What Just Happened?

The National Venture Capital Association recently released data on 1Q14 investment activity, which always makes for an interesting read – at least on long plane rides. Point of fact, this past quarter was exceptional in many ways – and arguably somewhat unexpected. The headlines read that $9.5 billion was invested in 951 companies, an amount we have not seen since the fateful quarter of 2Q01. But it is what is beneath the headlines, buried in the reams of data, which paints a more nuanced picture.

Undoubtedly the level of investment over the first 90 days of 2014 was unprecedented. In 4Q13 and 1Q13 the amounts were $8.4 billion in 1,112 companies and $6.0 billion in 916 companies, respectively. Clearly the stepped up investment pace throughout 2013 extended into 2014 – and tracked the increased liquidity VC’s witnessed along the way. Given the marked public stock market volatility which set in this past February it would not be surprising to see activity tempered over the next few quarters, suggesting that we probably are not on an annual investment pace of ~$38 billion for 2014 (4 x $9.5 billion); for context annual investment activity from 2011 – 2013 averaged ~$28 billion.

Overall certain important themes are emerging in 1Q14 data – VC’s are clearly investing in later stage companies, VC’s are investing in businesses that have meaningfully less technology and development risk, and round sizes have spiked, most notably by “mega rounds” of hundreds of millions of dollars – which probably skews the data somewhat.

So what jumped out at me?

  • Dramatic decline in Seed investing: only $125 million was invested in 41 seeds (average size $3.0 million) in 1Q14 as compared to $347 million in 69 companies (average size $5.0 million) in the prior quarter, which is a decrease of 64%. The advent of the micro-VC and “super angel” investor from a few years ago may be running its course.
  • Where did the Seeds go: Early round financings were $2.9 billion (451 companies, average size $6.4 million) of the activity which is a meaningful step up from 1Q13 of $1.6 billion (420 companies, average size $3.7 million). Not surprisingly many of the Seeds from prior periods have graduated onto the next phase of growth.
  • Expansion stage financings really spiked up: in 1Q14 $3.9 billion was invested in 274 companies (average size $14.3 million) which was over 40% of all investment activity for the quarter, as compared to $2.1 billion in 239 companies (average size $8.6 million) in 1Q13. Quite clearly VC’s are doubling down and supporting those Seeds which appear to be breaking out with larger rounds.
  • The Software category sucked the air out of the room: Software was 42% of all financing activity and by far and away the largest of the 17 categories tracked. In 1Q14 $4.0 billion was invested in 414 Software companies (average size $9.7 million) as compared to $2.3 billion in 361 companies in 1Q13. Arguably this activity came at the expense of other categories such as Telecom, Semiconductor, Networking and Equipment, Electronics which barely registered this past quarter (only $20 million was invested in Networking and Equipment for instance).
  • Services investing surged in 1Q14: all categories of Services (Business, IT, Financial, Consumer) more than doubled from 1Q13 and was $1.7 billion in 126 companies (average size $13.4 million). This is somewhat surprising given the historic VC aversion to services business models as they “don’t scale” and have lower gross margins. Are VC’s investing in safer companies? Clearly they have all but avoided capital intensive hardware businesses.
  • Healthcare held its own: in 1Q14 $1.7 billion was invested in 182 companies as compared to $1.5 billion in 182 companies and $1.9 billion in 252 companies in 1Q13 and 4Q13, respectively. Overall, though, healthcare (Biotech, Medical Devices, Healthcare Services) captured only 15% of all dollars invested.
  • Which category was the dark horse: over $250 million was invested in Retailing this past quarter as compared to $17 million in 1Q13!

The shuffling between stage of investing and industry categories is always illuminating. VC’s seem to be investing later to get closer to liquidity, perhaps to bolster their own fundraising stories as they set out to raise the new funds, but to also exploit the robust public capital markets. Arguably the rotation among industry categories reflects prior investment performance by category. Hardware centric businesses and those with long product development cycles have chronically disappointed investors; where would Biotech be right now were it not for the “biotech bubble” we witnessed over the past six months.

