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Dazzling VC Activity in 1Q19…

At the 2018 year-end holidays, venture capitalists celebrated an unprecedented year of investment activity, certain that it could not be repeated. Now that the books on 1Q19 are closed, the pace seems to have only modestly unabated from an historic 4Q19 with $32.6 billion invested in 1,853 companies. All of this was punctuated by the Lyft IPO in the second to last day of the quarter.

While the activity in 1Q19 was indeed down from the prior quarter, it was still the second highest month in nearly 20 years. Now that the S&P 500 Index is effectively back to its all-time high set in September 2018, the anticipation of sustained unicorn IPO activity has bolstered investor confidence. All of this is further energized by the 3.2% GDP growth in 1Q19.


1Q19 VC

Evidence of continued concentration of capital, by company and by venture capital fund, persists. The top ten deals accounted for $10.3 billion of the quarter’s activity (0.5% of the deals represented 32% of the capital). As encouraging as the overall 1Q19 activity might appear, there are also some other notable vexatious trends buried deeper in the data. Seed investment activity was largely flat in terms of dollars invested, but there was a marked reduction in the number of seeded companies – nearly a 200 company decrease quarter-over-quarter. The median seed round was $1.0 million at a pre-money valuation of $7.5 million.

Even more notable was the decline in the number of early stage financings (Series A and B) from 1,013 to 828 quarter-over-quarter. Might this suggest increased investor aversion to early stage risk? The median round size in 1Q19 was $8.2 million which is substantially larger than the 2018 median of $6.0 million. In aggregate, median pre-money valuations for the early stage category was $32.0 million, up sharply from the $25 million for all of 2018. If investors were nervous, they certainly seemed to be at risk of over-capitalizing companies at historically high prices. Nearly 42% of all early stage financings were greater than $10.0 million in size, accounting for almost 90% of all the capital invested. There were 15 “early stage” rounds greater than $100 million. Quite clearly concentrated investments around fewer, presumably, very high potential opportunities.


Median Pre-Money Valuations

1Q19 A B Valuation

Nearly $21.4 billion was invested in late stage opportunities (Series C and D) in 1Q19 which was two-thirds of all capital deployed in the quarter. Of the 538 late stage investments, 62% of them were greater than $100 million in size. Another sign of capital concentration. Quite remarkable was the dramatic step-up in pre-money valuations when companies were able to graduate from Series C to Series D, with median Series D valuations of $345 million.


Median Pre-Money Valuations

1Q19 C D Valuation

There were a handful of other interesting items in the 1Q19 data, including…

  • Corporate venture capital investors participated in 17.1% of all deals this past quarter; those deals accounted for nearly 60% of all dollars invested. Quite clearly, corporate investors tend to join later stage syndicates, when the start-up has solutions that are ready for prime time
  • Somewhat counter to the theme of concentration, only 30.1% of all financings were for software companies which is down from the 34.8% for all of 2018. A number of new categories are emerging (autonomous vehicles, etc) which is leading to a greater diversity of sectors.
  • Geographic concentration continues apace though. Three MSAs (Bay Area, New York metro, Boston) captured 75% of all 1Q19 capital invested yet represented only 40% of the deals.

The aforementioned Lyft public offering accounted for nearly 50% of the quarterly exit activity (based on the $21.7 billion valuation at the time of the IPO which now seems like a rather distant memory). There were 137 exits of venture-backed companies in the quarter, of which only 12 were IPOs – the dramatic fall-off was due in large measure to the government shut-down. The top 10 M&A transactions generated $18.7 billion of proceeds; between those transactions and Lyft IPO, 87% of the exit value went to 8% of the transaction. Further concentration.

A word of caution. The Economist recently reported that the dozen recently and soon-to-be listed unicorns recorded operating losses of $14 billion last year. Cumulative losses for those companies were $47 billion which is precisely the amount the entire venture industry invested in 2013 (or nearly 5x all the capital raised by venture firms in 1Q19 – see below).

One of the truisms of the venture capital industry is that liquidity (or the promise of it) drives fundraising activity. Notwithstanding the recent difficult trading dynamics of Lyft, the very successful Zoom and Pintrest IPOs provide hope that the pipeline of unicorns will finally be released from the private market corral. This past quarter 37 funds raised $9.6 billion with a median fund size of $103 million, which is up substantially from the 2018 median of $80 million. The average fund size was $259 million, given that the top five funds raised accounted for $5.4 billion (14% of the funds raised captured 56% of the dollars). Notably, there were 11 funds raised which were smaller than $50 million, and only two of them were first-time funds raised and they were so small that they did not even register in the data for capital raised. Evidence of even further concentration.

