Israel – Such a Complicated Corner of the World…

As I reflect on a head-spinning five days in Israel last week, it struck me that for all that is going on around that country, people seem remarkably poised and operate with such grace. Next to the lead article in The Jerusalem Post about the delivery of two F-35 jet fighters (which was very big news, maybe in part because they were six hours delayed due to fog – really?) was an article discussing the Health Minister’s announcement imploring the public to refrain from eating donuts during Hanukkah because “there is no need for us to fatten our children.”

The phenomenon of the “Start-up Nation” is well-chronicled now, which does not make it any less impressive whenever witnessed firsthand. Since 2012, it is estimated that there are approximately 1,100 start-ups created each year; on average, over the last four years nearly $4.4 billion of venture capital was invested in Israel. In 2015 there was $148 billion venture capital invested globally which means that Israeli entrepreneurs captured 3.0% of the total dollars; this for a country of 8.6 million people which is only 0.12% of the world’s total population of 7.4 billion. Civilian R&D is 4.3% of Israeli GDP. According to the Mr. Avi Hasson, the Chief Scientist of Israel, he has closed more than 70 bilateral R&D agreements worldwide. He also shared that 21% of the population is Israeli Arab and that he is committed to improving upon the fact that they only account for 3% of all Israeli IT jobs.

There were two other announcements last week that were striking and frankly quite unexpected, and underscored how impressive the progress is despite profoundly challenging structural issues. More than 2.4 million (or 29%) Israelis live below the poverty line per the 2016 Alternative Poverty Report. Separately, but arguably related, the Organization for Economic Cooperation and Development (OECD) announced the same day that Israel has a poor record fostering non-tech small and medium-sized enterprises (SMEs), which account for a surprisingly 99.8% of all companies in Israel. The OECD noted that Israel has the largest share of early-stage venture capital funds as a percent of GDP of any country, and other than Korea, invests at one of the highest R&D rates globally. Importantly, the OECD also observed that the lack of government financial incentives and training programs account for the disappointing labor productivity in the non-tech sector.

The Israeli tech sector is unrivalled. Specific areas of expertise include healthcare technology and cybersecurity, and both reflect the needs and challenges of this part of the world. Two healthcare announcements last week were notable. Tel Aviv University’s School of Psychological Sciences published fascinating research supporting important advances with virtual reality technologies in the field of physical rehabilitation. A few days before that, the University of Haifa released two studies that supported the calming power of work and sticking to a routine. Given the painful geopolitical issues surrounding Israel, the phrase “necessity is the mother of invention” never seemed more appropriate.

Notably, The Jerusalem Post also ran an editorial last week bemoaning the fact that Israeli school children chronically rank quite low on standardized testing when compared to other OECD countries (ranking 16th and 19th in mathematics and sciences, respectively). The piece goes on to attribute this phenomenon to two fundamental issues, both of which are controversial: low quality of teachers and number of disadvantaged Israeli Arabs. Like many other parts of the world, issues of societal bifurcation play out in painful and unfortunate ways.

A week later, I am most struck though by the overwhelming geopolitical complexities. Tel Aviv is only 132 miles from Damascus (Boston is the same distance to New Haven, well before you even get to New York City). Aleppo is 314 miles away. This is a very tough neighborhood, arguably made even more complicated by the recent naming of the US Envoy to Israel who has publicly disavowed the two-state solution. Every day the newspapers ran heart-wrenching stories about the devastation unfolding on every one of its borders. Good thing that the extraordinary work being done in the Israeli tech sector can be calming.

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Life Expectancy Gradient…Role of Healthcare Technology

It is readily accepted that social determinants and education levels directly influence life expectancy gradients; that is, the central issue to well-being is not simply poverty but more fundamentally an issue of inequality. The profound promise of technology in healthcare is its role as the great democratizing force across all strata of society by improving access, engagement, care coordination and outcomes at lower costs. The journal Health Affairs published an important study this summer which showed that more healthcare dollars are spent in affluent neighborhoods even though the medical needs tend to be greatest in poorer communities. Evidence suggests that members of these communities forgo healthcare at higher rates due to issues of access and economic consequences associated with the “consumerization” of healthcare (i.e., high deductible plans, cost shifting, etc.).

Worldwide life expectancy improved from 26 years in 1820 to 31 years in 1900 to 49 years in 1950 to 79 years by 2010. Obviously, the accelerated rate of change over the last fifty years was largely due to advances in our understanding of biological pathways and innovative new medical technologies. Arguably, we are now on the threshold of another step function of improvements with innovative new care delivery models coupled with precision, more tailored medicines, which are supported by “value-based” payment models. Healthcare technology’s promise today is to both extend the curve below to the right as well as meaningfully increase the “area under the curve” with dramatically improved health status.