The other barometer of risk taking is “First Time Financings” which tracks companies receiving venture capital for the first time; some interesting developments jump out of those data:

  • First Time Financings in 1Q14 totaled $1.2 billion or 13% of all investment activity, which compares (poorly) to 21% and 19% in 1Q13 and 4Q14, respectively.
  • Early stage First Time Financings was $830 million of that activity, which was down slightly from $887 million in 1Q14, although Expansion stage showed a more marked decline to $135 million from $227 million in the prior quarter.

And I always get a kick out of some of the other data buried in the report…

  • 23 states had 3 or fewer venture investments in 1Q14. In fact 7 states had zero.
  • California captured $5.5 billion of the $9.5 billion invested which was up substantially as a percent of total dollars invested from 1Q13: 58% now as compared to 48% from a year ago. Further concentration of activity – although for those of us not in California it is important to note it is a huge state!
  • Hawaii, on the other hand, had 2 venture-backed investments which raised in total $271,000! How cute.
  • The Top 10 venture investment rounds in 1Q14 were at least $100 million in size (are those venture deals, really?) with Dropbox raising $325 million registering as the largest. And there were no healthcare companies on this list. These mega-rounds reflect funds with either too much capital or a strategy to anoint winners and thereby chilling any competitive companies being launched – but will they drive great returns – stay tuned.


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Let the Good Times Roll?

Earlier this week the National Venture Capital Association (NVCA) released the VC Quarterly Fundraising data for 1Q14. The expectation was for this past quarter to be a strong quarter for fundraising, given the (until recently) buoyant public equity markets and strong M&A environment which drove a lot of liquidity back to LP’s. But the headline number was quite a bit greater than many expected. Notwithstanding what investors might say, the level of fundraising is arguably a function of recent market action and investor sentiment – which is directly related to LP liquidity.

The headline for this past quarter was very positive – 58 funds raised an aggregate of $8.9 billion, which blew away 4Q13 of 53 funds and $4.9 billion raised. In all of 2013, 191 funds raised $16.9 billion which was consistent with the prior five years where plus or minus 175 funds were raising between $15 – $20 billion each year. But I am not sure one should now conclude that annualizing 1Q14 performance (where 230 funds will raise $35 billion!) is what to expect for this year.

Since 2008 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. This imbalance is not sustainable. Notably we also learned this week that VC’s invested $10.7 billion in 1Q14, yet again exceeding how much was raised (the aforementioned $8.9 billion) – but at least the gap may be narrowing.


VC Fundraising


It is still a challenging environment for VC’s to raise new funds. As one stares at the data it is quite evident that the bifurcation of the VC industry continues apace – are we seeing the advent of only two predominant VC models: the “billion dollar firm” which is frankly focused on both a large number of investments and larger size investments and the smaller, more narrowly focused venture firm?

Some of those details buried in the data may provide insight into what is a more nuanced picture of 14Q14 fundraising activity…

  • Of the 58 funds raised this past quarter, four were greater than $1.0 billion in size.
  • This past quarter witnessed 33 funds raised by firms that had already raised a prior fund so therefore 25 funds were raised by “first time” firms – a nice indicator that the VC industry continues to be able to re-invent itself to some meaningful degree.
  • The largest of the new firms was $243 million
  • The top 5 funds raised $5.4 billion or 60% of all capital raised even though they represent just 8% of the firms which raised capital – continued concentration at the high end.
  • That phenomenon is even more acute when looking at the top 10 firms which raised $7.3 billion of the $8.9 billion (82% of the dollars) yet were only 17% of the firms – perhaps more troublesome for entrepreneurs staring at fewer larger firms as possible partners.
  • Of the 58 funds raised, 44 were less than $100 million in size – the average size of fund in this cohort was $27.5 million.
  • Let’s look at the other end of the market: 26 of the 58 firms raised funds were less than $10 million in size – ouch.
  • The bottom 10 funds totaled $8.4 million – yes, that is millions – so 17% of the firms which raised capital last quarter represented 0.09% of all the capital raised.
  • The largest fund raised ($1.38 billion) is 164x the ten smallest funds combined.