Determining the precise size of the US venture capital industry is challenging, but analysts tend to peg it at around $300 billion of assets under management (of course, SoftBank’s $100 billion Vision Fund complicates this even further). Given that, it is often useful/instructive/entertaining to put all of this activity into some broader context.

  • Blackstone in the past twelve months alone has raised $126 billion in investable assets, effectively equivalent to what the US venture capital industry invested in all of 2018.
  • Berkshire Hathaway has a cash balance of $110 billion.
  • Last month, the Saudi national oil company Aramco disclosed preliminary plans for its $100 billion IPO, which is expected to come to market in the next 12 – 24 months. It was also revealed that Aramco is the most profitable company in the world given it’s absurdly low $3 per barrel oil extraction costs, making it wildly more profitable than venture-backed SaaS companies.
  • BlackRock’s $2 trillion iShares exchange-traded fund had $31 billion of inflows in 1Q19 – as much as the entire US venture industry invested.
  • And Tianhong Yu’e Bao money market fund in China, which is part of Ant Financial which is affiliated with Alibaba and has 588 million investors, has ~$168 billion under management. That fund was launched in 2013. Ponder that.

And in the possible good news category for 2Q19, the infamous yield curve inversion in March, which is one of the most reliable recession predictors, seems to have corrected itself. We will see in 90 days.


yield curve


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Quarterly Check-up On Healthcare…

Notwithstanding the quite significant stock market turmoil for publicly traded healthcare companies in recent months, the level of private investment actitivty continued to be quite strong this past quarter. According to Rock Health, 1Q19 registered just under $1.0 billion of investments made in 61 healthcare technology companies, which while below the trailing two year quarterly average of $1.4 billion, still suggests an annual investment pace running toward $4.0 billion. StartUp Health, which reports global funding data and inlcudes non-software healthcare companies, tabulated $2.8 billion invested in the quarter.


It certainly appears that 2018 may well have been a high-water mark for digital health funding. Over the last five years, between 300 – 375 companies were funded annually in the healthcare technology sector. A more modest investment pace arguably will lead to a greater degree of consolidation, from which stronger companies should emerge. It also suggests that management teams and investors should be even more vigilant about expenses to ensure appropriately long cash runways to hit value-creating milestones.

A review of Rock Health’s analysis of M&A activity in the healthcare technology sector is quite illuminating. Given the lack of sector-specific IPOs, the M&A dynamics become even more important to assess. Clearly the overall level of activity is trending down in terms of number of transactions while the percent of “in sector” consolidation among healthcare technology companies is consistently just over half of total merger activity. While mostly conjecture, much of that consolidation is likely uninspiring for the selling shareholders. Much of the other M&A activity likley reflects larger companies back-filling for gaps in their own product roadmaps, particularly in light of the dramatic vertical healthcare mergers (CVS/ Aetna, Cigna/Express Script). A strong case can be made that once the re-architected playing field emerges, the pace of strategic M&A will acccelerate as companies seek to fortify positions in a particular market.


Broadly speaking, there is a high level of venture investor enthusiasm for companies that improve both affordability and access. There has also been a notable increase in investment in care coordination and monitoring start-ups, in part due to the recent establishment of billing codes by Center for Medicare and Medicaid Services (CMS) for those products. In light of staggering income inequities highlighted below in the Axios analysis, it is not surprising that recent investment activity has tended to focus on businesses that are outcomes based and have the ability to take on risk, driving value-based models. The 2018 poverty line for a 4-person household was $25,100. Those families are paying between 14% – 35% of income on healthcare. What are the innovative models that can lessen the burden for those Americans?


Income vs HC Spend

The early stage healthcare technology community does not operate in isolation. Interestingly, Bain & Co. calculated that $63.1 billion was invested in healthcare transactions by the private equity industry in 2018, an increase of 50% from 2017 and the highest level since 2006. Over $35 billion of that activity was in 159 provider deals, as broadly speaking, there was a trend to transition away from acute care settings into more specialty, consumer-centric care models. These new entities arguably will look to early stage innovative solutions to make their offerings more effective and outcomes oriented. It was not surprising to see MobiHealthNews report on App Annie data that showed global medical apps downloads was more than 400 million in 2018, which was 15% ahead of the 2017 pace.

Corporate venture capitalists have participated in approximately one-third of all healthcare technology financings consistently over the last five years (as compared to all other sectors which has corporate participation in the ~15% range). In particular, the healthcare systems have been quite active venture investors, in large measure as a strategy to incorporate novel solutions into clinical workflows and to generate non-traditional revenue streams, all encouraged by the transition to value-based care models.

