Singapore Rocks…

Somewhere Over the South China Sea – What a fascinating yet complicated time to be in Singapore. In addition to the great spectacle that is Formula 1 Grand Prix racing, the weekend Singapore Summit (Asia’s version of Davos) convened business and political leaders from around the world and also served as the set-up for SWITCH (Singapore Week of Innovation and TeCHnology). A number of significant themes emerged over the three days, many of which were a function of dramatic advances in technology and healthcare.


In addition to the obsession with the US political scene (I find myself apologizing to my guests whenever I travel overseas now) and whether the Fed will raise interest rates this week, of greatest concern at the Summit appeared to be the possible, no likely, turmoil due to the rapid pace of change and the immaturity of social systems. Inevitably workers will be displaced as legacy industries falter.

Notwithstanding Singapore’s 2.1% unemployment rate, the Singapore Strait Times Index has effectively been flat for the past 12 months which has generated some local investor concerns. There are 768 listed companies on the Singapore exchange with around $130 billion of total market value. Although it has struggled with a number of high profile trading outages, Singapore is quite clearly one of the leading financial centers of Asia, if not the world, a position bolstered just in the past few days with a handful of notable corporate announcements. Singapore Airlines disclosed that it would not extend its lease on its first Airbus 380 (the double decker plane) which caused ripples throughout the global aviation industry. Today, Singapore-based Grab announced that it raised $750 million to strengthen its lead as the “Uber of Southeast Asia” while nuTonomy, a Boston start-up, started to pilot its driverless taxis in Singapore.


But there was some haze on the horizon – literally – but a lot less of it this year. Atmospheric modeling experts at Harvard this past weekend announced that over 100,000 people in the region in 2015 likely died prematurely (only 2,200 in Singapore) due to palm plantation fires in Indonesia. It was a significant issue at last year’s Grand Prix but fortunately, given the collective outrage (and rain), was not nearly as noticeable this year.

The new scourge this year is Zika, which was prominently discussed in every newspaper, every day. The call-to-action was the confirmation in late August of 41 locally transmitted Zika cases. The Ministry of Health this weekend came out with a “whole-of-society” approach to combat Zika and also indicated that it will provide free testing for pregnant women, an approach that the World Health Organization does not endorse for asymptomatic women. A number of local health insurance firms are now offering “Zika coverage.” There are 369 known cases in Singapore while the incidence of microcephaly has been between 5-12 per 10,000 live births over the past five years. Hopefully the Indonesian haze can keep down the mosquito populations.

The Singapore health system has a well-deserved reputation for delivering high quality and sophisticated care at reasonable costs. In 2012, Singapore spent 4.7% of its GDP on healthcare with dramatic outcomes: life expectancy is around 83 years which is greater than the US level of 79 years. At its core, the system drives personal accountability with significant co-pay models as well as a compulsory health savings program. Interestingly it is estimated that 80% of primary care is privately held while the inverse is true for secondary and specialist care. The government provides a strong guiding hand when it comes to healthcare priorities and appears to be very focused on the aging population and the importance of wellness as a core element of overall societal health.

A handful of recent announcements just this weekend captured both the level of innovation and the demands that a modern world place on Singapore’s sophisticated healthcare system.

  • Mount Elizabeth Novena Hospital, in partnership with IBM Watson, deployed robots to automate nurses monitoring ICU’s. The government announced that it will spend $450 million over the next three years to deploy robots.
  • The winner of the Most Promising Startup Award among all industries at the Emerging Enterprise Awards was Mirxes, a company developing cancer detection kits
  • Singapore celebrated World Morrow Donor Day this past Saturday and announced that it will focus it recruiting efforts on attracting donors from minority races. Currently there are 65,000 people registered as donors (80% are Chinese) with a goal to add another 50,000 by end of 2018. Apparently the chance for a random match is 1-in-20,000 and is greatly influenced by ethnicity.
  • The National Cancer Center Singapore (NCCS), through aggressive screening and development of advanced therapeutics, announced that male lung cancer rates were lowered from 61.2 per 100,000 in the late 1970’s to 33.7 in 2014. Current research is focused on why “never-smokers” are 3 of 10 Singaporean lung cancer cases.
  • The NCCS also announced new research focused on specific gene mutations which will add to Singapore’s strengths in the field of precision medicines.
  • Fertility is a big deal in Singapore. There were over 6,000 assisted production cycles in 2015, which was a significant jump from the 5,000 in 2012. In separate but related news, it was reported that “egg freezing” was experiencing rapid growth, which underscores the growing importance of women’s careers in this region.

And, oh, there was a race Sunday night. Notwithstanding that attendance dropped to 73,000 from the 87,000 last year, this race is often described as Formula 1’s crown jewel. Formula 1 – the company – was sold last week to Liberty Media for approximately $8 billion. Singapore has the second slowest track given that it meanders through 3.15 miles of downtown streets; the race is 61 laps or 192 miles. This year the first pile-up occurred just a few hundred feet into the race which admittedly made for great fun. And unlike the race drivers, Singapore certainly is not going round and round (ouch – too much?).



