth quarter for young companies from Ventura County to San Diego County, but analysts said the change did not signify any long-term trend, which they see as remaining strong.

Nationwide, venture capitalists invested $1.5 billion in 351 companies in the first quarter, about the same volume as the previous quarter.

Mike Larrenaga, a managing partner in the accounting firm’s Costa Mesa office, said the drop in first-quarter funding regionally reflected the smaller size of deals. But the number of companies getting funding, he said, has held steady since the third quarter of last year when Price Waterhouse began its survey.

“It still seems to be pretty strong,” Larrenaga said of venture capital funding in the region.

Software, biotechnology and health care were the top three industries that attracted venture capitalists in the latest quarter. But funding also went to a variety of other businesses, including $50,000 to a Fullerton dentist; $4.2 million to La Salsa Holding Co., a Los Angeles-based restaurant chain; and $4.2 million to Liberman Broadcasting Inc., a radio station operator in Hollywood.

The biggest chunk of venture capital, $12.5 million, went to Neocrin Inc., an Irvine firm that is developing a new method for treating diabetes.

Analysts say the expanding pool of venture capital should continue to help entrepreneurs in health care. One fundamental reason: “What venture capitalists thrive on is an environment of change,” said James Morgan, president of the National Venture Capital Assn.

And Cornerstone Physicians, he noted, is “a great example of the ingenuity of the entrepreneurial mind.”

Seitz, 41, says he wasn’t smart enough to be a doctor. But in 1991, the graduate of Harvard Business School saw where health care was headed. HMOs were increasing their market share at the expense of traditional indemnity insurance as they drew patients away from solo physicians. Hospitals also were trying to buy or control physicians’ practices.

Seitz figured doctors wanted to regain control. Forming a medical group was one way to do that.

So in 1991, Seitz founded the company with $45,000 in cash. That year he helped 10 oncologists in Orange County form a medical group. A year later, he formed a medical group of 15 doctors in the Bay Area.

Today, with many doctors in California already part of medical groups, Seitz and his partner, Charles Birmingham, are going out of state where HMOs are now budding. Seitz says Cornerstone Physicians currently has contracts with doctors in Tucson, Ariz., and Dayton, Ohio, and is negotiating with doctors in a half-dozen other mid-size cities.

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Down but Still Strong

Southern California companies raised $92.5 million in venture capital during the first quarter, down 34% from the fourth quarter of last year. Software, biotechnology and health care firms were the biggest beneficiaries (figures in thousands):

1995 1994 Pct. 1st quarter 4th quarter change Software, information $23,150 $44,000 -47 Biotechnology 21,100 17,300 +22 Health care 9,817 23,788 -59 Distribution/retailing 9,736 22,750 -57 Communications 8,943 15,100 -41 Electronics, instruments 6,600 6,750 -2 Medical instruments 5,200 -- -- Entertainment 4,700 -- -- Hardware, peripherals 2,800 -- -- Consumer 390 400 -3 Industrial 50 11,025 -99 Total $92,486 $141,113 -34

Source: Price Waterhouse