According to an analysis prepared by Axios, the average healthcare system generated nearly twice as much operating income from investment activities than from clinical activities in 2017. Interestingly, the twelve largest not-for-profit health systems reported cumulative investment losses in 2018 of $3.7 billion due to 4Q18 public equity turmoil. In 2017, aggregate investment gains were $11.4 billion for those same dozen providers.

In sharp contrast, it was recently reported that IBM Watson – yet again – will be retooled and that Watson for Drug Discovery will no longer be sold. This follows the June 2018 announcement that Watson Health was scaling back its offerings targeting the provider segment. Many large legacy vendors struggle with how best to incorporate novel AI and ML solutions into their broader healthcare suite of solutions, opening the door for innovative start-ups.

Given the enormity of the market opportunities, as well as the promise of new healthcare technology solutions coming to market, the recent public equity performance in April 2019 was especially incongruous. Political uncertainties that will directly inform healthcare policies post-2020 (role of government in healthcare, pricing transparency, etc) have pushed the S&P 500 Healthcare Index down 4.4% in April month-to-date, generating losses of $150 billion in market capitalization. Notwithstanding that healthcare was the best performing sector in 2018 of all industry sectors, year-to-date 2019 healthcare stocks are lagging at a near historic rate (only up 4.2% versus S&P 500 which has increased nearly 16%). Ironically, healthcare is expected to exhibit the strongest earnings growth of all sectors in 1Q19 per FactSet with 3.9% quarterly growth (although the pharmaceuticals sector is expected to decrease by 4.0%). Currently, the healthcare sector is trading at 15.3x P/E ratio versus 16.9x for the broader stock market.

Sounds like a “buy” to me.


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Colombia – Peace Dividend Boosts Healthcare…

What a fascinating time to have traveled in Colombia. In addition to being scorching hot (it is bisected by the equator), the country recently settled a painful 55-year Marxist uprising, to say nothing of the extraordinary level of despair on its eastern border with Venezuela. Last week there were large street protests in the capital city of Bogota against proposed changes by President Duque to adjudicate the nearly one million pending cases from the half-century long conflict that claimed 250k lives.

Colombia measures over 440k square miles with a population of 50 million people, which is estimated to have just expanded by over one million Venezuelans fleeing the repressive and wholly incompetent regime of President Maduro. The last two decades saw dramatic GDP growth, which is estimated to be $345 billion in 2019 by Trading Economics (or approximately $7k per capita). Colombia is deemed to be one of only 18 “megadiverse” countries in the world given the level of bio-diversity of the environment.

Annual GDP


Notwithstanding the very high level and very visible police and military presence, the peace accords appear to have directly benefitted the well-being and health of the Colombian population. Against initial expectations that a country which had weathered such a grinding protracted insurrection would have an inferior and devastated healthcare infrastructure, the World Health Organization ranked Columbia #22 in the Top 100 Health Systems with an overall Healthcare Efficiency Index of 0.91. For context, France ranked #1 scored 0.99, while the United States was ranked #37 with an index of 0.84. Sierra Leone was ranked last at #191 with 0.00 score.

The Revolutionary Armed Forces of Colombia (FARC), which led the insurgency for all those years, numbered 18k militia at its peak and survived on a diet of extortion, kidnaping and drug smuggling. Estimates are that the organization earned $300 million annually, but over the last decade, the FARC became less of a disruptive force as the government pushed aggressively to integrate the combatants. Notably, in 2008, the Venezuelan President Chavez recognized the FARC as the proper Colombian army, which furthered strained relations between the two countries. Sadly, locals told us to save our smaller bills for the numerous Venezuelan pan-handlers which were more visible than the police and military.

In the 1980’s, the Colombian government made a massive commitment to healthcare. In 1993 only 21% of the population was covered by any health or social security programs; by 2012 that number was 96%. Notwithstanding that according to the most recent data (2017) from the National Administrative Department of Statistics that 26.9% of the population lives below the poverty level (7.4% is in “extreme” poverty – there are three billionaires with aggregate net worth of $17.1 billion per Forbes), Colombia has become one of the main destinations for medical tourism, particularly for cardiology, neurology and dental procedures. In fact, the microkeratome and keratomileusis techniques (affectionately known as LASIK) were invented in Colombia.