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Where Do We Go From Here…

Given the amount of capital that washed into the healthcare technology sector over the last 30 months or so (as much as $16.9 billion globally according to StartUp Health since 2014), the next year may be somewhat unsettled as many of those start-up’s come back to market to raise additional funds. Typically a venture financing round is meant to provide 18 – 24 months of runway, at the end of which a company will have presumably knocked down a number of critical product, team and/or commercial milestones. Anything materially short of that and investors can be quite unforgiving, especially if market conditions have turned more hostile.

Clearly the narrative at board meetings has changed from one of unbridled enthusiasm for growth and scale, almost at all costs, to a more measured cautious focus on what will it really take to get to cash flow breakeven. Or to prove the unit economics. Or what is the real impact on clinical outcomes or cost of care models? Customers, particularly in the employer space, are much more demanding when it comes to near-term ROI on healthcare technology investments. The fact that there is dramatic consolidation in the health insurance industry, much of which is now hung up in Department of Justice litigation, has created some confusion and materially extended sales cycles.

Two contextual developments are also not helpful: questions about the efficacy of accountable care organizations (“ACO’s”) and the lack of robust investor liquidity. There are more than 400 ACO’s serving 8 million of the more than 57 million Medicare beneficiaries. The Dartmouth Hitchcock health system, one of the pioneering ACO’s, just dropped out of the federal program as cost-saving targets were not met. Public investor sentiment is also fickle. According to VentureSource, there has been 166 IPO’s in the healthcare sector between 2013 – 2015, but only 16 in 1H16 (and for half of those IPO’s, existing investors had to buy more than 50% of the offering).

Implications of this are many, and not all of them good. Clearly there will be rotation of investor interest among the sub sectors of healthcare technologies. According to StartUp Health, the top three most active categories in 1H16 were Patient/Consumer Experience, Wellness and Personalized Health, accounting for over $2.4 billion of investment in 95 companies. Those categories consistently have ranked high over the last few years and now many of those companies will have to claim the successful completion of important milestones. Absent that, one might expect to see these categories attract less capital as investors “wait and see.”


Why the focus on those sectors? Analysts (and the executive team of one of our portfolio companies!) often estimate that the determinants of one’s health status is based on four elements: clinical care (10%), genetics (20%), environmental (20%) and then lifestyle and behavioral traits (50%). So arguably the largest contributors to one’s health are the non-clinical components – and have been wholly unmanaged until recently. Thus, the great seduction for many entrepreneurs to utilize and/or develop tools from other industries and apply them to the business of healthcare. And for many, it appeared that the barriers to entry were quite low (“I solved customer acquisition issues for American Express/Amazon/Google, so I can certainly do that in healthcare – how hard can it be?”) The great frontier in healthcare is to successfully match healthcare consumers (members and employees) with appropriate healthcare resources.

The problem is that this is a non-trivial challenge, with difficult consumer engagement dynamics and elusive ROI (or at least not immediate ROI). What appears to resonate with customers are product features that better inform guidelines and evidence-based protocols, tools and incentives that meaningfully impact behavior, and platforms that influence consumer spending. These look like complex B2B products and less like B2C opportunities.

Insights may be gleaned from another industry that experienced dramatic investor interest: adtech. In 2011, $2.7 billion was invested in the adtech sector, which led to an explosion in the number of start-up’s, often tripping over themselves with largely undifferentiated offerings. Since 2012, the adtech sector has attracted approximately $1.0 billion annually, a fairly dramatic fall-off. A great many of those companies even managed to get public, leaving us today with a number of poorly valued, thinly traded public companies and many disappointed venture capitalists.


Interestingly, in the adtech sector entrepreneurs recalibrated their business models from volume-based media models to SaaS models (even rebranding their companies to be “marketing tech” platforms). Arguably, in healthcare technology a similar migration may be underway as companies move away from PMPM-based pricing models (volume) to software subscription models focused on customer ROI.

Expect to see much greater scrutiny by venture investors on issues like time to break-even, gross margins, burn rates (and burn per FTE), and important clinical outcomes. As an ode to the opening weekend in the NFL, expect to see a move away from a “west coast offense” strategy (emphasis on hyper growth, number of members, cost of acquisition, life time value calculations) to a more staid “east coast” grind it out style of company building where the focus will be on cash flow break-even and clinical relevance.




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Interesting Tan Lines in Croatia…

Croatia – what a complicated yet beautiful country, and as sports obsessed as any place that I have visited. Of the 4.19 million people, over 400,000 self-identify as active sports participants, with nearly 70% of that group enrolled as a member of a sports association (there are 4,000 members of the national chess association). Earlier this summer, the Croatian national soccer team faced disciplinary proceedings when its fans threw flares (as in fireworks – not my firm) onto the field during the European soccer championships. Notwithstanding how embarrassing these incidents were for the people of Croatia, they were bursting with pride when Dario Saric blocked Pau Gasol’s layup late in the opening Olympics basketball game in their upset win over Spain. Unfortunately for Dario, though, he is joining the NBA 76ers this fall.

