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.

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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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I did not know that “pentafecta” was actually a word, and while it does not perfectly describe the background of Flare Capital’s Dan Gebremedhin, it is serviceable as it suggests the extraordinary range he has.

Dan joined the firm in April 2015, just as we were getting started, and today we celebrate his promotion to Partner. Someone of enormous talent and range, Dan and I first met nearly ten years ago when he was raising capital for his healthcare technology start-up (“fecta” #1). While I did not end up investing in that company, it was clear that he had extraordinary potential. He had earned his MD and trained at Massachusetts General Hospital (“fecta” #2), and when we first met, was studying to get his MBA at Harvard University (“fecta” #3).

After graduation from Harvard Business School, Dan joined Harvard Pilgrim Health Plan where he served as Associate Medical Director (“fecta” #4). It was here where he thought critically about the business of healthcare and the role of technology in reallocating risks and revenues between the various constituents. What perhaps strikes me the most is his sense of the “voice of the customer.”

And that brings us to the present. Dan is an accomplished investor (“fecta” #5), respected by his investment peers and entrepreneurs alike. The healthcare industry is extraordinarily complex, made further complicated by regulatory frameworks that are in transition. The diversity and relevance of his various professional and academic accomplishments strengthens his ability to navigate this sector and partner effectively with entrepreneurs we are privileged to back.

When Bill Geary and I started the firm, we saw an opportunity to build an important investment platform to help scale leading healthcare technology companies. To do that effectively over many funds, we knew that building a strong investment team was essential. Today, I am delighted to call my colleague and good friend, Dan Gebremedhin, also my partner.


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Sugar High

Between being stuffed at Thanksgiving and having visions of Christmas sugar plum fairies dancing in my head, thoughts of healthy eating are elusively far away. Given how pervasive sugar is in U.S. diets, it was striking to learn that the commodity price of sugar has declined so dramatically over the last two years. In fact, over this decade, save for a sugar “short squeeze” in 2016, the price has collapsed by nearly 65%.

Globally, there was a record 186 million metric tons of sugar produced last year, which was an 11% increase from the prior year. Of this amount, 178 million metric tons was for human consumption. According to the U.S. Department of Agriculture, domestic sugar consumption was 11.3 million metric tons. Nearly 80% of sugar is produced from sugar cane, which turns out to be a very important structural element of the sugar industry. Sugar cane is considered a grass and is simply cut back (versus dug up and replanted) and relatively easy to cultivate. The remaining 20% of sugar comes from beet root.

The sugar industry is incredibly complicated given all the local export subsidies and high import duties and tariffs, all of which have been further complicated by current global trade tensions. Production costs are estimated to between $0.12 – $0.14 per pound for unrefined sugar and yet, given the myriad number of structural price supports, domestic producers are receiving nearly twice that amount (and it is not uncommon that retail prices are around $0.70 per pound). Some of the largest producers include China, Brazil, Thailand and Pakistan which have entrenched and powerful sugar lobbies, further undermining the free market dynamics of the global sugar markets. The record bumper crops have created an oversupply of sugar, further depressing prices.


Arguably, the most problematic issue the sugar industry is confronting is that excessive use of their product is unhealthy, certainly in the amounts being consumed now. The World Health Organization estimated that per capita consumption is approximately 53 pounds annually, which spikes to 73 pounds in developed countries (ouch – a glutinous 1.5 pounds each week). The last few decades have witnessed an explosion in Type-2 diabetes, quite clearly attributed to the elevated levels of sugar consumption. Sugar producers are periodically accused of trying to influence medical research and the public health debate with substantial (and sometimes clandestine) lobbying efforts. The Sugar Association spent over $1 million lobbying Congress in 2017.

While sugar may not be the sole factor causing obesity and other metabolic syndromes, it clearly contributes to the explosion of diabetes. In 2016, 422 million people have diabetes worldwide, an increase from an estimated 382 million people in 2013 and from 108 million in 1980. The prevalence of diabetes globally is 8.5% among adults, nearly double the rate of 4.7% in 1980. Type-2 diabetes accounts for nearly 90% of the cases. In the U.S., there are over 100 million people who are diabetic or prediabetic, of whom over 30 million have diabetes (9.4% of Americans) with an annual cost of $245 billion according to the Center of Disease Control.