Determining Healthcare Efficiency Index is complicated and wrestles with a number of variables to assess progress against three principle goals: (i) has the health of the population improved; (ii) has the responsiveness of the healthcare system increased; and, (iii) is there intrinsic fairness and reduced financial risk to all. Colombia ranks #49 in healthcare expenditures per capita globally and now has average life expectancy of 74.8 years (71.2 for men, 78.4 for women). Good progress.

The success of the Colombian healthcare system shows up in other important metrics, particularly in light of the civil strife for so many years. The country ranks #119 of the 183 countries monitored for incidence of suicides with 7.0 per 100k which compares quite favorably to other South American countries (Uruguay had 16.5 per 100k, Chile had 9.7 per 100k). According to the International Diabetes Foundation, 7.4% of Colombians had diabetes which ranked it an attractive #86 of the 194 countries tracked. Unfortunately, the incidence of obesity is 20.7% according to recent World Health Organization data.

The “peace dividend” appears to be paying off in other interesting ways. According to recently published country data by Numbeo, Colombia ranked #54 on the Pollution Index with a score of 61.7 of the 106 countries measured. As a point of comparison, Finland at #1 scored 11.9 with the United States at #21 with a 34.0 score; choking at the end of list was Mongolia, ranked #106 with score of 93.1.

Of perhaps of greatest importance, Numbeo ranked Colombia #57 with a score of 108.4 on the Quality of Life Index, which while a significant distance from #1 Denmark at 198.6, it was comfortably ahead of Egypt in last place with 84.0. The United States eased in at #13 with score of 179.2.

While there, I learned of an island off the western coast of Colombia called Santa Cruz del Islote (below), which may have dinged Colombia’s Quality of Life score. The size of just over two football fields (~130k square feet), this island is home to 1,250 people and lays claim as being the most densely populated island in the world. Good thing for the residents of del Islote that they are not separately ranked.

Santa Cruz del Islote


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Flare Capital Team Expands – Yet Again…

Today we are thrilled to welcome Parth Desai to the Flare Capital investment team as a Senior Associate. As a partnership we will make literally hundreds of decisions together every year but the decision to add to the team is a profoundly important one and one that is infrequently done. Parth’s background makes him almost uniquely prepared to help us right away.

Most recently, Parth was with the investment team at New York Presbyterian Hospital, focused on a wide array of innovative solutions to improve both the quality and the ability to access care while driving improved patient outcomes. Prior to his time there, he spent nearly five years at Deloitte Consulting advising provider systems as they re-architected their care models, often to arrange novel risk-bearing arrangements. Right after graduate school, Parth was a Health Policy Analyst for the Massachusetts House of Representatives, where he worked on critical oversight legislation to oversee the pharmaceutical industry.

What also struck us was his deep commitment to be in Boston. In addition to having “BOS” in his personal email address, Parth earned his Master of Arts in Clinical Medicine and a Master of Public Health in Health Management and Policy, both from Boston University, as well as graduating from Boston College with a BS in Biology. Admittedly, we pushed back hard when he asked if we could somehow work “Boston” into the name of the firm.

There is another important dimension to Parth joining the firm. He is a member of the great Flare Scholar Class of 2018. He is well known to us and joins Vic Lanio as the second Flare Scholar to join the firm. Since inception there are now 109 former and current Flare Scholars, who tend to be younger healthcare technology executives and academics from across the country. What unites them is their passion about the transformation of the business of healthcare. Many of our Scholars are from our strategic investors while others are studying at leading graduate schools around the country. Serving as our “ambassadors” back in their home markets, the Scholars assist with diligence but also identify emerging talent who may want to work in many of our portfolio companies or launch the next great start-up.

Please welcome Parth to the team…

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Do Rich People Live Longer?

Undoubtedly – by almost 15 years according to a landmark National Institutes of Health study which looked at over 1.4 billion de-identified U.S. tax records from 1999 – 2014, comparing them to associated death records from the Social Security Administration. According to the National Center for Health Statistics (May 2017), life expectancy at birth increased from 72.6 to 78.8 years between 1975 to 2015. This improvement has been attributed to dramatic advances in medical technologies as well as resources devoted to enhanced public health and education programs. As impressive as this is, whether you are rich or not actually appears to play a greater role in how long you will live.

This is obviously a very complicated analysis, compounded by almost innumerable variables such as local health behaviors (e.g., prevalence of smoking, access to quality food and housing), strength of local governmental assistance programs, societal stress, environmental conditions. Interestingly, the study concluded that the quantity and quality of local medical care was not a significant factor when accounting for such dramatic disparity. The pattern that emerged most forcefully in the data was that proximity to wealthy cities with both high levels of government spending and quality education accounted for higher life expectancy rates across all economic strata.