Does this mean anything really? Maybe not. Many of us are just thrilled that the VC industry seems to be able to once again raise capital, but what form this recovery takes will have significant implications for how we finance innovation. One question I wrestle with – is this concentration of capital leading to these multi-hundred million dollar “venture” rounds we are now seeing so routinely? Is that good?

An addendum: just announced – in 1Q14 all private equity firms raised $95 billion to put this into context…more than 10x that for venture firms.





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Good Evening, Vietnam…

Imagine all the people in Times Square in New York City or Central in Hong Kong or Piccadilly Circus in London…then double it…then put them all on motor scooters – which is what my family and I experienced in Ho Chi Minh two nights ago. An ambitious American entrepreneur here has built a business providing evening Vespa tours, stopping at various street food stalls eating your way across the city over four hours. It is chaos here but among all the bedlam the city actually seems to work.

I have been captivated by this country for many years (having grown up in Hong Kong in the ‘70’s when the “Vietnamese boat people” escaping persecution literally washed ashore daily). There are 92 million people in Vietnam, making it the 14th most populous country in the world. There are 36 million internet users and 20 million Facebook accounts. Analysts estimate that ~65% of the population is less than 35 years of age. And while it is a technically a Socialist Republic, incredibly exciting entrepreneurial forces have been unleashed. The GDP is $142 billion and has experienced a trailing 10-year annual growth rate of around 7% per annum. Many believe that if the total “cash economy” were included, the GDP would be 50% greater. Some other fun local facts:

  • The lead story in today’s Vietnam News (local English paper) trumpeted that this March Vietnam will have the lowest increase in monthly inflation in ten years (0.08%) – reflecting increased stability – annual inflation is now running less than 5%
  • The World Bank just loaned $100 million to build public IT infrastructure
  • Intel invested $1 billion in a chip plant in Ho Chi Minh
  • Samsung just built a $2 billion production facility
  • Retail consumption is estimated to be $23 billion but there is only the beginnings of an e-commerce economy – people will often buy cars with cash (there are 21,000 Vietnamese Dongs to $1 US dollar – which my son finds hilarious)

And yet it is “under venture capitalized” – there are fewer than six VC firms that matter and increasingly a handful of incubators and accelerators. My great pal, Henry Nguyen, runs the leading VC firm in the country – IDG Ventures Vietnam, which manages $100 million and has invested in nearly 30 companies. He also has just opened the first McDonald’s the country – and his midnight tour of that store and the “back of the house”  may have been one of the highlights so far for my kids and me!

This flagship store is simply killing it! Running 24 hours a day and employing over 250 people, we visited at shift change. The grand opening last month was the third largest in McDonald’s history – behind store openings in Russia and China (Henry quickly pointed out that those stores were twice as large as his which is only 13,000 square feet). The lines are so long that there are red velvet ropes to queue everyone outside. In its first month they served 61,890 Big Macs. A typical drive-through can handle 60-70 cars per hour; Henry has processed as many as 144 cars per hour at peak times. They are typically serving over 1,000 customers each hour. We stood with the woman who initiates each hamburger order – she was simply amazing. All the lettuce is hand-cut as there is not a vendor in Vietnam that can deliver fresh-cut lettuce.

The next day Henry and I spent some time discussing the healthcare scene in Vietnam (My firm, Foundation Medical Partners, is privileged to be working with some of the most important global healthcare companies so I am always interested in what is happening in other parts of the world). Not surprisingly there is much work to be done but he was excited by some of the recently launched telemedicine initiatives (Henry has an MD as well as an MBA) and the introduction of some “light weight” consumer healthcare engagement platforms – but this is still a country without EMR’s for the most part and only recently have new private hospitals opened. Much of healthcare is being delivered today in the pharmacy as doctors make most of their money filling prescriptions. Many wealthy Vietnamese with complicated cases leave the country for care.