Just over 20 years ago the War of Independence was settled, which exploded the former Yugoslavia into many pieces, creating Croatia. Over 200,000 Serb refugees migrated out of the country so that today over 90% of the population is Croatian; Serbs account for only 4%. The war was understandably a devastating event in the country’s history and frames many of the policies today. GDP contracted by 45% over the course of the nearly 5-year war. The Croatia Bureau of Statistics projects the population to decline to 3.1 million by 2051, which is a dramatic contraction from the start of this decade when it was 4.28 million. For a country that is smaller than West Virginia (which is the 41st largest state in the U.S.) at 22,000 square miles, Croatia is surprisingly the 18th most popular tourist destination in the world with 11 million annual visitors.

Since January of this year, the MSCI Emerging Market index has increased about 30% but unfortunately the Croatian stock market (only 22 public companies) has muddled along, increasing only 3.2% over the same time frame. With nominal GDP of $49 billion growing at an annual rate of 2.7%, the economic situation in Croatia is at best described as promising, and struggles with an unemployment rate of 13.3%. Government debt as a percent of GDP is approximately 87%. Like many other smaller economies, Croatia struggles to provide basic public services, particularly when it comes to healthcare.

Ironically, for a country so preoccupied with sports, there is an emerging issue of obesity and other chronic conditions; the European Observatory estimates that between 50%-60% of the population is over-weight. Total life expectancy for those born in 2012 is 76.9 years, which ranks lower than most of the other European Union countries. The World Health Organization estimated that over 27% of Croats over 15 years old smoke (2009). After the War of Independence, the government turned to a single payor model and created the Croatian Health Insurance Fund which is based on principles of “solidarity and reciprocity” such that contributions are made according to one’s ability to pay, and accordingly, receive care pursuant to their needs. In 2012, Croats spent $2.8 billion on healthcare which was 6.9% of GDP (it is ~18% in the U.S.) or nearly 18% of the overall state spending. There are 79 hospitals and 5,200 doctors in Croatia, or one provider for every 800 people.

Notably, there is a lack of healthcare technology infrastructure which has been flagged a few times by the legislature (2006 and 2013) in the context of broader financial reforms targeting the healthcare system. The Ministry of Health points to over 60 healthcare registries yet acknowledges that there is no central source of general health system information. Importantly, the Croatian health system has altered its focus from reducing the incidence of specific diseases to more improved population health outcomes, not unlike what is witnessed in more developed nations. While there is virtually universal coverage in the single payor framework, there is not the depth of services enjoyed in other EU countries, which is made more problematic with a declining population.

Given this backdrop, one might expect an emerging entrepreneurial community to address an obvious set of market needs, but as with many smaller countries, the level of “home grown” innovation is limited. The Croatian Private Equity and Venture Capital Association has 5 members and in fact, still advertises on its website a set of “recommended events” which all occurred in 2011 and 2012. In July 2015, the World Bank approved investing $22 million to seed a local venture industry, but has yet to disburse any of the ear-marked funds, and by its own admission rates the Overall Assessment for Risk as “substantial.” Curiously, the Croatian government recently announced the formation of a program to provide up to 135 million euros in “economic cooperation funds” via a 50% match to investment managers who raise at least 10 million euros for local investing.

To further explore the renewed Croatian focus on healthcare, I felt compelled to see another one of the “healthy” attractions while there, but I can assure you that I did not go swimming – much less, venture past this intimidating sign.



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Amazing Halftime Show

As the healthcare sector heads into the second half of 2016, there is much to be excited about notwithstanding the significant political and regulatory turbulence. Actuaries at Centers for Medicare and Medicaid (CMS) recently estimated that the U.S. healthcare system spent $3.2 trillion, or roughly $10,000 per person, in 2015 which was an increase of 5.5% from 2014. The 2015 amount was 17.8% of GDP and is now estimated to increase to 20.1% by 2025. Over 900,000 new jobs will be added in the healthcare sector in 2016 alone.

HC Bill

As these spending and hiring trends emerged, innovative companies solving problems with customer experience, drug pricing and other important areas have already made healthcare technology an attractive sector. Looking forward, venture investment will continue to increase, though other factors will undoubtedly come into play, including the Affordable Care Act and its ultimate impact on healthcare spending. With so many distinct areas in healthcare, which categories are likely to benefit from changes to the way the industry operates? The answer is complex, just like the healthcare industry itself.

The principal reasons for healthcare’s expansion, while almost too numerous to count, include the aging population, greater healthcare insurance coverage as more people purchase on the exchanges, Medicaid expansion, and sharp increases in prescription drug costs. Estimates today are that the consumer is bearing 10.6% of these expenses directly, mostly because of the advent of high deductible plans.