Each 5-point increase in percentile consistently added  about 0.8 years of additional life expectancy, notwithstanding that the absolute change in income could be dramatically different. For instance, going from the 95th percentile to the 100th was an increase in income from $224k to $1.95 million, yet going from the 15th to the 20th percentile was only an increase in income from $14k to $20k.




Shockingly, men in the lowest 1% of household income were expected to survive until only 72.7 years of age while men in the top 1% enjoyed a life expectancy of 87.3 years. Men in the lowest percentile had a life expectancy equivalent to the mean expectancy for those in Pakistan and Sudan, while at the other end of the spectrum, those men had the highest expectancy of all countries measured. The wealthy had relatively higher survival rates well into their 70’s while the poor immediately experienced deteriorating survival rates.

nihms783419f1 (3)


The Federal Reserve Board recently estimated that 40% of all Americans would not be able to afford an unexpected $400 expense, an incredibly stressful condition to be in. Furthermore, 25% of the respondents shared that they skipped a necessary medical procedure, while 20% were not able to cover their monthly expenses. Axios reported that total U.S. 2018 healthcare costs were $3.65 trillion or $11,121 per person. As healthcare spending in the U.S. converges on nearly 19% of GDP, the Labor Department recently published data that showed almost 8% of all consumer expenditures is for healthcare, nearly 5.5% of which is just for insurance. Obviously, the burden of healthcare costs is significant and may account for why Gallop polling data points to nearly 70% of all Americans in favor of a single payor model.

The distribution of wealth in the country is uneven and relatively concentrated in mostly a number of coastal counties and the Upper Midwest. The disparity can be as much as a 10x difference, although even within counties there are obvious differences by neighborhood.


Income by County


Interestingly, when looking at life expectancy by county, that map (below) shows a similar distribution as the median household income map above. The counties with lower life expectancies have been particularly hard hit by “diseases of despair” such as those associated with substance abuse and suicide. The Institute of Health Metrics and Evaluation identified 21 less affluent states where the risk of “dying young” from those conditions was particularly high. According to Axios, drug overdose, suicide and alcohol abuse accounted for over 150,000 fatalities in 2017, contributing to a disturbing decline in the life expectancy rate in 2016 to 78.7 years.


Life Expectancy At Birth


Concurrent with this slight decline in life expectancy has been the accelerated wealth inequality in the U.S. Over the last ten years, more than $30 trillion of household wealth was generated, in large measure due to the bull market in public equities. Surprisingly, though, the median American household net worth declined by 34% over that same period. At the end of 2018, household net worth was $104.3 trillion according to the Federal Reserve, which was down 3.4% in the last quarter. Interestingly, the household savings rate was 6.7% in 4Q18.

Economists and entrepreneurs are now focusing increasingly on the “Longevity Economy” given there are already 600 million people over 65 years old worldwide. Americans over 50 years old accounted for nearly $8 trillion of economic activity in 2015. Innovative new forms of housing, consumer products and healthcare technologies will need to be developed to serve their unique needs. Much of this innovation will likely target a relatively more affluent customer base.

An October 2018 Pew Research Center survey showed that 43% of respondents thought that the rich got that way by working harder, while 42% felt that they simply had more advantages. And while the life expectancy / wealth relationship is an incredibly complicated issue and will require exceptional leadership to even begin to address, one conclusion in the data is very clear: communities that enjoy greater levels of residential economic integration demonstrate overall greater life expectancies across all strata.

BREAKING NEWS: The Trump Administration today announced dramatic cuts today to Medicaid entitlement programs as part of the proposed 2019 budget.



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What a Freaking Crazy Year…

Who thought that it could get any better? After nearly $83 billion of venture capital was invested in 2017, this past year clocked in at nearly $131 billion; in fact, 4Q18 registered $41.8 billion or nearly half of all of 2017 activity, according to National Venture Capital Association and PitchBook data. The level of activity was unprecedented and has left some industry observers somewhat befuddled as to the current state of the venture capital industry.

2018 VC

As always, the headlines risk obfuscating a number of significant trends and themes. Notwithstanding that the amount invested in 4Q18 was $10 billion more than just the immediate prior quarter, nearly 10% fewer companies were financed (2,071 in 4Q18 vs. 2,282 in 3Q18), further underscoring the recurring theme of capital concentration with fewer companies raising disproportionately larger rounds. Across the board, average deal size was markedly greater in 2018 than for any of the last dozen years (for later stage deals, average round size of $43.8 million was nearly 3x that of 2007).

