An Interesting List….

Every year for the last nineteen years I have spent the final week of the year with a dozen of my closest friends (now there are also 14 children in our group) – some of these people have grown up to be real serious business executives! We reflect on the year just concluded and then prognosticate about the next 365 days. There is always a lot of smack talk which makes for a very entertaining week. One of my closest friends in the group is a senior partner at a leading Wall Street firm. The list below – much of it collected from various experts across his firm – captures many of the highlights for 2013. It is actually quite bullish – and not all of it is business related. Enjoy!

  •  The stock market did not turn negative (on a rolling YTD basis) at any point this year; that has only happened ten times since 1928
  • The total return of S&P since the March 2009 lows is 202% 
  • S&P added $3.7 trillion of market capitalization in 2013 to reach $16.4 trillion
  • US companies will earn close to $2 trillion this year, up 250% since 2000 
  • Excluding financial companies, US corporate cash balances are up 70% since 2007 
  • Twenty years ago, only 200 S&P companies repurchased stock; in 2013 that number was 425
  • Approximately $1.3 trillion of capital flowed into bond funds with 10-year notes yielding less than 3%
  • Global private equity dry powder is estimated to be $404 billion 
  • Rough math: the trend of household formation is 1.2 million units/year with nearly 300k of demolitions, which means that we need to build around 1.5 million homes (housing starts are running around 900k)
  • Texas is now producing more oil than the US imports from the Middle East 
  • Average value of farm real estate in the US has nearly doubled since 2005
  • The FDIC has taken control of nearly 500 banks since the financial crisis began in 2008 
  • Warren Buffett’s overall gain from 1964 through 2012 is 586,817% while the S&P increased 7,433%
  • EBAY sells nearly 10,000 cars a week on its mobile app
  • Over 400 million cups of coffee are consumed each day in the US 
  • Americans work 8.5 more hours per week than they did in 1979
  • From the 1992 highs, Chinese stocks are up ~ 50% while US stocks are up ~380%; over that same time period, Chinese GDP has grown 17 fold  while US GDP has grown 1.7 fold
  • Over 50% of start-up companies in Silicon Valley were founded by immigrants
  • The European Central Bank hiked rates in 2008 and 2011 – true story 
  • The Eurostoxx 600 index (SXXP) is up 17 of the past 19 months 
  • The corporate tax rate in Japan is 50% yet 70% of Japanese companies don’t pay taxes
  • Most all-time playoff wins by an NFL quarterback – Tom Brady (17)
  • Most all-time playoff losses by an NFL quarterback – Peyton Manning (11) 

 

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Hong Kong is on Fire…

Not literally but it might as well be given the smog in the air last week. Locals attribute it to the coal plants in Southern China and others say it is because of all the cheap fuels being burned by the hundreds, maybe thousands, of container ships and junks crowding the harbor.

But it all seems to work. An economic system with seductively lax rules, unfettered entrepreneurial spirit and no capital gains tax (!) continues to amaze me whenever I am back “home” (I spent much of my teenage years living there). While there last week I met with a number of local investors and asset managers – it is always energizing to see how excited they are to be operating in the shadow of China. Thought I might share just a few of my observations and highlight some of the recurring themes from those conversations – and close with a big insight:

  • Everyone is looking to expand into the numerous frontier Asian markets, especially China. No surprise there but people are also talking about Myanmar and Mongolia (apparently the miners in Mongolia are absolutely killing it). The other two most talked about countries were Malaysia and Thailand.
  • With this diversity and fragmentation many found the landscape confusing and chaotic. The laws and financial regulations in many of these regions are unclear, undocumented, inconsistent, poorly enforced yet the growing financial assets and wealth is intoxicating. I often heard comments that “we just have to be here.”
  • Consistent with the above, there was much discussion about distribution and access. Hong Kong, after much concern with the hand-over back to China in 1997, continues to be the undisputed gateway to China. But there was anxiety on how best to access (i.e., sell to) the emerging Chinese middle class. The definition of the mutual fund laws are under active debate now in Hong Kong. Today most mutual fund products are sold through less than a handful of local Chinese banks.
  • Surprisingly some fund managers saw the rise of social media as an important customer acquisition tool.
  • Local tax laws in China – a mess. Capital gains laws are still not resolved.
  • A lot of discussion around brand and the legitimacy of a US brand. Brands in the US have been imbued over many generations with attributes of trust and strength, but they today have no value in many emerging Asian markets.
  •  With the “one child” policy China is confronted with real challenges on best to support an aging population which has modest financial assets set aside for retirement. Pension systems are being overhauled and minimum contribution levels are being increased. Fortunately, when compared to the US, China and many Asian countries have consistently greater personal savings rates.