Before leaving Ho Chi Ming for Da Nang it was important to visit the War Remnants Museum, which is in the heart of the city and vividly portrays the horrors and consequences of the war. Scattered around the grounds surrounding the museum are captured American tanks, troop convoys, planes and other heavy armaments – which inadequately prepared us for the horrors depicted inside.  Nothing fancy, in fact the photos are stark and speak for themselves, the artifacts are irrefutable. The “Agent Orange” room is haunting. As an American you experience a confounding array of emotions as you pass from room to room: obviously there is horror, some confusion, some shame, deep and profound sorrow – probably some anger realizing that history does indeed continue to repeat itself. I am still trying to reconcile those feelings a few days later.

There are echoes of the war everywhere you go in Ho Chi Ming but with the exceptional youth of the country comes great optimism. The entrepreneurs one meets are very much excited about what is possible, and like my kids, seem very focused on the future.


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“And Now For the Rest of the Story…”

Spent some time this weekend looking at the recently released 4Q13 investment data compiled by the National Venture Capital Association/PricewaterhouseCoopers/Thomson Reuters in their “MoneyTree Report.” The report tracks, by stage/sector/geography, where investment dollars are flowing but it also provides insight to broader themes and implications.

In general 4Q13, at least on the surface, looked like a strong quarter as $8.4BN was invested in 1,077 companies which was in line with prior quarters. The 4Q13 was 28.5% and 27.0% of the dollars and deals for the full year ($29.4BN and 3,995, respectively), which is consistent with prior years as there is always a flurry of year-end activity. There was reasonable diversity of stage of investing in this past quarter as well with Seed/Early Stage taking 39.4% of total dollars invested, Expansion Stage and Later Stage were 35.8% and 25.8%, respectively (although interestingly the proportion of Seed investing seems to be declining over the last number of quarters – so maybe some rotation to Later Stage, or at least instead of classic seed rounds, we seem to be seeing greater incidence of Early Stage financings – suggesting entrepreneurs are taking more capital to start). Emerging from the Great Recession over the past four years the total number of VC financings on an annual basis has consistently been between 3,700 and 4,000 – nice to see some stability.

The average size of Seeds in 4Q12 was $2.6M but spiked to $4.8M in 4Q13 – clearly round sizes are increasing which may be an acknowledgment that seeds just don’t get you far enough or increased investor confidence. Early Stage round sizes increased from $4.4M to $5.5M over those same periods, while Expansion ($9.0M to $10.9M) and Later Stage ($10.5M to $10.1M) remained relatively flat.

Given the reams of data in the report there is a risk of missing some key trends but here are some items that jumped off the page for me…

  • Overall dollars invested increased 7.5% from 2012 to 2013 – that is pretty extraordinary growth (although the number of deals increased only 3.6% underscoring the larger round size phenomenon) – over all stages, the average round size in 4Q13 was $7.8M, which frankly is relatively meaningless but it was only $4.2M 20 years ago – and this in an age of Lean Start-up!
  • “First time” financings were 19.3% in 4Q13; twenty years ago that was 49.6%, perhaps suggesting that entrepreneurs have lessened their dependence on VC’s for financing. In the depth of the Great Recession, that number was 21.8% which I had expected would have been meaningfully greater as VC’s became the financier of last resort.
  • Healthcare (biotech/services/devices) in total was 33.5% of the dollars invested yet only 15.7% of the companies in 4Q13; in 4Q12 those numbers were 23.9% and 12.8%, respectively. VC’s are directing greater amounts of dollars toward healthcare (and the data do not separate out healthcare IT which would arguably add to the increased investor enthusiasm). The average size of the healthcare investments was $10.0M as compared to $4.7M for all 4Q13 investments.
  • Ready for profound insight from the data? Interesting (troublesome) trends emerge when looking at the regional data – and not just the tiresome Boston vs Valley debate (or now the New York/Boston debate). In 4Q13 Silicon Valley consumed 38.5% of all dollars invested versus 14.6% for NY Metro and 11.0% for New England (those numbers were 40.2%, 11.7% and 13.1% in 4Q12, respectively). Those three regions consumed 64.1% of all VC dollars in 4Q13; in 1995 that was 38% and ten years ago it was 57.3%. Are we seeing a bifurcation of innovation across the country (“haves and have nots”) in parallel to what we are seeing with the extraordinary disparity of family income? Clearly VC is increasingly a coastal phenomenon which does not at all take anything away from the very strong regional VC markets in the middle of the country – the implication of this VC dollar migration is something not well understood yet for our national economy.
  • Corollary to the above profound insight: 24 states in this great country had 3 or fewer reported VC deals in 4Q13 – almost half of the country! There were 6 states which had zero…nada…zilch VC deals (Iowa, Idaho, Kentucky, Maine, Montana, South Dakota) in the reported data (actually I find this hard to believe but the direction of the point remains intact).
  • The top 10 deals in 2013 consumed 6.8% of all dollars invested last year and only one of those was healthcare. In the 4Q13, the top 10 deals captured 14.9% of the $8.4BN invested and three of those were healthcare deals.
  • Head Scratcher – earlier this year the same three organizations announced that $4.9BN had been raised by VC firms in 4Q13 bringing the total for 2013 to $16.7BN (versus the $29.4BN invested). This amazes me and is now the fifth year when the VC industry has raised meaningfully less capital than it invests. Clearly this is not sustainable. Clearly other investors have stepped into the breach and joined these investor syndicates (strategics, angels, hedge funds) in an amounts not well understood – is this good? Is it bad? Arguably having the capital gap filled by investors who may not be accustomed to the vicissitudes of the VC asset class is problematic – but having said that they seemed to have hung in through the Great Recession! At some point though the amount invested and the amount raised need to come back in line.