2018 Round Size

Driving this concentration of capital is the proliferation of very large later stage rounds, most notably the $12.8 billion investment in Juul. In 2018, there were 198 financings greater than $100 million in size and they totaled $61.1 billion (2.2% of all deals in 2018 accounted for 46.7% of the dollars invested). In fact, over 61% of all financings were greater than $25 million in size. At the end of 2018, there were 120 unicorns parading around (CB Insights counts 315!). The underlying reasons for this phenomenon likely reflect the investment activities of some relative newcomers such as SoftBank’s nearly $100 billion Vision Fund (more on that later) as well as attractive (i.e., elevated) private market valuations, certainly as compared to public market valuations. With the explosion of the amount of venture capital looking to be invested, it is not surprising that round sizes have so dramatically increased as have later stage valuations, hitting $325 million in 2018 (up from $137 million in 2016).


2018 Valuations

At its essence, the debate about company valuation turns on ownership levels. Advanced-HR recently published fascinating ownership data which concluded that for post-Series A companies over the last eight years, investors owned 45.4%, founders held 35.6%, and employees were granted 16.6% of the equity, typically in options. This is even more interesting in light of the chart above which suggests that early stage venture-backed companies will have raised on average about $17 million.

Whether this level of activity is good or bad is difficult to determine. The venture capital industry has a chronic problem of “capital absorption” – too much capital, too quickly undoubtedly leads to considerable and widespread heartache. While there has been a five-year steady decline in the number of angel/seed stage financings, early and later stage investment activity have remained relatively constant with between 700 – 800 early stage and 450 – 550 later stage companies funded quarterly, suggesting that there has not (yet) been a “crowding out” effect.

One other potential explanation is that these enormous financings are meant to finance companies to the point of being self-sustaining (free cash flow positive) and not ever have to rely on public markets to raise additional capital. Arguably, many of these later stage companies can now address global markets which both requires significant additional capital but also offers a path to build much larger businesses.

Industry analysts are quite focused on the impact of SoftBank’s Vision Fund. At the end of 2018, $45.2 billion of the fund had already been invested in just 18 months according to Dow Jones (perhaps overstated due to the transfer of some large assets into the fund upon formation). This level of activity is unprecedented in the venture industry, both in terms of size and pace from one investor. It underscores another important development involving corporate venture capital entities; nearly 51% of all financings in 2018 had at least one corporate investor in the syndicate. Not surprisingly, most of this activity was in later stage deals. Corporate investors tend to be less valuation sensitive as they are also solving for a range of strategic issues.

The Vision Fund has also triggered an arms race among some of the larger venture capital franchises, most notably with Sequoia’s recent $8.0 billion new fund which closed in 3Q18. For all of 2018, $55.5 billion was raised by 256 funds, signaling strong continued limited partner interest in the asset class. The amount raised in 2018 was nearly 5x the amount raised in 2009 during the depth of the Great Recession. While the average fund size of $226 million is not that informative (median was $82 million), it is instructive that 11 funds larger than $1.0 billion were raised in 2018, again pointing to further capital concentration among investment managers (43% of all capital raised in 2018 went to these 11 firms). Importantly, first-time funds were quite well-received having raised $5.3 billion across 52 funds, both amounts significantly ahead of any year in the last dozen years.

2018 Funds Raised

Much of this limited partner interest in the venture capital asset class stems directly from the encouraging signs of consistent and meaningful investor liquidity. For all of 2018, there were 864 exit events, although the activity in 4Q18 was the lowest level in the prior 27 quarters. Of that activity, 604 of those were M&A transactions valued at $54.4 billion in aggregate, on average nearly 4.8 years after initial funding with a median valuation of $105 million. Unfortunately, this may be tricky for some companies as post-Series D average valuations in 2018 were $325 million.

There were 85 venture-backed IPOs in 2018 raising $63.6 billion in proceeds, 22 of which were valued north of $1.0 billion. This arguably overstates how robust the exit market really is; the average time for a venture-backed company to get public in 2018 was 12.6 years. Cleary IPO activity is a terrific proxy for the health of public capital markets, but they are financing events and only put a company on a path to generate future venture investor liquidity.