 A worrying societal development is the “senior boom” which can only be addressed by advances in healthcare technology. When Medicare was established in 1965, there were 5.4 Americans between the ages of 20 – 64 years for every American over 65. This year that ratio has decreased to 4-to-1, and now the Congressional Budget Office is warning that in 30 years that relationship will be 2.6-to-1. Compounding this situation is the burden of U.S. Treasury debt on society. In 1999, it was 38% of U.S. GDP and analysts estimate that level today to be 76% of GDP and an unimaginable 141% in 30 years from now. As a result, investments in healthcare technology have become an absolute imperative.

Just over the last five years, healthcare technology spend on a per physician basis increased nearly 50% from approximately $23k in 2010 to $33k in 2015, according to the Medical Group Management Association, underscoring data’s role in optimizing outcomes. The promise of better matching patient to provider, or patient to therapy, is real and Artificial Intelligence (AI) will play a powerful role as computer neural networks develop to optimize the human-to-data interface. This last observation is fundamental to many of our portfolio companies as entrepreneurs seek to utilize rigid clinical data captured in patient-based systems made actionable with more informed, appropriate and predictive decisions.

As the complexity of the “business of healthcare” accelerated over the past 30 years, new technologies were developed to manage the escalating administrative burdens. In 1980 over $27 billion was incurred in administrative and insurance-related costs; that number in 2012 was $413 billion. An explosion of innovative tools and services have been developed to manage those expenses. Compounding this situation is regulatory reform which has introduced new financial and operating risks into the delivery system that must be assessed, underwritten and then managed.

According to StartUp Health, in 3Q16 global digital health investment activity (including partnership and joint venture activity) totaled $2.4 billion and year-to-date nearly $6.5 billion has been invested in 394 companies. This level of activity continues the pace set during 2014 and 2015. The three most significant sub-categories in the healthcare technology sector this year are Patient/Consumer Experience ($2.5 billion invested year-to-date), Wellness ($918 million) and Personalized Health/Quantified Self ($634 million).

Public investor enthusiasm was equally robust this past quarter. The Leerink Healthcare Technology and Services index of 33 publicly traded stocks increased 7.9% in 3Q16 and 11% year-to-date. Leerink estimates that aggregate revenue growth for these companies will be 19.6% in 2016 and 14.7% in 2017, which accounts for average valuation multiples of 13.7x and 13.0x for 2016 and 2017 EBITDA estimates, respectively. In a period where broader publicly stock indices have advanced modestly (S&P 500 is up 4.8% year-to-date), the healthcare technology sector has been embraced. Having said that, it is worth noting that this is the final year for Meaningful Use payments which likely introduces some uncertainty for some healthcare technology vendors.

While still in excess of $200 billion, global healthcare M&A activity is off more than 50% year-to-date when compared to 2015 volumes, much of this due to Department of Justice delayed reviews of the large pending insurance mergers. Overall M&A activity across all sectors is down more than 20% to put that in some perspective. Specific healthcare technology M&A consolidation themes that emerged this past quarter generally centered on consumerism/patient engagement, telemedicine/remote monitoring, data-driven devices and strengthened infrastructure offerings.

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Pins and Needles…3Q VC Data

Given the obvious anxiety and frustration that surrounds us all, the US venture industry is also exhibiting some fatigue as we finish the 88th month since the last recession. This is the fourth-longest period of economic growth in US history (admittedly, at 2.1%, the growth over this period of time is the slowest since World War II). According to the National Venture Capital Association, this past quarter $15 billion was invested in 1,810 deals which compares unfavorably to both the prior quarter ($22.1 billion, 2,034) and 3Q15 ($21.1 billion, 2,559), signaling perhaps a period of digestion given how much had been invested during 2014 – 2015 window. Notably, this was the lowest quarterly deal volume since 4Q11, a period spanning 19 quarters.

What is most interesting is the activity beneath the headline data. Year-to-date annualized investment activity suggests that 2016 will see approximately $74 billion invested in just under 8,000 companies, which would still make it the second most active year in the past decade, although with a marked deceleration. The amount invested is consistent with what was deployed in each of the last few years, but the median round size across each stage of financing has increased significantly as the level of deal activity has declined. For instance, early stage round sizes are tracking to be nearly $5.5 million this year versus $3.0 million in 2013. Just in the past six quarters, seed stage investing activity has declined dramatically: in 2Q15, there were 1,547 seed deals as compared to 898 this past quarter. As a percent of overall activity, seed investing dropped from 55% in 3Q15 to 50% in 3Q16.