The subtext to all of this is the unspoken gradual transition of a population from having to rely solely on the state for all of one’s needs. That is what I find so fascinating with the maturing of the financial markets in Asia. With sophisticated new investment products, and with greater understanding of how these products are meant to work, the state is gently moving people to be increasingly self-reliant and empowering them to manage more of their own well-being.  

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Land of the Setting Sun…

With no disrespect to Japan at all, the population is aging so quickly, that new healthcare technologies must be deployed to navigate this dilemma….  

Over the past four days I have been meeting with government officials and executives of some of the leading healthcare companies in Japan (I am traveling with Governor Deval Patrick of Massachusetts as he promotes the extraordinary healthcare technology community in the Commonwealth). Meeting with Japanese leaders who are tasked with solving many of the same problems we have in the US – aging populations, role and costs of advanced medical technologies, novel insights into disease progression, etc – has been fascinating. But the Japanese have a unique set of challenges which profoundly defines their healthcare technology agenda.

First some context. Many entrepreneurs I met with this week talked about the “Lost Two Decades” of economic vitality. Imagine an entire generation experiencing nominal economic growth – how dispiriting, and frankly, quite damaging to the entrepreneurial community. Notwithstanding the current genuine enthusiasm for Prime Minister Abe’s economic policies to finally spur demand – “Abenomics” recently levied a 3% point increase in national sales tax rate concurrent with the pending termination of a massive $130 BN fiscal stimulus program – early results are mixed. Recent quarter trade balances swung to a deficit as import growth spiked. Many of these initiatives are structured to address the extraordinary levels of government debt which looms frighteningly over the rapidly aging population. Real income per worker is falling quickly which makes the future cost of healthcare more daunting to the next generation.

It is this economic background which now frames the healthcare technology agenda. Often executives in Japan referred to their society as a “super aging” society. Some analysts forecast that two-thirds of the population is older than 50; in 1970 that would have been well below 20%. In urban centers 18% of the population is over 75 years old. There does not appear to be significant investment in new hospitals, and given it costs roughly one-third to provide in-home care, new technologies are being deployed to both rationalize healthcare costs and improve remote care.

Due to recent natural disasters like the earthquake that crippled the Fukushima nuclear facilities, and the ever-present threats of future disasters, across the country the Japanese healthcare system is encouraged to provide more innovative and distributed care coordination systems. For example, nearly three years since the devastating tsunami hit Ishinomaki City, one third of the residents still live in compromised housing. This is exposing a debilitating set of social costs as well – 40% of residents have experienced a reduction in household income, 25% are reporting social issues, and 6% are at imminent risk of suicide.  

The healthcare priorities most referenced in Japan this past week tended to center around a few key themes:

  • Connected Health:  given the demographics cited above, lack of hospital capacity forecasted, and the constant fear of the next natural disaster, distributed systems to manage patients are paramount. Being able to provide “end-of-life” care in the home, manage patients in a rapid response manner, intelligent remote monitoring all appear to be top of mind with healthcare executives. Industry leaders demonstrated a wide range of platforms from voice activated psychological assessment tools, “quantified self” peripherals (wristbands, sensors, etc), to a “check-up” toilet by Toto – not kidding, Toto has developed a medical screening and monitoring system which is used exclusively in the bathroom – the ultimate connected device.
  • Robotics:  Not surprisingly, given strength of the Japanese robotics industry, there were numerous fascinating robotics platforms on display from motion-assist systems (like the “robot suit”) to rehabilitation devices.
  • Personalized Medicine:  But not necessarily in the manner VC’s in the States but think of it. There is the concept of “Me-Byo” which is a continuum of one’s state of health from “Healthy to Sickness.” New care models are forming which rely on more sophisticated IT infrastructure and are data centric and tend to be very consumer-centric (mostly app’s).

There was little discussion around predictive modeling and population analytics which is all the rage in the US today, in part driven by the advent of accountable care and the new healthcare insurance exchanges. The Japanese have a Universal Health coverage system which in 2016 will adopt a universal identifier numbering system which will serve as both one’s social security and tax ID; once this has been rolled out perhaps we might expect to see a greater emphasis on population management tools.