Notwithstanding approximately $75 billion of “dry powder” (capital raised but not yet committed), it is somewhat precarious to contemplate the amount of invested capital in aggregate that would need to be supported should conditions meaningfully deteriorate. Venture capitalists are forever struggling with the “sunk cost” dilemma of investing good money after bad. If a particular portfolio company is struggling, at what point does the investor stop supporting it or look to sell? It is quite common for early stage investors to reserve $2 – $4 for every dollar initially invested. Strikingly, the Silicon Valley Venture Capitalist Confidence Index fell to 3.2 (out of 5.0) in 4Q18, which is notably down from 3.5 in 3Q18 and is the lowest point since the Great Recession. Interestingly, the discount in the secondary market for venture capital partnership interests increased from 20% in 3Q17 to 25% in 3Q18 according to Setter Capital.

Invested vs Raised

FactSet recently reported that analyst estimates for 1Q19 S&P 500 corporate earnings were revised downward to a 1.9% decline, which was a dramatic revision from the 7.0% increase expected in September 2018 for 1Q19 earnings. While the calculus is complicated, and undoubtedly clouded by the government shutdown and trade tensions, a deceleration in corporate earnings will both impact general investor sentiment and public equities. In point of fact, according to Morningstar, in December 2018 a staggering record $143 billion of capital rotated out of actively managed investment funds into passive vehicles in the United States. The impact of these capital flows on the IPO market is likely not helpful.

While perhaps foreboding, the story in China may also be quite revealing. Stock performance for all of 2018 in China was very poor, with major stock indices in Shanghai and Shenzhen showing losses of approximately 25%. According to Wind data, 395 public companies on those two exchanges will generate cumulative operating losses between $43 – $50 billion for 2018, which will be the worst performance in a decade. Concomitantly, Chinese venture firms raised $44.8 billion which was down 13% from 2017 levels, according to Zero2IPO. The number of investments dropped 10% to 4,321. The South China Morning Post just announced that venture deal activity declined 60% in January alone. There are estimated to be 186 unicorns in China, with 100 having been created in 2018 alone (although only 11 in 4Q18). And there were only 24 Chinese technology IPOs in 2018, suggesting there are now a number of nervous VCs there.

Against all of this venture capital data, the World Inequity Database released other data pointing to perhaps even more disturbing areas of capital concentration. The top 400 citizens in the United States have a combined net worth that equals the bottom 60% (~150 million people). According to Axios, at the end of 2018 there were 2,208 American billionaires. Globally, the 26 most wealthy people posses the same wealth as 50% of the world’s population according to Oxfam. Staggering.


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Healthcare Bubble Concerns – Likely Overblown….

By nearly every measure, 2018 was a banner year for the venture capital industry, particularly in the healthcare technology sector. Over $130 billion of venture capital was invested across all sectors, easily eclipsing the prior high-water mark in 2000 and nearly 4.8x of what was invested a decade ago. While certain sectors may now be demonstrating bubble-like tendencies, the data also reflect the activity of Softbank’s ~$100 billion Vision Fund and other late start cross-over investors. In the healthcare technology sector, according to Rock Health, $8.1 billion was invested in 368 companies which is notably greater than the $5.7 billion invested in 2017 (StartUp Health pegs 2018 at $14.8 billion globally).

But have we entered a healthcare technology bubble?

First, some context. Over the past five years, healthcare technology investors have funded consistently between 300 – 375 companies each year. Between 2014 – 2016, the amount of capital invested annually ranged between $4.1 – $4.7 billion. The average deal size spiked to $21.9 million in 2018 but otherwise had been consistently between $14 – $16 million since 2014. In 2011, 92 healthcare technology companies raised $1.1 billion (average deal size was $12.0 million). Of the 368 financings in 2018, only 11 were greater than $100 million in size. Importantly, there were only 110 M&A exits and no IPOs in 2018.


Notwithstanding the herd mentality tendencies of venture capitalists and that chronically there is a “capital absorption” issue (that is, too much capital invested too quickly in any sector depresses returns), the healthcare technology sector does not exhibit the classic characteristics of a bubble. In 2011, this sector accounted for just over 2.4% of all venture dollars invested, reaching only 6.2% in 2018. Classic bubble markets tend to be awash in hype – either at the novelty of the companies, the seductive rates of growth, dramatic and sudden liquidity, or the ability for a “quick flip” (see all things crypto currencies) – arguably none of these attributes are present today. Importantly, nearly 60% of all healthcare technology investors in 2018 had invested in multiple companies in the sector, suggesting some level of investor understanding and commitment to the sector.

Clearly, healthcare is an enormous market going through a remarkable transformation and that has drawn a lot of attention. At over $3 trillion of annual spend, much of which is being reapportioned between new and incumbent players, healthcare is nearly 15x the size of the U.S. advertising industry, estimated to be approximately $200 billion. And look at the staggeringly valuable companies created over the last two decades as the advertising industry was rearchitected (see Google, Facebook, etc). Furthermore, with the Democrats’ successes in the mid-term elections, many analysts anticipate expanded public healthcare proposals which will further drive interest and activity (see New York City’s recent $100 million proposal for expanded primary care services).