Considering this, there has been no shortage of announcements by food and beverage companies with initiatives to reduce sugar as a core ingredient. A few months ago, Starbucks committed to put its famous and wildly successful Frappuccino drinks on a diet, reducing the sugar content to “only” 98% of the daily value needed (down from what had been 132%). To put this in context, a Snickers bar is 54% of one’s daily need. Global soda volumes are estimated to have increased by 2% in 2018, largely from a rotation away from sugar drinks to zero-calorie drinks. Interestingly, and likely for entirely different reasons, Coke recently announced development activities to use cannabidiol ingredients for a slate of “wellness” products – another effort to diversify away from sugar-based products.

Industry is also experimenting with other alternative natural sweeteners such as stevia and something called monk fruit that do not have the negative health issues. There are also several innovative new “agtech” start-ups that have been funded to develop alternatives, such as Amai Protein, an Israeli company which is developing “designer proteins” that would serve as sugar substitutes. Alternative sweeteners often look for production approaches that will avoid supply chain issues with having to harvest crops.

The sugar industry structure makes it quite difficult to replace a relatively inexpensive commodity with relatively expensive alternatives, particularly when issues around formulation and consumer preferences are involved. Importantly, for nearly 30 years prior to 2010, the price of sugar was rarely ever above $0.10 per pound, arguably accelerating the dramatic proliferation of sugar across the U.S. culinary landscape. Akin to the energy industry, artificially low cost “dirty” fuels have curtailed the rapid  development of relatively more expensive “clean” sources of energy. Would the “unsubsidized” higher true market prices for sugar have encouraged greater innovation, sooner?

All of this complexity took me back to my final exam for Biology 101 when I labored to memorize the dozens of steps in how sugar is converted into energy in the Krebs Cycle (which fortunately I was not asked to recite). Just studying the chart below is enough to cause one to lose one’s appetite over the holidays…


Krebs Cycle


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Heading For Home – 3Q18 Funding Environment…

The Bureau of Economic Analysis recently announced that the real Gross Domestic Product increased at a 3.5% annual rate in 3Q18, which while lower than the 4.2% reading in 2Q18, continued a streak of six quarters above 2.0%. Notwithstanding strong economic fundamentals, there appears to be evidence that the sugar high provided by the corporate tax cut may wearing off as 35% of the S&P 500 companies missed 3Q18 Wall Street revenue estimates according to FactSet. Year-over-year revenue growth estimates for the S&P 500 is 7.3% although for fiscal 2019, revenue growth estimates have been lowered from 8.2% to 5.4%. According to Evercore ISI, 3Q18 year-over-year corporate earnings will have increased 24% but 13% of that is attributed to the tax cuts, while 11% is organic growth. This broad reset, alongside raising interest rates, are in large measure responsible for the marked increase in public market volatility over the past month.

3Q18 Growth

None of this appears to have rankled the venture capital industry. With great fanfare, and a tinge of trepidation, the National Venture Capital Association recently announced that venture investors invested $27.9 billion in 1,937 companies in 3Q18. The venture industry is on pace to exceed $100 billion invested this year. The average size of investment at $14.4 million, although somewhat meaningless given the range of activity covered, is the largest average round size ever which reveals an important concentration of capital around fewer portfolio companies. Over 24% of all investments in 3Q18 were in late stage companies, which is the highest proportion in seven years. In fact, nearly 29% of the capital invested in 3Q18 was in just 39 unicorn companies. There were 51 financings that were greater than $100 million in size and those captured 64% of the capital invested in 3Q18.

3Q18 deal value

This concentration of capital is also echoed by the continued rotation away from seed and angel investing witnessed in 3Q18, which saw only $1.6 billion invested in 785 companies which was dramatically lower than the $2.1 billion and 1,005 companies in the prior quarter. Seed and angel investments were 5.6% of all dollars invested and 40.5% of all companies in 3Q18. The average round size was $2.0 million, which is significantly greater than every prior quarter (save for 2Q18 when it was $2.1 million). Over 56% of all seed rounds were greater than $1.0 million. The implication is that seed rounds are no longer simply to “prove out an investment thesis” but rather to start to scale start-ups. Another interpretation may be that a level of risk aversion has entered the marketplace, causing timorous venture capitalists to focus on more mature later stage companies.