The promise of regulatory reform is meant to reduce overall spending growth, in large measure by driving down the percentage of uninsured Americans and also to encourage innovative new care models and solutions. A core component of reform was the introduction of public exchanges for health insurance. In 2Q16, the financial impact to many insurance companies which introduced new products started to be revealed, often with very disappointing results. For example, UnitedHealth reported over $200 million of losses last quarter alone directly attributable to exchange products. In part, and in response to a dramatically changing regulatory framework, many of the larger insurance carriers looked to merge, only to have the Department of Justice step in to block that wave of consolidation.

In 2014, 11% of the population was uninsured which is now expected to decrease to 8% by 2025; unfortunately, there are still 29 million without insurance coverage today. By 2025, Medicare estimates to have nearly 72 million enrollees, up from 54 million in 2015. As insurance coverage becomes more ubiquitous, expect the national discourse to turn to adequacy of that coverage; that is, will care be both affordable and accessible. The relationships between the patient/consumer and their care providers and insurers will evolve to be more focused on costs and value for services provided, thus ushering in the “golden age” for healthcare technology.


Against this backdrop, the healthcare technology sector continues to attract significant new investment. Arguably, regulatory reform in combination with a suite of associated technological advances (mobility, extraordinary computing power, analytics, just to name a few) are converging to drive great innovation across the healthcare system. StartUp Health recently published its 2016 Midyear report which estimated that the digital health sector funding was $3.9 billion across 234 companies, while CB Insights estimated that $3.6 billion was invested in 471 companies.

HC Funding

Although much of this activity was focused on early stage companies, just under $2.0 billion of the total was invested in ten companies, highlighting that there are now a number of substantial emerging winners. Simply annualizing the first half investment activity suggests that the healthcare technology sector will see more capital invested than prior years but in slightly fewer companies. Arguably, with nearly 1,800 companies funded between 2014 – 2015, a degree of consolidation and rationalization will be positive for the sector as emerging winners come to the forefront.

It also is clearer, as the healthcare technology market matures, that successful digital solutions are best delivered in the context traditional provider interactions. Early stage companies showing the greatest traction tend to not be stand-alone point solutions but rather augment or enhance or further the quality of the existing clinical engagement. The novelty of new solutions should not ignore its almost secondary role in providing great clinical care. These insights are starting to be manifest in which categories are attracting the greatest levels of investor capital. Perhaps these companies should be called “B2(B+C).”

Nearly $1 billion this year has been invested in 51 companies in the “Patient/Consumer Experience” category, while almost $900 million was invested in “Wellness” 25 companies. Some of the other significant categories include “Personalized Health/Quantified Self” ($525 million), “Big Data/Analytics” ($400 million), “Workflow” ($325 million), and “Clinical Decision Support” ($235 million). Notwithstanding the number of successful break-out companies in the above categories, according to StartUp Health, Seed and Series A rounds represented 55% of the deal volume with an average round size of $3.9 million.

In addition to this private investment activity, public market investors have embraced this sector as well. The Leerink Healthcare Tech and Services index increased on average 17.8% this past quarter and is now trading at 3.8x 2016 revenues and 3.3x projected 2017 revenues. Interestingly, other traditional valuation metrics also are quite robust: the index on average trades at 13.9x 2016 EBITDA and 25.8x 2016 net income (P/E). Projected average 2016 revenue growth for this cohort of 34 companies is 19.9% and 15.0% in 2017 – quite impressive growth rates.

While consistent liquidity remains elusive overall, there were some notable transactions in healthcare, although most of the IPO activity admittedly centered around the biotech sector with 15 IPO’s to date. According to Mercom Capital, 8 healthcare technology companies raised $270 million in the public debt and equity capital markets as compared to 111 M&A transactions year-to-date, the top four of which were valued at over $1.5 billion (very few of them disclosed transaction values). Undoubtedly much of the M&A activity likely involved larger platform companies rolling up smaller point solutions to extend their core offerings.

Selected Areas of Opportunities

While technology innovation promises to improve almost every element of the healthcare marketplace, there are a handful of specific themes that captured significant attention this year including issues of access to care, drug pricing, and fraud and abuse. As consumers continue to experience rapidly increasing insurance premiums and are challenged to readily find affordable care, compelling new start-ups will continue to emerge to develop solutions and services to address these needs. The healthcare consumer will want to see measurable value.

Primary Care: Much of the innovation in primary care falls along two dimensions – patient engagement to drive impact and business model changes. The first half of this year saw the introduction of the Medicare Access and CHIP Reauthorization Act (MACRA) which created payment incentives to move Medicare fee-for-service patients into risk-based reimbursement models. As primary care providers, who are a relatively small portion of overall healthcare costs, start to realize the power of the “shared savings” model, analysts expect a significant reduction in downstream specialist spend (which the primary care provider directly influences through referrals). In order to facilitate this new payment model, expect to see greater adoption of telehealth platforms, engagement solutions and bundled payment models. All of this is pointing to a world of “on-demand” healthcare.