The direct implication of larger round sizes is to provide companies with greater runway but this flies in the face of the capital efficiency mantra, something venture capitalists shouted from mountain tops when we were in a more challenging fundraising environment. In the early stage category, nearly 54% of deals in 2016 were greater than $5 million in size, which compares to 32% of investments right on the heels of the Great Recession in 2010. Have investors drifted, becoming less dogmatic about hitting interim milestones with as little capital as possible?

One of the emerging story lines in the back half of 2016 is the pullback of late stage “unicorn” financings – only eight new “unicorns” were created this past quarter. In 3Q16 the top ten largest venture financings in aggregate raised $2.1 billion which represented 14% of overall activity. In the prior quarter that number was 40%. The largest round in 3Q16 was $474 million, raised by a Boston-based biotech company called Moderna. Notably only three of the top ten companies were software companies, which over the past few years has been the category that represented so many of the “unicorns.”

The data also risk masking a number of other important emerging themes when considered in the aggregate, so here are a couple of other nuggets to consider:

  • The broader software category captured $27 billion to date in 2016 or nearly 50% of all dollars invested; biotech was second with $6.3 billion invested or 11% of capital
  • Through 3Q16 the 357 healthcare technology sector deals raised $2.6 billion which was 6% of the overall activity
  • Average round size for healthcare technology is $7.4 million which is meaningfully below the $9.3 million for all categories
  • The number of late stage deals (355) in 3Q16 has dropped materially from 3Q15 (429) and is down 36% from the high water mark set in 2Q14 (555), reflecting a steady decline in large mezzanine rounds
  • Just over 13% of all financings to date in 2016 included a corporate venture investor; the corporates greatest impact in 3Q16 was felt in the late stage rounds where those investors participated in 23% of those financings versus only 5% of all seed rounds
  • A dozen states had less than 3 companies venture-financed in 3Q16, underscoring the continued concentration of capital in a handful of markets

In general, investment activity is bolstered by investor confidence that a predictable exit environment will continue. In 3Q16 there were 162 venture-backed exits which generated $14.6 billion of value, coincidentally an amount just below how much was invested that quarter. The top five M&A transactions accounted for just about 50% of that value. Notwithstanding the underwhelming IPO market – year-to-date there have only been 32 IPOs with average proceeds of $67 million – the annualized exit activity suggests that there will be in excess of $50 billion of exit value created. The greatest level of exit activity over the past decade was in 2014 with nearly $82 billion of activity; the annual average for the last ten years is $39 billion.

Liquidity feeds right into the fundraising conditions for venture fund managers. This past quarter there were 56 new funds which raised $9.0 billion for an average fund size of $161 million. This is significantly greater than the $77 million average fund size in 3Q15. This fundraising pace is somewhat less than the prior three quarters but meaningfully ahead of 3Q15 which saw only $4.1 billion raised by venture capitalists. Interestingly, the top ten funds closed on $6.1 billion or 68% of all capital raised, indicating a further concentration of investment managers; in the prior quarter 62% was raised by the top ten funds. Just over 40% of funds raised this past quarter were less than $50 million in size.


The projected $43.2 billion raised in 2016 is on pace to be the strongest year since the early 2000’s. Notwithstanding this robust pace, the “funding gap” persists, strongly suggesting that non-VC’s are continuing to invest aggressively in start-ups. According to the recent Preqin Quarterly Update (3Q16), in a survey of active institutional investors in private equity, 71% expressed a “positive” perception of the asset class while 56% expected to increase their allocations to private equity (and of those, 59% planned to do so before year-end).

The other closely watched quarterly report is produced by Cambridge Associates, which recently released its Venture Capital Index and Benchmark Statistics with data as of June 30, 2016. While year-to-date 2016 performance has trailed other public indices, the Venture Capital Index consistently and meaningfully outperforms over longer periods of time. The 3-Year, 5-Year and 10-Year venture returns were 19.2%, 13.6% and 10.4%, accordingly, while the S&P 500 Index was 11.7%, 12.1% and 7.4%, respectively.

So where does that leave us as we enter the final quarter of 2016? The elephant (and donkey) in the room is the US elections, clearly. Interestingly, this past quarter the European venture capital investment pace fell by 32% in the wake of Brexit and was 39% lower than the same period in 2015, according to Dow Jones VentureSource. Isolating just the United Kingdom, the news is even more disturbing: U.K. venture firms invested only $58 million in 3Q16 versus $282 million in 2Q16 and $656 million in 3Q15 – that is what running into a wall looks like, a huuuge wall.