Note to self – I need to poke around some more at the VC fundraising data.  Investors who watch my industry closely are extremely excited about this phase of the cycle so I expect to see stepped up fundraising activity – certainly in light of the extraordinary liquidity we are now witnessing.


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“All Hat, Ton of Cattle…”

Had a remarkable day today in Houston crawling around the Texas Medical Center. I was in town to speak at the Xconomy Healthcare event – an incredible roster of speakers and attendees I must say. As Ron DePinho, President of MD Anderson, characterized that this part of Houston is as if someone put the Kendall Square and Longwood regions around greater Boston into a giant centrifuge and spun it down – what an extraordinary concentration of healthcare expertise/technology/discovery – 54 healthcare institutions, 21 hospitals in only 1.6 square miles! If you have not been there before, make a point of hanging out at the Texas Medical Center.

The Texas Medical Center has 8 – 9 million patient visits per year and as Bobby Robbins, CEO of Texas Medical Center, lamented that until recently the most important part of his job has been dealing with parking. More specifically, MD Anderson sees 1.4 million of those patients and has a $4 billion annual budget; more impressive – of that amount, $700 million is on research. There are 11,000 patients enrolled in clinical trials being run at MD Anderson and the productivity of their development pipeline is exceptional.

Much of the discussion today was centered on how best to build an end-to-end healthcare innovation economy. John Mendlein, serially successful biotech entrepreneur and current CEO of aTyr Pharma, portrayed numerous possible roadmaps (he called them recipes) on how one might go about building great start-up companies, but the common refrain was that it was all about the aggregation of talent – scientific, clinical, commercial, financial, managerial talent – and they all need to be present for the ecosystem to survive. With this important awareness, it certainly feels like it is only a matter of time, and not much time at that, before we see a Genzyme or Genentech launched in Houston.

Other interesting observations I gleaned over the course of the day…and some are meant to be more thought provoking.