Drug Pricing: While prescription drugs only account for approximately 10% of national healthcare expenditures, according to the Bureau of Labor Statistic’s Producer Price Index year-over-year pharmaceutical pricing increased 9.8% through May 2016. The lack of pricing transparency, exacerbated by complex discount and rebate programs, frustrate both lawmakers and consumers to no end. According to IMS Health, total prescription drug spend in 2015 was $425 billion, making this an attractive market for innovation and disruption. In addition to novel digital adherence solutions and direct-to-consumer ecommerce platforms, expect to see further payment model innovation which ties drug pricing to outcomes. These “value-based” payment models will introduce pricing discounts if certain clinical end-points are not achieved.

Notably, with a greater emphasis on precision medicines, an increasing number of patients are expected to turn to expensive specialty pharmaceuticals, which will likely put additional upward pressure on prescription drug spend. Anticipating this development, CMS recently announced proposed changes to Medicare Part B injectable drug payments in 2017 which will allow manufacturers greater pricing flexibility tied to outcomes.

In response to upward trend in drug pricing, 30 of the country’s largest employers formed the Health Transformation Alliance in an effort to push for greater value for drug spend. Initially focused on renegotiating existing pharmacy benefit management contracts, expect to see more sophisticated data analytics to identify other sources of savings. Notably, 170 million Americans rely on their employers for health benefits (and while the Alliance above only accounts for 6 million of them, the group spends in excess of $20 billion a year on benefits).

Fraud and Abuse: Earlier this summer, CMS announced that over two years (2013 – 2014) nearly $42 billion of fraud was prevented through more effective provider oversight and screening. The agency estimated that for every dollar invested in the technology to manage the program’s integrity, precisely $12.40 of savings were realized. Superior analytics undoubtedly will improve patient care through greater clinical insights but these tools also will have dramatic impact on work flow and the management of the healthcare system overall.

And in the breaking news category, the Justice Department just announced its largest criminal healthcare fraud case which involved $1.0 billion of fraudulent Medicare and Medicaid billings in South Florida. The interagency Medicare Fraud Strike Force, which has gone after 2,900 defendants ($10 billion in billings) since 2007, relies on a network of nine locations and mines multiple databases to identify suspicious billing behavior.

Obviously the case studies of how innovative technologies impact healthcare are nearly infinite. Providers and payors will continue to focus on population health management, value-based care models, supporting solutions such as wearables and remote monitoring and telehealth, to continue to provide more effective care at acceptable costs.


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Oops!… I Did It Again…

As the immortal singer, Britney Spears, shared with us over 15 years ago, the venture capital industry “did it again;” that is, in 2Q16 it has invested more capital than it raised. While the amounts raised and invested in the 1Q16 were effectively the same (initially estimated to be $12 billion), during this past quarter VC’s invested at a pace nearly twice the amount that was raised, $15.3 billion versus $8.8 billion, respectively (per NVCA data). Yet again, the financing gap has re-emerged.

The last 90 days were tricky. Notwithstanding current estimates for 2Q16 GDP growth of 2.4%, and a June employment report which was startlingly robust with nonfarm payroll jobs increasing by 287k, heading into this past quarter 1Q16 GDP growth was a disappointing 1.1%. June unemployment came in at 4.9% and notably wages grew a reasonable 2.6% year-over-year. More importantly, some level of “clarity” was brought to the national election stage but alongside a steady drumbeat of horrific terrorist events around the world. Over the course of 2Q16, analysts’ expectations for S&P 500 earnings estimates declined 2.7%, with the tech sector forecast being lowered by 7.2% according to FactSet. Perhaps it is not surprising that the amount raised declined nearly 27% quarter-over-quarter given some of this turbulence and uncertainty, but it is curious that the amount invested spiked up over the same period.

U.S. venture firms raised $8.8 billion across 67 funds which compares to $11.1 billion and 82 funds in 2Q15 and $14 billion (final tally, up from $12 billion preliminary estimates of a few months ago) and 67 funds in the prior quarter; in fact, 1Q16 was the strongest fundraising quarter in the last decade. Of the 67 funds raised, 48 were follow-on funds which means just under 30% of funds raised were from first-time managers. As is consistent with the capital concentration theme that emerged over the past few years, the venture industry continues to consolidate around a handful of global brands leaving numerous smaller focused funds to fill in the gaps.