Only around the periphery of conversations was there discussion of a more holistic, population-centric approach to Japanese healthcare.  It does increasingly appear that there is a movement toward (as John Halamka, CIO of Harvard Medical System suggested) a system that is a health care system, not a sick care system.

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Big Data to Make Boston StreetSafe…

This is not just another Big Data story. Or just another post on innovation. Or another good read on entrepreneurship. But it does touch on all of those things. And it shows the very real impact innovation and big data can have on our lives.

A few nights ago I walked some of the toughest Boston neighborhoods with Ed Powell, the Executive Director of StreetSafe Boston, meeting former gang leaders. StreetSafe is an organization which puts young caseworkers on the most violent streets in Boston to intervene in gang activity – literally standing in the line of fire. Ed is a real inspiration himself, having grown up in these same neighborhoods.  The brilliance of this start-up is to focus resources directly at one of the most disturbing problems facing our cities today – kids killing kids. You see, Ed has recruited his own gang – a team of counselors, some of whom are former gang leaders (whom he calls “street workers”), to connect with current gang members to re-direct them toward job training and other social services. After a shooting in these neighborhoods, Ed’s “gang” is up most of the night literally preventing further retribution violence.

That night I learned a number of troublesome and distressing facts about Boston’s gang situation.

  • 70% of shootings in Boston happen on only 5% of the city’s blocks so the problem is readily identifiable.
  • One in 100 of Boston’s youth belong to gangs; those kids account for nearly 75% of the city’s gun violence.
  • There are estimated to be 120 gangs in Boston, but few if any national gangs. Our gangs tend to be smaller and organized on a hyper-local basis, literally a gang on each street – which makes for dramatic scenes of urban warfare given the proximity of these gangs. Watch a gang member on the street and see how his head is constantly swiveling.
  • A 1.5 square mile area accounts for nearly 80% of our shootings and murders – that is a really small area. It is effectively a one mile stretch down Blue Hill Avenue, which is monitored by only four of Boston police districts.
  • Not surprisingly these gangs are highly organized and are run like small start-up’s. Unlike years ago, drugs today are not the major contributor to gang violence in Boston, but rather historic grievances passed from one generation to the next. Coincidentally, my firm (Flybridge) met with a very interesting start-up out of Harvard today called Nucleik, which has developed software to map gang hierarchy (they were also featured on 60 Minutes this past weekend).
  • Recently enacted local legislation, which instituted 10-15 year mandatory prison sentences for gun shootings, has led directly to a significant spike in stabbings. For some reason, not yet understood, stabbings in the South End have increased even more dramatically this year.
  • Nearly 25% of gang shootings result in death.
  • The Big Data angle: Ed is aggressively capturing a number of variables to better characterize gang profiles – ethnicity, number of conflicts, age and race of participants, addresses, social connections, etc.

With better data capture, Ed believes he can more precisely segment gang populations and therefore develop more tailored, more appropriate solutions to reduce gang violence. Ed has the “street workers” carry diaries to log dozens upon dozens of data points when they are out on their shifts. Impressively, in StreetSafe’s third year of operation, his 20 “street workers” are engaged with 332 active gang members and have spent, on average, 52 hours with each youth – a highly leveraged business model. His four Case Managers, who manage transitions for these gang members into job training, remedial education or other social service programs work with 171 youths and have placed 67 of them in jobs.

And the initial data support his thesis of the power of this type of intensive intervention. The gangs which work with StreetSafe exhibited a 32% reduction in shootings over the first three years of engagement. Many of the neighborhoods studied showed even more dramatic reductions (Grove Hall down 46%, Bowdoin/Geneva down 54%, Morton/Norfolk down 47%), while some neighborhoods were only modestly down, and for some yet unknown reasons, Dudley was up 43%. Better analytics should bring more clarity to why that is. I hope to have one of our Big Data analytics portfolio companies look at this problem as well.

As StreetSafe expands, and more data are collected, it should be even more evident that this level of outreach will lead to far fewer fatalities. On behalf of the Boston Foundation, StreetSafe’s most significant benefactor, Harvard University is conducting a multi-year, multi-million dollar Big Data study to better understand the complexities of inner city youth violence, so there is an expectation of greater insights shortly.

But how do we calculate the ROI on fewer shootings? When you meet these kids, you conclude it is immeasurable.

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Is that the Fat Lady?

One of the more interesting press releases from the National Venture Capital Association (NVCA) is the VC Quarterly Fundraising announcement which came out yesterday for 4Q12. The data serve as a weathervane for the industry, indicating how much capital was raised – by firm, by geography, by investment strategy.