  • Academic centers of excellence seem to be increasingly prepared to embrace that innovation must co-exist with commercialization. DePinho stressed the need for “informed” clinical trials and the powerful role of integrated diagnostics (which was music to my ears)
  • Houston, like many other emerging healthcare hubs, has numerous grass roots efforts to raise awareness, build community, create dialogue – these activities are important precursors to successful ecosystems (see Bloomberg in NYC)
  • Surprised how many leading academic hospital systems are “exporting” their expertise in the care service delivery models that they have built (see Hopkins in Saudi Arabia, Cleveland Clinic in Abu Dhabi, MD Anderson with its numerous international partnerships, etc). There is something profound here and I am not sure all of us fully understand the implications with this phenomenon – they are probably all good though. For Foundation Medical Partners we have seen the increased focus placed on Asia, specifically China, and the ravenous appetite for new healthcare delivery service models.
  • We need to better “democratize” expertise from academic centers which plays directly into the “consumerization and retailization” investment themes our firm is exploring. How can we best deliver to the consumer/patient very complex clinical information? How can we ensure the superior standards of care we are accustomed to receiving from leading providers are made available to people who cannot access those providers? Innovative healthcare technology platforms will provide that consistency of care.
  • What is a human life worth now? The old therapeutic pricing models were predicated on inadequate therapies which showed poor efficacy for many (only great outcomes for few) and many of these drugs merely extended life by few months, and in many of those cases, it was very low quality of life. Soon we will see therapies which will profoundly extend life for many – should those drugs be more expensive or less expensive? If across a population we extend life expectancies, are we not raising overall healthcare costs to society because we all know most of healthcare care costs are incurred by those over 75 years of age. Complicated issues are going to be raised by extending life expectancy.

But none of that mattered earlier today as I toured my brother’s pediatric ward; he is an extraordinary pediatrician at the University of Texas Health Sciences Center. At one point we stood at a large window looking down Main Street across the entire complex at Texas Medical Center and I remarked “this is the Las Vegas Strip of Healthcare.”

Fortunately for all of us, what happens at the Texas Medical Center does not stay at the Texas Medical Center…


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“A Giant Hairball of Perverse Incentives…”

The best thing about going back to school is to think big thoughts, immerse oneself in what the great academic minds are ruminating over. This past weekend Harvard Business School hosted its annual healthcare conference for students and alums, and fortunately for us, some of the great faculty were on hand to share their views on the state of the healthcare industry. The quote above was the opening comment from the breakfast keynote by Prof Bill Sahlman, one of the best of the best!

While we all lament the fundamental conundrum that competition has not led to an improvement in quality at lower costs, which is the phenomenon experienced in every other industry vertical, the business of healthcare is now facing arguably the most profound transformation in modern history. But most troublesome were Prof Sahlman’s observations around the true costs, not yet acknowledged, to society due to this tragic paradox. Today the outstanding federal debt is over $17 trillion; the unfunded Medicare and Medicaid liabilities are estimated to be $30 trillion each, so a total of another $60 trillion of additional obligations – not recorded on the country’s balance sheet – sit out there due to the societal pact to fund healthcare costs for all citizens over 65 years old.

A couple of other fun facts and observations from the morning session:

• An employer-based healthcare insurance system obviously has left a lot of people uninsured
• At 18% of GDP, this implies $4,000 – $5,000 higher health costs per citizen than other developed societies; higher costs with more modest outcomes. This dynamic clearly hurts the global competitive position of the US
• The third leading cause of death is due to faulty medical care – ouch!
• Fundamental misunderstanding of the current reform debate is that we have modestly reformed access to insurance, NOT healthcare services – big difference
• And what are considered the greatest needs in healthcare today according Prof Sahlman? Greater transparency of costs and outcomes which need to be readily accessible, and a re-engineering of where healthcare services are delivered

This event also attracts CEO’s from leading healthcare franchises, and as such, we were privileged to have Mark Bertolini (Aetna) and John Brooks (Joslin Diabetes Center) address the audience later in the day. The juxtaposition of having a provider and then payer share their visions of the future underscored the “jump ball” around who will own the consumer/patient. Both view a very “patient centric” delivery model, enabled by many of the highly disruptive, highly innovative platforms which will enable these new and deep patient relationship to be fostered (frankly the types of companies my new fund at Foundation is investing in).

Some more fun facts from Mark Bertolini, who by the way if you have not heard him speak, make a point of doing so – he is great.