The early stage sector also saw a marked increase in round size to $12.9 million across the 686 companies. Interestingly, the median deal size was $7.0 million which is twice as large as early stage financings in 2014. Nearly 59% of early stage capital was invested in round sizes greater than $25.0 million. Year-to-date there have been 378 financings that were larger than $50.0 million. These large financings turn the historic definition of early stage milestones on its head and presumably are providing companies with extended runways. Another possible explanation may be due to the dramatic increase in fund sizes as investors look to “put more to work” in any one portfolio company.

Where it gets really interesting is in the late stage category. Quite clearly, we are in an “anoint the winner” cycle of investing with a dramatic increase in average round size of $37.4 million; over the past 10 years, the average round size was $19.0 million for late stage financings.  In 3Q18, while over $17.4 billion was invested in 466 late stage companies, 51 of those financings were greater than $100 million in size and accounted for $11.0 billion or 39% of the entire quarter’s activity. That is right – less than 3% of all companies accounted for 39% of the dollars invested this past quarter.

This stepped-up investment activity is also reflected in quite robust pre-money valuations. Across each stage, valuations were at high water marks, most notably in the Series D and later stages at $285.0 million (year-to-date), which is effectively twice what it was just two years ago. Year-to-date, average round sizes for early stage and late stage companies were $14.1 million and $36.4 million, respectively, which compares favorably to the pre-money valuations (perhaps suggesting more modest dilution than in prior periods).

Valuation A B


Valuation C D

There was one other development that was quite noteworthy and that involved the corporate venture investors. Notwithstanding some notable recent announcements of retrenchment (Intel Capital, the most prolific corporate VC, let go 25% of its investment staff this week), corporate investors participated in $39.3 billion worth of financings through 3Q18, which is already greater than any prior full-year period and represents nearly 47% of all deal values. Ten years ago, corporate investors consistently participated in less than $10.0 billion of annual financings.

Liquidity and generating superior returns drives the venture capital industry. The exit environment in 3Q18 remained strong with 23 venture-backed IPOs (17 of which were biotech companies). Additionally, a handful of very late stage companies “nominally” went public, selling a very small portion of stock suggesting that the IPO was less of a financing event but rather to provide founder liquidity. There were 182 venture-backed exits for $20.9 billion in 3Q18. For the year-to-date, there have been 637 exits for $80.4 billion (which coincidentally mirrors closely the $84.3 billion that has been invested year-to-date). Arguably a more relevant barometer as to the health of the venture market is how many new companies are being funded versus being sold; that ratio has been above 10:1 since 2013 (save for 2014 when it was 9.6:1) which reflects the reality that companies are staying private longer and that consistent investor liquidity is still somewhat elusive.

Cambridge Associates (CA) data highlight the strong venture capital returns which outperform broader public equity indices in nearly all timeframes. Specifically, for year-to-date, 1-year, 5-year and 10-year periods net returns for the CA Venture Capital Index (2Q18) and the S&P 500 Index are 11.7%, 20.1%, 17.4%, and 10.9% versus 2.7%, 14.4%, 13.4%, and 10.2%, respectively. The comparisons are likely even more attractive given the public market turbulence this month. The ever-important distributions back to limited partners increased 17% to $21.5 billion in 2017 over 2016 levels and are expected to be strong again in 2018.

All of this has clearly benefited fundraising, although similar to the dynamics many entrepreneurs are facing (fewer but larger financings), the venture industry continues to be barbell – small handful of large venture funds alongside numerous smaller focused funds. Year-to date the venture industry has seen 230 new funds close on $32.4 billion with median fund size of $68 million and the average fund size of $151 million (the highest level since 2011). In 3Q18, venture capitalists raised $12.2 billion; the top ten largest funds accounted for $8.2 billion of that total (or in other words, just ten funds in 3Q18 represented over 25% of all capital raised so far in 2018). Twelve of the largest 25 funds raised in 3Q18 were based in San Francisco and 7 were in Asia.