For a reasonably extended period of time – over the past four years – the VC industry has been investing more capital than it has been able to raise in new funds. I have been worried that this dynamic will end abruptly (i.e., badly) as one would logically conclude the investment pace needs to dramatically slow as firms invest the balance of their funds. Or fundraising would increase materially (but that has not happened). This imbalance is not sustainable.

The headline for this past quarter was quite positive; 42 funds raised an aggregate of $3.3 billion, which meant for all of 2012 $20.6 billion was raised by 182 funds, which compares favorably to 187 funds and $18.7 billion in 2011. Notwithstanding the more modest 4Q12 activity ($5.1 billion was raised by 56 firms in 3Q12, $6.2 billion by 54 firms in 4Q11), that felt understandable given the concerns and distractions surrounding the election and fiscal cliff, and frankly, the continued lack of meaningful and consistent liquidity. But some of the details buried in the data provide a more nuanced picture of 4Q12 fundraising activity.

  • The largest fund in 4Q12 was Sequoia’s $700 million Growth fund, which interestingly is only the ninth largest fund raised in all of 2012. The second largest fund in the quarter is only the 16th largest fund for the year. Clearly funds continue to trend smaller in size.
  • The top 5 funds accounted for 56% of all capital raised; the top 10 accounted for 75%. Clearly continued concentration of managers.
  • 17 funds were classified as “new” while 25 were “follow-on.”
  • Of the top 10 funds, one is in New York, none are based in Boston, two are healthcare, and two are deemed “new” – which is perhaps somewhat misleading – NovaQuest Capital (~$250 million) is the investment team from Quintiles which had been investing together since 2000 (in fact the fund is labeled “III”) and Costanoa Venture Capital ($112 million) is reported to be constructed with a number of existing positions spun out from Sutter Hill Ventures.
  • The average size across all 42 funds is $78 million but the median is $24 million.
  • The average size of “new” funds (including NovaQuest and Costanoa) is $34 million; excluding them the average drops to $14 million.
  • Of the 42 funds, 13 are less than $5 million in size while 5 are less than $1 million!
  • Many of the funds raised this past quarter appear to be “side car” funds of existing, longstanding venture firms.

Consistent returns and liquidity should reverse the fundraising trends driving the VC industry to be smaller and more consolidated. Given the strength of the public markets over the past year the overhang of the “denominator effect” should also be less of a concern in the near to medium term. Unfortunately it may take time for many LP’s to adjust their portfolio allocation models to increase exposure to VC. But that will happen. Hopefully the news in 90 days will hint at that.

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3Q12 Fundraising Data – Drum Roll Please…

The National Venture Capital Association (NVCA) and Thomson Reuters released today the 3Q12 VC fundraising data, which is a report I eagerly await as it is a barometer of the health of the VC industry. And while 53 funds were raised – the largest number since 3Q11 – only $5.0BN was raised which continues the quarterly trend downwards since mid-2011; there was $6BN raised in 2Q12. Year-to-date VC’s have raised $16.2BN which suggests that for the full year VC’s will raise between $21-$23BN – not too shabby given the Great Recession and the generally uninspiring returns for the past decade across the industry. In all of 2011 VC’s raised $18.6BN. But it is what is beneath the headlines that I always find fascinating…

  • No doubt the industry is shrinking (which over time will be very healthy for those firms that remain active) – year-to-date there was a 13% decline in the number of funds raised when compared to the same period in 2011
  • But over that same year-to-date period the amount of capital in 2012 was up 31% when compared to the first nine months of 2011 – which included arguably the worst two quarters in recent memory (2Q11 and 3Q11) for VC fundraising
  • Interestingly, of the 53 funds raised, only 16 were new funds (more on that later)
  • If one considers NEA a Silicon Valley firm (I know they are headquartered in Baltimore but they have a very large and successful west coast practice), the top five funds raised are in San Francisco and represented 55% of the capital raised
  • Nine of the top ten funds are in California; #10 (Pharos Capital) calls Dallas and Nashville home
  • The average size of fund raised in 3Q12 was $94M, although the median was $160M
  • This is more troubling – the average size of new first-time fund raised was $9M while the median was $2.5M (that is not a typo). In fact 19 of the 53 funds raised this past quarter were less than $5M in size
  • The largest new first-time fund raised was by Forerunner Ventures ($42M) which ranked #22 of the 53 funds raised
  • The largest fund raised in 3Q12 was the $950M growth fund raised by Sequoia Capital – the rich get richer!