  • The Top Ten funds raised $5.5 billion or 62% of all dollars yet were only 15% of the number of funds, while the Top Five funds raised $4.0 billion or 45% of the total. In shorthand, less than 10% of the funds raised just about half the capital
  • There were two funds of over $1.0 billion in size
  • Median fund size was $37 million while the average was $131 million, which is quite misleading given the handful of mega-funds
  • Funds were raised in 15 states although 50 of the 67 funds reside in California, New York or Massachusetts
  • The remaining states accounted for only $1.1 billion or 12% of the capital (and one of those funds captured $525 million or nearly half that amount)
  • Nearly 7% of the capital was raised by first-time managers with an average fund size of $34 million, and the largest of these was Liberty Mutual Strategic Ventures which is corporate-sponsored
  • 43 of the 67 funds were $100 million or smaller in size, while 16 were smaller than $10 million

Liquidity tends to be the most reliable predictor of limited partner interest in venture capital. Woeful IPO activity has been widely reported, even though public equity markets were hitting all-time highs. There were only a dozen IPO’s in 2Q16, nine of which were biotech companies, and only $893 million was raised. To put that in some context, 961 companies raised venture capital in that same quarter – quite a narrow funnel to get to IPO. According to NVCA, there were 64 M&A transactions involving venture-backed companies, which was meaningfully down from the 91 in 1Q16. Another source, Pitchbook, tallied 153 M&A transactions valued at $15.2 billion which calculates to less than $100 million on average, which likely indicates that there were a lot of distressed sellers last quarter when taking into account some of the few exceptional outcomes which would have captured much of that value. This current year is trending to be the weakest M&A year since 2010, which is striking given the low-growth environment and nominal cost of capital.

In an effort to improve prospects for liquidity, the Jumpstart Our Business (JOBS) Act was passed in 2012 which instituted new rules as of June 2015 called Reg A+, which promised to reduce reporting and legal requirements to assist smaller companies going public. According to the Securities and Exchange Commission, while 94 companies had filed to raise $1.7 billion pursuant to these new Reg A+ rules in the past year, only a few have managed to get public. Issues have involved challenges to raise investor awareness given how small some of these offerings are to conflicting state regulations (fascinatingly, Reg A+ allows companies to publicly raise up to $20 million without an audit, which is illegal in many states). As a point of comparison, at the end of 2Q16 the China Securities Regulatory Commission reported that there were 894 companies waiting to go public on Chinese exchanges.

Interestingly, Cambridge Associates recently released 1Q16 venture capital performance data (there is a one quarter lag given reporting delays) that show 1-, 3-, 5- and 10-year returns of 6.6%, 20.6%, 15.0% and 10.4%, respectively. Across the board this performance was 300 – 500 basis points better than the associated Dow Jones Industrial Average and S&P 500 indices (in fact, it was more than 1,000 basis points better for the 3-year benchmark). And in an environment when interest rates are basically zero, risk assets like venture capital continue to be able to raise funds, even with modest and inconsistent liquidity.


So given all of this VC enthusiasm, at least relative to 1Q16, where did the invested capital go? Consistent with the concentration theme witnessed for fundraising, the top ten companies (0.5% of the total companies) captured over $6.0 billion of the $15.3 billion invested (40% of the total dollars). This was the tenth consecutive quarter with investment activity in excess of $10 billion. Across all 961 companies in 2Q16, the average size financing was $15.9 million (which was larger than 20 of the funds raised in that period!).

While there is some movement quarter-over-quarter as to which stage and sector are hottest, Software continues to dominate with over $8.7 billion (57% of the total) in 379 companies (39% of the total), which runs somewhat counter to the notion of capital efficient business models and is likely due to the “Uber” effect where software unicorns suck up most of the later stage capital in order to scale as private companies.

  • 2Q16 was the fifth straight quarter of declining deal volume which has not been below 1,000 companies since 1Q13
  • Biotechnology was the second largest category with $1.7 billion invested in 100 companies which is off somewhat from the $2.0 billion in 1Q16. This level of activity has been reasonably consistent over time, even in light of the tremendous IPO activity, although recent declines in public biotech stocks likely account for this quarter’s softness
  • There was evidence of a pullback in the Financial Services category which raised $0.6 billion across 25 companies and is down from the $0.8 to $1.3 billion per quarter pace over the last year. The consumer online finance sector has been hit hard recently with questionable activities at some of the more notable names. According to Venture Scanner, there are now 1,379 fintech companies which have raised a total of $33 billion, causing some concerns about the ability to generate compelling returns across that entire group.
  • Silicon Valley companies raised $8.2 billion (53% of the total) across 311 companies (32% of the total), suggesting perhaps that Valley-based companies are raising larger rounds in general.
  • Interestingly, LA/Orange County clocked in as the second most active region with $2.1 billion and 70 companies, pushing NY Metro ($1.4 billion and 124 companies) and New England ($1.0 billion and 97 companies) back to third and fourth places.
  • All of California had 404 companies raise $10.7 billion
  • Twenty states had less than 3 companies raise venture capital; 8 had no companies

The stage of investment often reflects risk tolerance for venture investors. Seed and Early stage investment activity were both down in 2Q16 (5% and 12%, respectively), while Expansion increased 112% with an average size financing being $29 million. Quite clearly investors are doubling down on their perceived winners and are less likely to take on new perhaps riskier ventures. Consistent with that, First-time Financings (companies raising their first round) declined 8% to $1.7 billion. Later stage activity declined 35% reflecting investor fatigue with inflated valuations for many of these companies. Much of the dialogue in the market now is focused on getting to break-even as opposed to growth simply for growth’s sake.

