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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Easy Rider: Circulation Case Study

The sale of Circulation, which was a Flare Capital portfolio company, closed two weeks ago. The company successfully deployed a leading patient-centric transportation exchange for non-emergency medical rides (“NEMT”), leveraging a virtual national transportation provider network anchored by Lyft and Uber. This announcement was concurrent with CareMore Health’s announcement of the results from its two-month Lyft pilot, which were nothing less than startlingly positive. CareMore is an integrated health plan with over 100,000 members; the cost savings were so significant that they were able to offer 28,000 rides at no additional cost to the plan. Rides were 39% less expensive with meaningfully shorter wait times and much greater member satisfaction.


It was a terrific outcome for the team and investors. Flare Capital was the largest investor, having seeded the company less than two years ago. Upon reflection, there were a handful of critical elements to the Circulation story which may be applicable to other healthcare technology start-ups that are attempting to scale in these complicated times.

  • An Unfair Advantage: Quite clearly the founders and team were special. It is an easy observation to make, and it is one that is often made too freely. But the Circulation team was unique. One of the co-founders (CEO, Robin Heffernan) and I had worked together multiple times over many years. The other co-founder (John Brownstein, Chief Innovation Officer at Boston Children’s Hospital) had a deep understanding of the clinical need, and as importantly, was Uber’s healthcare advisor, affording him a privileged set of insights and relationships that were unrivaled. The CTO and third co-founder (Jared Hawkins) is a rock star, who built a product on-time, below budget. This was clearly a unique asset of the company and one that no other emerging competitor has. And they had been successful together in a prior company.
  • Enormous Market Opportunity: The NEMT market is estimated to be $6 billion. It is hard to build a big company in a small market. And there were no shortages of use cases for the Circulation platform once it was operational. One of the great frontiers in healthcare is the home and Circulation nicely “connects” the home to the healthcare system. NEMT is also a market in transition. Legacy transportation brokers are under siege by the “gig economy” players like Uber and Lyft, and are looking for greater functionality in their products, which led to the next success factor.
  • Contextual “Moment in Time”: In addition to the NEMT market being in transition, there were a number of adjacent developments which underscored and validated the power of a virtual transportation and delivery network like the one Circulation built. Transportation, delivery and logistics are being redefined in every sector. A cursory review of the business headlines quickly confirms that: SoftBank’s announcement with Toyota to deliver healthcare services and meals to the aging population in Japan in self-driving vehicles; Amazon just announced the purchase of 20,000 vans to build a captive delivery network; Walmart launched Spark Delivery, its response to Amazon; Careem, the largest transportation provider in the Middle East just raised $500 million and acquired Commut in India; then rumors spread that Uber was going to acquire Careem; and, Grab, a leading provider in Southeast Asia, announced the NEMT rides was one of its fastest growth categories – and that was all just in the past few weeks.
  • Role of Strategic Investors: Perhaps most particular to healthcare, strategic investors can be powerful advocates and sources of product validation when they are an early investor in a start-up. Often there is a perspective to engage strategic capital later in the journey as a way to price a growth stage financing. Circulation wisely included five leading strategic investors in the Series A, all of which brought unique use cases to the company. In fact, one of them pre-emptively acquired the company. Embrace the strategics.
  • Business Model: Flare Capital tends to gravitate toward business models that lower costs in the near term (months or quarters) on a fully attributed basis, as well as improve quality and outcomes in the medium term (few years). This is by no means a hard and fast rule but companies that can claim success along those two dimensions, in healthcare, are able to raise significant additional capital at attractive valuations. Circulation clearly addressed both of those conditions. Furthermore, the revenue model aligned well with customers and contemplated a value sharing component. Additionally, the product and commercial milestones were well-understood and straightforward.

Uber Cool

  • “Be Cool”: Circulation was a “buzzy” company, in large measure due to its partnerships with Lyft and Uber. There is a very clear sense of mission, which made recruiting easier and built great culture. Who cannot be excited about disrupting a massive market and in the process drive down missed appointments from mid-20% to low single digit percentage points. Or get the frail and elderly better connected to the healthcare system.

Interestingly and not immediately related, there was other news in the transportation sector that should be considered in many of the emerging “gig economy” businesses. Fortune magazine recently published the results of a J.P. Morgan Chase Institute study which concluded that over the past five years ride-hailing drivers’ monthly income dropped by 50% to an average of $762. The success of many of these companies have been, in part, predicated on unnaturally low labor costs. At a time when Amazon just increased its lowest minimum wage to $15 per hour, and with unemployment below 4%, there will be pressure on transportation providers to service more valuable rides like those in the NEMT sector.

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Escape to Singapore…

Having been chased out of Hong Kong by Super Typhoon Mangkhut on Friday, a few days in Singapore with investors and entrepreneurs offered a modest respite. Actually, no…it was the Singapore Formula One Grand Prix weekend at the sovereign city-state, which coincided with the Singapore Summit that convened global leaders (quite different from the notorious June 2018 summit with other leaders, Trump and Kim). Not surprisingly, Lewis Hamilton below in the silver “car” (more like a rocket with wheels) won the race.

Singapore 2018

This island country of less than 280 square miles, sitting on the southern tip of Malaysia balanced on the equator, has become a global powerhouse in commerce, finance, education and healthcare since securing independence in 1965 from said Malaysia. Home to 5.6 million people, 74% of whom are ethnic Chinese, Singapore ranks third in the world in GDP per capita and fourth in quality of healthcare.

Unfortunately, like many countries in Southeast Asia, the current economic climate is being battered by bellicose trade rhetoric between the U.S. and China. The Singapore Straits Time Index is trading at its lowest level in the last 18 months. The Singapore Commercial Credit Bureau just significantly moderated its 4Q18 Business Optimism Index, which tracks the top 200 companies in country. This theme seems to be playing out across the region.

Singapore spends 4.6% of its GDP on healthcare, which is less than the 4.9% it spends on its military (the U.S. is approximately 19% and 3%, respectively). The healthcare system struggles with many of the same structural issues experienced in the U.S. – how to provide care in non-traditional settings, drive down cost of care, and how best to utilize many of the innovative healthcare technology solutions coming to market. While there over just a few days, there were several interesting healthcare announcements:

  • The Ministry of Health established a “regulatory sandbox” for telemedicine providers, announcing the creation of four telehealth start-ups
  • Formation of several community health centers to address chronic conditions for the elderly, with an objective to dramatically increase the number of health assessments across the population
  • Installation of automated external defibrillators across the city

And given Flare Capital’s investment in Circulation (more to come on that later), it was particularly notable that Singapore-based Grab, the leading regional provider of ride-hailing services (Grab acquired Uber’s Southeast Asian operations in 1Q18), announced this week that transportation volume to / from medical centers increased by 500% since 2015, making those facilities the third most popular destinations. A leading medical tourism survey recently ranked Singapore as the most attractive of all Asian countries.

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