Many start-ups in the healthcare technology sector today are relying on quite well-understood technologies which have been widely utilized across other sectors for many years; often times the innovation is around the novelty of the business model, meaningfully limiting the true technical product development risk. The problems healthcare technology entrepreneurs are solving are quite obvious and indisputable (need to lower costs, improve outcomes). Overall healthcare industry growth rates are modest and somewhat predictable. The battle is to reallocate dollars to more efficient, more efficacious solutions and approaches.

And while there are some encouraging signs about investor liquidity and exits, there certainly has not been the explosion of irrational outcomes far in excess of underlying fundamentals. Venture capitalists across all sectors always bemoan the lack of consistent exits; recent exit activity in the healthcare technology sector suggest prudent consolidation of sub-scale companies (most of the exit values were not disclosed, strongly suggesting underwhelming outcomes). However, this does not suggest that many of the later stage private financings today are not fully valued and priced for perfection.

Arguably, the healthcare technology sector is showing signs of maturation. Larger round sizes may simply reflect that many companies are now scaling. Undoubtedly, it also reflects that some healthcare technology companies have lower gross margins due to a greater level of (lower margin) services and longer sales cycles, all requiring more capital. The sales of Flatiron to Roche for $2.1 billion and PillPack to Amazon for ~$750 million underscore the attractiveness of healthcare technology companies to companies in adjacent sectors, suggesting a depth to the acquirer universe for break-out companies in this sector.

Public stocks in this sector have also performed quite well: the Rock Health “Digital Health” Index increased 21.6% in 2018 which compares very favorably to the S&P 500 which declined over 6% for the year. Strong public stock performance should create a cohort of acquirers with attractive currency for further consolidation. Notwithstanding 4Q18 market volatility, the healthcare industry ended 2018 trading at 20.0x P/E versus 17.7x for the S&P 500. And so far, so good in 2019.

2019 ytd

It may be instructive to look at the funding data for the “cleantech” sector in the 2000’s. Like healthcare, the energy sector is a large regulated industry which also attracted a lot of venture capital investor interest. Unlike healthcare, though, these investors took on significant technical risk with less clear business models, and yet it still took nearly a decade to hit the peak number of companies funded annually (just over 700 or more than 7x the number funded ten years earlier). While that number declined to below 500 over the ensuing five years, the amount of capital invested stayed relatively constant at around $5.0 billion annually. The high-water mark was in 2011 when nearly $7.5 billion was invested; notably that would have been well over 16% of all venture investment activity, which was clearly not sustainable.


Determining whether this is a bubble is more than an academic debate. Other bubbles have ended fabulously badly, bursting and leaving oily residue everywhere, so it is instructive to search for other bubbles to see if there are relevant parallels (and one may not need to look too far…)

  • Aforementioned crypto currency: Bitcoin now trades at $3,530 per token, down from all-time high of $19,783 on December 17, 2017. How many of you had heard of Bitcoin in January 2013 when a token traded for $13.30? Ever used one?
  • It is estimated that venture capitalists have funded over 1,000 artificial intelligence (“AI”) start-ups in 2018, up from 291 five years ago. Participants at the World Economic Forum in Davos, Switzerland last week had 11 AI panels from which to choose.
  • According to the Institute of International Finance, global debt reached $244 trillion at the end of 2018 (nearly 80x the U.S. healthcare industry) which was estimated to be 318% of global GDP – a very frightening debt load.
  • The Chinese bond market is $12.7 trillion of which $4.0 trillion is corporate debt. While there was only $23.3 billion of corporate bond defaults (0.6% of total outstanding) in 2018, this was more than the prior four years combined – and likely is significantly understated.
  • U.S. corporations have taken on nearly $9.0 trillion of debt since the Great Recession. Just since 2017, the number of companies rated one level above junk bond status increased 247% but Fitch Ratings has only downgraded 7% of them. Hmmm.

us debt

  • This month the 5-year Treasury yields were less than the 2.25% – 2.5% that the Fed targets for rates banks pay for overnight loans. This inverted yield curve has been an unshakable predictor of recession. Gulp.

The healthcare technology sector took no one by surprise, is addressing profoundly important and obvious problems, and should be able to productively deploy significant capital – if deployed thoughtfully.

Check out a recent Rock Health podcast for additional debate about whether the healthcare technology sector is in a bubble…

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