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It Takes More Than a Village…

Kids are freaking fragile creatures. There is simply nothing more heartbreaking than when we hear of cases of child abuse and neglect. And now, when good healthcare is defined as more than just the absence of disease, and there is a greater focus on interconnected healthcare systems to create multiple healthcare access points, the promise of technology to address this horrific condition should never be more promising.

The underlying causes of child abuse may never be fully understood but it is clear that the rising incidence of abuse correlates to disturbing societal trends, many of which are quite obvious. Undeniably this country is experiencing unprecedented class segregation along residential, political and educational lines – all exacerbated by profoundly skewed income distribution. Ironically, demographers report that the U.S. is experiencing less segregation along religious and racial lines (inter-racial marriages were 0.7% of all married couples in 1970 and was 3.9% in 2008, per United States Census Bureau). A significant contributor to rising rates of abuse is the impact of poverty on certain populations and the associated desperation and pressures on family structure.

Earlier this year the Boston Globe reported that Massachusetts had the highest rate of abused and neglected children in the country, which quite frankly staggered me. In 2014 there were 31,867 “victimized children” in the Commonwealth which equated to 22.9 cases per 1,000 children. Of those children, 6,587 had to be removed from their homes to ensure their personal safety. Unconscionable. Nationally, there were 702,208 cases of abuse or 9.4 victims for every 1,000 children in 2014. The Crimes Against Children Research Center determined that abuse is directly tied to illegal drug use and that both poverty and a lack of affordable housing were also significant contributors to this tragedy.

Separate but related, my brother, Dr. Christopher Greeley, is a leading national expert in child abuse and has dedicated much of his career to developing community-based approaches to addressing this type of abuse. Over the years, and having heard about many of the heart wrenching cases he has confronted, I was shocked to see the incidence data above, which overshadow the data of many of the most feared diseases that we commonly discuss. My brother and other clinicians in the field are frustrated by the lack of effective diagnostic and intervention technologies that might determine more precise care pathways – all of these buzzwords are used when discussing other diseases like cancer, heart disease and even obesity.

Again, separate but related, gang violence has profoundly touched my family – twice. I am utterly baffled by the phenomenon of kids shooting kids. Inner city youth violence is one the greatest tragedies of our day and is yet another form of child abuse that we witness time and painful time again. And this too is directly tied to poverty and the associated break downs in social order.

Then there is the explosion of reported sexual misconduct cases at boarding schools. My prep school – Phillips Exeter Academy – was recently caught up in this with a series of revelations of inappropriate behavior by revered faculty. A dozen years ago the U.S. Department of Education released a study suggesting that nearly 10% of all children are the victims of “unwanted sexual attention” from educators and school employees over the course of their academic careers. Child abuse in yet another form.

Two months ago a group of neuroscientists, geneticists and social scientists convened in New York City for the “Poverty: the Brain and Mental Health” meeting. This group described the concept of “social concussions” for children raised in poverty given the multiple and chronic stress conditions that they are subjected to like parental discord, maternal depression, crime, intermittent hunger and poor nutrition. Notably, these conclusions are consistent with the pivotal Adverse Childhood Experiences study conducted in the mid-1980’s in California which studied 17,421 adults to understand how similar stress circumstances when they were children led to mental health issues later in their lives. These epigenetics studies suggested that damage from early abuse can be partially reversed through compelling community-based support systems that allow children to rebuild resilience via caring, consistent relationships with other adults, but it is an on-going struggle for most.

So how bad is it? in a meeting with Professor Robert Putnam at Harvard recently, he shared a wide range of social data which were very disheartening. Much of his research cuts across educational levels and compares those cohorts along a number of dimensions often considered predictive of childhood quality. For instance, as of 2010, for households with less than a high school education, 65% of those are single parent households; this was less than 20% in 1950. The statistics below describe children in each of those households.CHART 3

And on and on. Clearly children born into less educated, poorer households are placed into more stressful, less supportive environments – and it is only getting worse with increased income disparity. The LENA (Language ENvironment Analysis) Foundation has developed a small wearable digital recording device (LENA System) to measure language patterns in children to assess impact of poverty on development. This “talk pedometer” has exposed the dramatic fact that poor four year olds have heard as many as 30 million fewer words than affluent children by that same age.

Earlier this year a nearly ten-year-old class action lawsuit was settled in Florida which sought to improve access to quality healthcare for children in low-income Medicaid families. It was shown that state reimbursement rates were so low that literally hundreds of thousands of children in that state had never had a check-up and that 80% of them had never seen a dentist. The primary remedy mandated in the settlement required that state contracts ensure that providers maintain adequate medical and dental provider networks so as to eliminate issues around access. While obviously not directly defined as child abuse, this structural disadvantage resulted in many cases that mirrored the impact often found in classic child abuse. The Florida legislature determined that steps taken to raise the general condition of a population ought to certainly help with overall well-being of its children.