• According to the Institute of Medicine in 2009, 27% of the $880 billion of medical spend was unnecessary; 17% of that was on inefficient care delivery; and, 10% was considered fraud – staggering waste and inefficiencies
• In 2020 Bertolini expects there will be 75 million people on retail commercial insurance exchanges
• When asked about his strategic priorities, quite surprisingly he pointed to the need to enable providers to underwrite risk (be insurance companies?), foster greater sense of community by facilitating public/private exchanges and then drive hard on an integrated “digital experience” – very provocative and forward-thinking
• Worst 5% of the US population consumes 43% of healthcare spend – the two greatest costs are attributed to heart failure to people over 85 years old and end-stage renal disease for those under 65 years old
• Arguably better social safety nets (i.e., better education and healthcare systems) will lead to greater peace of mind, which leads to greater consumption rates and lower savings rates
• Medical device companies will soon be confronted with greater burdens to prove that their devices actually lead to better outcomes which is ostensibly measured by keeping people out of the hospital, thus Aetna’s work with Medtronic on taking data feeds from pacemakers to better monitor for cardiac incidents – before they occur
• The iTriage initiative with CVS – mobile apps to manage one’s entire healthcare needs – is borne from the realization that better quality is mostly correlated to convenience
• Bertolini’s best quote: “Give up control to get power…”

John Brooks, CEO of Joslin, had an equally expansive vision which is very focused on providing an extended care model driven by highly innovative technology platforms. The epidemic of diabetes demands close and regular patient engagement – better longitudinal care earlier can have enormous benefits – which is the real power of the “connected health” models.

All of this opportunity/confusion in the marketplace is reflected in recent financing data. In addition to the dramatic spike in overall healthcare tech investing, valuations have moved meaningfully over the course of 2013…

• First round pre-money valuations from 2012 through 3Q13 decreased from $7.1 million to $4.8 million – perhaps a reflection of the increased start-up activity in this sector and the risk of too many undifferentiated companies – just a guess
• Second round pre-money valuations from 2012 through 3Q13 remained essentially flat – $23 million to $22.5 million
• While Later Stage valuations from 2012 through 3Q13 jumped from $54 million to $64.7 million, which undoubtedly reflects some of the “break-out” winners and increased IPO and M&A activity.


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Some 2014 Predictions….

So I wanted to come up with some 2014 predictions – nothing fancy or too controversial – but hopefully somewhat thought provoking…

  •  IPO’s: This past year witnessed an extraordinary resurgence in IPO activity for venture-backed companies. It felt much like 1999 right before the crest of the wave. With modest growth, unsustainably high valuation multiples, little excess left for Corporate America to cut, profit margins are maxed out which makes the next 12 months feel very much like the year 2000. While it will not be such a disaster, clearly the pace of last year simply cannot be maintained. Even raging bulls need to stop and smell the roses once in a while.
  • Fundraising:  Very strong liquidity to LP’s in private equity and venture funds give them increased confidence to continue to increase – albeit modestly – allocations to the asset class. Notwithstanding every investor’s claim that they only invest looking forward, past performance (i.e., distributions) continue to fuel fundraising. Unfortunately the rich continue to get richer as established firms find it relatively easy to raise new and larger funds causing the overall roster of investment managers to continue to shrink.
  • Crowdfunding:  This form of financing continues to play an important role for start-up’s, although admittedly, mostly around the margins. The crowdfunding phenomenon simply does not have the heft to lead Series B and C rounds. And furthermore, in addition to capital, great entrepreneurs are also looking for great business partners in their investors. The risk here is that there will be a spectacular scam and Senator Warren and others come down hard with new consumer protection laws which chill the marketplace. Disaster scenario: some desperate African Prince just needs $10M more in Bitcoins to fund his next great widget…and he actually raises the “money!” – never to be heard from again  
  • Healthcare Technology:  Out of the carnage with the introduction of health insurance exchanges comes the broad and irrefutable realization that the healthcare industry simply must be fundamentally re-architected. Novel and innovative business solutions lead the way to greater efficiencies and productivity. Ironically improvements in healthcare at lower costs accelerate across society as more people get access to affordable care at the right time, right place. With this phenomenon comes the growing appreciation that extraordinary near-term societal benefits can be achieved and may even outweigh any distant future benefits hoped for with continued massive investment looking for the next great therapeutic or medical device.
  • Sports Grand Slam:  The Mets win the World Series, the Knicks win the NBA Championship, the Giants win the Super Bowl and the Islanders win the Stanley Cup.

Now you know I have no idea what I am talking about…


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