The healthcare technology sector was white hot in 3Q18. Both Rock Health and MobiHealthNews reported that $3.3 billion was invested in 71 companies this past quarter – the best quarter ever. Year-to-date there have been 290 financings totaling $6.8 billion, which is tracking to make 2018 the most active year yet and likely to be between 8-10% of all venture capital activity (this was low single digit percentage points a decade ago) suggesting that this sector is reaching a level of maturity. In 2011, there was $1.2 billion invested in 93 companies. The chart below from Cooley points to the number of significant companies now scaling to provide enterprise solutions.

Digital Health Landscape - October 2018

Domestic spending on healthcare is over $3.2 trillion. As a point of comparison, the U.S. advertising industry is estimated to be $190 billion and launched thousands of valuable start-ups over the last 20 years. This augurs for even better times ahead as new revenue and risks are reapportioned across the healthcare industry. The FDA is playing a particularly supportive role, in large part through Commissioner Gottlieb’s pre-certification program which has seen 34 FDA approvals or clearances in this sector so far in 2018. Notably, there have been a series of significant strategic partnerships announced such as GSK’s $300 million investment in 23andMe.

According to Statista, there will be 5.8 billion smartphones globally by 2020 and over six million apps across various app stores. The Institute for Human Data Sciences at IQVIA estimates that 318,000 of these apps are healthcare specific, and most have never been tested much less widely utilized. This harkens back to the phase nearly 20 years ago when thousands of content and commerce companies were launched, many of which struggled to create enduring economic value. The enormity of the healthcare industry suggests profoundly important healthcare technology companies will emerge, but more often than not, they will need to offer comprehensive end-to-end solutions which both lower costs and improve outcomes.

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Collison Course: Observations from Shanghai…

Jet lag is a strange and mysterious thing. In the middle of the night a few weeks ago I found myself on a treadmill in my Shanghai hotel gym riveted to the Poland vs Iran men’s volleyball match on Chinese State Television. It was a welcome respite from CNN International and the battering ram of worsening news on U.S. – China relations. As many of you know, Twitter, Google, Facebook, etc are blocked in country and even certain CNN segments are blacked-out when covering awkward China-related stories. Whenever the recurring piece on the disappearance of Fan Bingbing played, my tv went dark as if someone pulled the plug from the wall.

The headlines in the U.S. are often at risk of masking some of the extraordinary advancements in the Chinese capital markets as well as the dramatic success stories in their innovation economy. While there certainly does appear to be troublesome signs in China’s $12 trillion economy (softening consumer spending, signs of inflation, currency weakness, debt levels in the shadow banking system, level of venture funding), the pace and consistency of global success stories is impressive and feels profoundly disruptive. That was certainly brought home when visiting what is considered to be the largest Starbucks in the world.

China Starbucks

Over the four days that I was there, economists pointed to several indicators that suggested the U.S. – China trade war was starting to have some measurable impact, particularly on the consumer class. For decades, my greatest concern for China has been the “revolution of rising expectations” (some may know that I grew up in Hong Kong so have marveled that nearly a quarter of the world’s population has come of age over a generation). With wealth and greater access to information, many Chinese will continue to insist (demand) better goods and services like food, education and healthcare. Obviously, the government is also worried about how best to manage this. A selection of some of the troubling headlines in the local papers over those few days included:

  • The renminbi (Chinese currency) has weakened by 10% since mid-summer
  • Auto sales in July 2018 were down more than 5%, leading to widespread discounting between 11% – 27%
  • Asian gaming stocks have declined between 15% – 18%, directly attributed to reduced Chinese gambling
  • Pork prices spiked in August 2018 by 8% due to concerns related to import restrictions and in part to an outbreak of African Swine Fever, which is fortunately not transmitted to people

Arguably, over the arc of history, this is just background noise for the Chinese – and that is clearly how they view it. The “One Belt One Road” Initiative, which seeks to connect China through Central Asia to Europe via massive public works programs such as ports and highway infrastructure, will recreate the Silk Road. The notable escalation of hostilities and militarization of the South China Sea with the Nine-Dash-Line framework seeks to extend its footprint over major trading routes. These initiatives underscore the country’s super power ambitions – and increase the likelihood of an inadvertent international incident (as evidenced by the incident involing U.S. and Chinese warships coming within 50 yards of each other last week).