Just a few months ago the Commission to Eliminate Child Abuse and Neglect Fatalities issued its final report after a two-year intensive study. A subtext throughout the report is a sense of frustration that technologies simply do not exist to provide an early warning system for healthcare providers. Shockingly but not surprising, the Commission identified that the best predictor of abuse is a call to a child protection hotline. Really?!? The most effective approach continues to be “home visiting” programs which unfortunately requires competent coordination across numerous public agencies, which at times can be a tall order. Sadly, buried in the data in the report, one learns that African American children die from abuse a rate 2.5x greater than the general population – shameful.

Which brings me back to my brother. Considerable VC investments have been made in disease specific diagnostics and therapeutics but when it comes to child abuse, it is very hard to precisely identify those children most at risk. Obvious cases of abuse are obvious – usually after the abuse has occurred. And while there are clear “markers” for likely conditions that would lead to abuse, such as poor maternal mental health or domestic partner violence, too often healthcare systems simply are not very good at predicting individual cases of abuse. Existing screening technologies still have far too high false positive rates; estimates for sensitivity are around 70%, which would not be commercially viable in the molecular diagnostics marketplace. “Meaningful use” was a significant step forward but too often there are stranded “data pools” that do not clearly correlate parental EMR data with related children.

In the general population the incidence of child abuse is thought to be about 1% but in “at risk” populations, the incidence spikes up to 2 – 3%. The field of child abuse prevention is moving to be more focused on population management; that is to roll out technologies to engage and educate broader “at risk” populations under the belief that a rising tide will help all children in a given community. For instance, there has been a dramatic increase in the number of “parenting apps” introduced to certain Medicaid populations; some of these require weekly recordings of parents reading to their children which both reinforces that reading is good for children and allows providers to witness those interactions for troublesome telltale signs.

Geo-coding of “at risk” populations also facilitates more sophisticated cluster analysis to see incidence patterns. Such an exercise allows providers and local governments and community leaders to better allocate resources such as community groups and other intervention programs.

And while the technologies to predict, assess and intervene in child abuse cases are developing, the clinical field at times struggles with the basic definition of many cases of abuse and neglect. Broken bones are easy to diagnose but what about latchkey children who are not eating regularly at home? Or cases of intermittent abuse – “my dad only hit me a few times” – or cases where an older child beats on a younger sibling? When does that behavior become a crime?

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Flare Team Expands…

As a team at Flare Capital we will make dozens and dozens of investment decisions together, but when we look to add to the team, well, those are decisions we will only make a few times. Fortunately, given who we have just added, those decisions were really easy to make.

Today we announced the addition of three new members to the expanded Flare Capital team. Dr. Gary Gottlieb, who currently serves at CEO of Partners In Health (PIH) and previously was CEO of Partners HealthCare, will also serve as an Executive Partner with us. Gary has run some of the most important hospitals in the country, and in his current role at PIH, is driving advanced healthcare technologies in some of the most troubled geographies in the world. Gary will provide important insights into where providers may be heading and will be an enormous resource to the teams at many of our portfolio companies.

Phyllis Gotlib is also joining as an Executive Partner. She has the distinction of having started and scaled one of the most successful healthcare technology companies, iMDsoft, which was a leader in provider-based solutions. In addition to being an extraordinary lightning rod for great entrepreneurial talent, Phyllis has an unrivaled network in Israel and other important overseas markets. We are particularly excited about the insights she will provide as our portfolio companies scale.

Additionally, we are honored to have Jonathan Gruber serve as Chair of our Industry Advisory Board (IAB). Jonathan has been at MIT for nearly 25 years as a professor of economics, but perhaps more importantly was one of the key architects of much of the healthcare reform which is framing the forces at work across healthcare today. To be successful investors in such a complex and nuanced industry such as healthcare, it is critical to deeply appreciate the regulatory landscape, so who better to help with that than the person who authored much of what we see today. Jonathan also provides an important voice on our IAB, which today numbers 20 industry leaders from all corners of healthcare.

And as we had previewed last fall, our Flare Scholars program is up and very much running. We have 17 young healthcare technology executives and academics from across the country, all passionate about the transformation of the business of healthcare. Many join us from some of our strategic investors while others are studying at leading graduate schools around the US. Serving as our “ambassadors” back on their home turf, 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.

This transformation of healthcare that we are witnessing now is complicated and touches all geographies of the country. As such, we look to build a team that can uniquely exploit these changes. The collision of profound change and exciting innovation will lead to the creation of important and valuable new healthcare technology companies, which will significantly improve care for all. And that is why, quite simply, we are adding to the team in such important ways to assist us in investing our new $200 million fund.



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