So what is there to make of all this? While I expected more rapid contraction of the industry, the amount of consolidation at the top of the pyramid is dramatic. Arguably this implies a more challenging time for entrepreneurs as there continues to be fewer robust VC franchises available to them, and those that are active, will tend to be centered around San Francisco. On a more hopeful note though, VC returns have meaningfully improved in recent times so perhaps we may start to see over the next few quarters a greater fundraising pace across more firms – a trend well worth monitoring.

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Funky Times…

I spent some time this weekend looking at the recent VC funding data for this past quarter to see if any trends jumped off the page. While much of what I could discern in the data felt consistent with what I experienced in the market, there were some surprising themes buried in the details.

In general investment activity this past quarter continued to show some resilience: $7.0 billion was invested in 898 deals, which was an increase of 17% in dollar terms and 11% in number of deals from 1Q12 but importantly was down 12% in dollar terms and 15% in number of deals from 2Q11 (arguably a more relevant comparison). This past quarter, when annualized, was tracking to an investment pace below 2011’s aggregate amount of $29.5 billion but ahead of 2010’s level of $23.4 billion – so evidence of continued recovery from the depths of 2008/2009 recession.

Some other interesting high (and low) lights from the 2Q12 data:

  • A major storyline was the strength of the Early stage market. In terms of number of deals, the 410 deals ($2.4 billion) was the highest quarterly level since 1Q01 – over ten years ago. Average deal size was $5.2 million.
  • When Seed and Early were lumped together they represented 53% of all deals in the past quarter; in 1Q12 they were 46% of total deals and 48% in 2Q11. Maybe funds are investing earlier to extend the investment runway of their existing funds? It also reflects the continued robustness of the “micro-VC” model which has come of age.
  • Average size of Seed deals was $3.2 million, which frankly does not sound like a seed deal to me.
  • $2.1 billion was invested in 193 Later stage deals for an average size of $10.8 million. Later stage declined 10% on a dollars basis and 11% on number of deals basis over the past two quarters – which is not what I would have expected as VC’s look to invest closer to the liquidity event.
  • “First time investing” – that is the number of companies raising VC dollars for the first time was up 27% from the prior quarter and represented nearly 15% of dollars invested and 31% of all companies which raised capital this past quarter.
  • As a reflection of the broad rotation away from industries that are capital intensive with long product development cycles, life sciences was really hurt this past quarter, attracting only $1.5 billion of the total $7.0 billion invested (or 21% of the total). In 2Q11, the life sciences attracted 29% of all VC dollars. Notably biotech declined from $1.4 billion to $0.7 billion across those two quarters.
  • Software category strengthened this past quarter increasing to $2.3 billion across 290 companies which ironically was the same number of companies although only $1.7 billion in 2Q11.
  • Another fascinating storyline involved cleantech – which many analysts had written off for dead. On a dollars basis cleantech investing increased 8% from prior quarter but the number of companies was down 28%. The average deal size for cleantech was $18.9 million, and in fact, the top three deals in the quarter were all cleantech investments (Fisker Automotive, Harvest Power, Bloom Energy – together those three companies raised $360 million or 5% of all VC dollars invested last quarter).
  • The top ten deals in 2Q12 raised $876 million or 12% of all VC dollars. Interestingly, as the VC industry consolidates, are we also going to see more consolidation around which companies attract VC dollars? Worth watching.
  • Nothing terribly interesting when one looks at the region data. Silicon Valley still dominates having attracted $3.2 billion of the $7.0 billion invested (46%) which is up strongly from 39% in 1Q11. New England, which remains comfortably in the Silver Medal position at $843 million invested, was only 26% of the amount for Silicon Valley. The New York Metro region attracted $567 million, which is a 52% increase from the prior quarter but down 15% from the prior year’s second quarter.
  • And one of my favorites: there were 10 states which had zero venture deals and 27 which had three or less – another sign of VC consolidation – many states are at risk of being left behind as the VC industry consolidates.

Obviously the venture industry is now comfortably a global phenomenon so I also looked at some headlines from overseas…  

  • Interestingly, and quite surprisingly, Europe VC investing activity increased by 37% to 1.26 billion Euros in 273 deals this past quarter.
  • China, though, decreased by 45% to $1.9 billion in the first half of 2012 when compared to first half 2011 (which compares to $13.1 billion in the US) across 103 deals, which was down 38% year-over-year (as compared to 1,707 deals in the US in first half 2012).

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