Here are a couple of other noteworthy developments that add to the economic commentary for 3Q16:

  • There is another group of “unicorns” out there – the human ones – the billionaires. Total wealth held globally by all 1,397 billionaires fell by $300 billion to $5.1 trillion since 2014, mostly as a result of commodity price deflation and drop in the value of technology and finance holdings, according to a report jointly published by UBS and PricewaterhouseCoopers. Family Offices are an important class of Limited Partners.
  • In the midst of unprecedented global turmoil, Saudi Arabia just raised $17.5 billion in the largest sovereign bond issuance ever; there was $67 billion of demand, making it nearly 4x over-subscribed. Why is this important? Let me count the ways: institutional investors seeking greater returns, the transition of an oil economy to a more diversified one (recall Saudi Arabia also announced the goal to create a $100 billion (with a “b”) tech fund with Softbank), strength of global capital flows, investor rotation to emerging markets.
  • Slowing growth in China compounded by extraordinary levels of debt and inflated real estate values have set off flashing yellow lights in many corners of the global capital markets. It is quite clear that credit growth is still faster than nominal GDP growth in China, and that often does not end well. Analysts estimate that the local housing sector is singularly responsible for nearly half of all investment in China today.

As complicated as the world now appears, the financing of innovation remains attractive and compelling, drawing in both investors and great entrepreneurs, hopefully making many of these issues background noise.


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Our Newest Seed Has the Coolest Name…

Venture investors have the great honor of backing some of the most talented, passionate people in the world, all trying to solve really big problems. And sometimes, their companies also have really cool names. Last week we hit the trifecta – we backed a brilliant team going after a big problem with a cool company name – Circulation.

This is my third time working with Robin Heffernan, a twice successful entrepreneur with a PhD in Chemical Engineering from Harvard. Robin worked with me as a venture capitalist at my prior firm years ago and then was one of the first employees of an exciting portfolio company of ours (which she was instrumental in sourcing). Third time is a charm – it is a great privilege to work with her again as she scales Circulation with John Brownstein, her co-founder, who is the Chief Innovation Officer at Boston Children’s Hospital and Professor at Harvard Medical School; notably, he is also the Uber Healthcare Advisor – very relevant to the Circulation story. Additionally, I happen to serve on John’s advisory board at the Hospital. Together, those two successfully bootstrapped and sold their last company, Epidemico. Circulation is also very fortunate to have as a founding partner, Klick Health, the leading digital health agency.

Turns out non-emergency medical transport (“NEMT”) services is a significant industry, with nearly $6 billion spent annually on rides to and from hospitals and for clinical trials. Utilizing its preferred partnership with Uber to access its API’s, Circulation has built a transportation exchange whereby providers, payers and companies running clinical trials can provide comprehensive transportation offerings for patients through a central care coordination platform, which basically doesn’t exist today. As providers and payers embrace “value-based” business models, there is growing demand for lower cost, more reliable NEMT services to reduce “no show” rates and to improve patient discharge processes. There are more than 3.6 million patients who miss appointments each year, much of that is due to inadequate access to reliable or appropriate transportation.

Consistent with our fund’s focus on the “business of healthcare,” seemingly mundane issues around transportation have outsized impact on care delivery models. Analysts estimate that for every missed appointment, the provider has lost nearly $150 in revenue. The ability to get patients at the time of discharge out of the hospital quickly frees up beds that can be used for new patients, say nothing of the improved satisfaction scores recorded by those patients.

And the beauty of having Uber as a strategic partner, most everyone is now comfortable with consumer ride-hailing services, with no hesitation about getting in the back seat of a stranger’s car. Obviously there is considerable sophistication in the Circulation platform (HIPAA-compliant, checks rider eligibility, driver training, ride authorization, etc.) versus simply hailing a taxi, using paper vouchers. And care coordinators embrace the level of insights from now being able to manage holistically all transportation costs while creating a detailed audit trail.

Also consistent with our investment strategy is our seed program. We expect that a number of the core holdings in this fund will be derived through our aggressive seed investment program, affectionately called “Flare Ignite” (branding cred goes to my partner’s wife, Kristi Geary) As we did with our Executive Partner, Bob Sheehy in our Bright Health investment last year, Flare is excited to seed exceptional founders addressing enormous market needs. We set a relatively high bar for our seeds as we treat each of them as core holdings, committing all of the firm’s resources even though we may have initially invested only a modest amount of capital.

And not all of the Flare Ignite seeds need to have really cool names…


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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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