China Collide

These political developments, which China’s neighbors and the U.S. at times find quite threatening, are supported by rapid maturation of the Chinese capital markets. The world’s largest bank is the Industrial & Commercial Bank of China and is a major financier around the world. Chinese finance authorities have carefully managed a deleveraging campaign of the countries’ major lending institutions. There was $100 billion of securitizations in 1H18 in China, which was an increase of 44% since 1H17. The government has instituted several other policies to ensure that there is adequate trade credit, particularly for exporters in the face of trade hostilities. While there, Chinese Premier Li Keqiang assured a global audience at the World Economic Forum of China’s embrace of pro-business policies.

Interestingly, China has become meaningfully less dependent on the rest of the world. According to China’s National Bureau of Statistics, manufacturing exports have been essentially flat for the past four years. As a percent of GDP, exports were 35% in 2006 and are now only 18% of GDP, suggesting that leadership is “Making China Great Again.”

The success of transitioning the Chinese economy is in part due to the deep commitment to developing a local technology economy. While in Shanghai, the city government announced the formation of a 100 billion yuan ($14.6 billion) venture fund. This announcement was made at the World Artificial Intelligence Conference, one of the largest AI gatherings all year. Over the course of my short visit there were a handful of notable venture financings including:

  • Meituan Dianping, a leading internet lifestyle-services platform, raised $4.6 billion in an IPO at a $60 billion valuation
  • Lianjin, a leading real estate brokerage firm, raised $2 billion from TenCent and Warburg
  • 111, an online Shanghai-based pharmacy, raised $99 million in an IPO
  • And on and on and on these financings keep coming – to such an extent that they stop being newsworthy

There are approximately 90 million Chinese retail investors. It is estimated that foreign investors own between 3.5% – 5.0% of all Chinese debt and equity securities. Recently, leading equity indices rebalanced their underlying share weightings which is increasing international funds flow into the country. For example, the MSCI Emerging Markets Index doubled its weighting to yuan-denominated shares. This adjustment alone is projected to bring an additional $22 billion of inflows.

Ironically, though, there may be subtle signs of investor fatigue. There were “only” 3,111 new private equity funds raised in China in 1H18 (just wrap your head around that number), which was a decrease of 60% from the same period in 2017, according to Jingdata, a start-up database. According to Zero2IPO, the level of private equity investments dropped by nearly 11% in 1H18, while the amount invested in early stage companies plunged 53% in the same period. Zero2IPO goes on to report that the amount of capital raised by venture firms dropped by 44% in 1H18. Only 49% of all IPO filings were approved by regulators in 1H18 versus 79% in 1H17. Many Chinese VCs are bemoaning the onset of a deep freeze in early stage financing market. It certainly feels like the environment is cooling – not at all what it was actually like in late September.

China Weather

There were also a few fascinating healthcare announcements which underscored both the rapid convergence of the clinical sector in China with advanced analytics, as well as the ability to compete with global healthcare technology companies. According to the National Health and Planning Commission, the rate of birth defects is 5.6% (as of 2012) which obviously has a myriad of associated costs and societal issues. In response, the National Development and Reform Commission for its 13th Five-Year Plan covering 2016-2020 set a host of ambitious goals. At a cost of one billion yuan ($145 million), this organization has set out to provide non-invasive prenatal tests for 50% of all newborns. Additionally, there was the creation of a national gene bank which will provide researchers and clinicians datasets to better diagnose and treat inherited diseases. A prominent company called Berry Genomics (Illumina’s China partner) announced that it already has a one-million-person gene pool. The first of its kind drug-coated stent, the Firehawk developed by Shanghai-based MicroPort Scientific, was cleared for clinical trial use in Europe.

China Plan

Undoubtedly, this is a complicated time and a complicated part of the world (maybe it is always complicated everywhere?). As I settled into seat 34C on my flight home, as exhausted as I was, it was nearly impossible to sleep recalling all that I had seen while there. Actually, that is not true – I had run out of sleeping pills.


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