Not Really a Ho Hum Quarter…

Now that most of the investment data are in for 1Q17, analysts are using words like “disciplined” and “normalized” to describe the activity of the first 90 days of 2017 – obviously not how we would characterize the current political climate. As always, the headlines belie what might be seen as more turbulent private capital markets under the surface, as quite clearly there is a continued and pronounced rotation away from the earliest stages of investment. Modest but encouraging exit activity has continued to generate strong limited partner interest as 58 new funds raised $7.9 billion, according to NVCA and PitchBook data.

Nearly $16.5 billion was invested in 1,797 companies in 1Q17, which was the fewest number of companies in the last 22 quarters. Much of this decline was in the Angel/Seed stage which over the past handful of years has accounted for roughly 55% of overall deal activity but only 45% this past quarter, signaling that investors may be somewhat more risk averse as they focus on later stage companies. The number of Seed companies dropped by 46% over the past eight quarters. While Seed rounds have consistently stayed at $1 million in size, average Later Stage VC round size was $10 million as compared to $5.5 million for Early Stage VC rounds.

1Q17 investments

The “bread and butter” of the venture market are the Early Stage financings and there the data are also mixed. Deal volume has declined quarter-over-quarter for each of the last eight quarters and in 1Q17, Early Stage accounted for only 30% of all deals, and at $5.7 billion of transaction volume, was only 35% of all dollars invested. The landscape is quite different in the Later Stage VC rounds where the number of deals has increased sharply over the past three quarters, accounting for nearly 25% of all financings yet 57% of all dollars invested. This concentration is underscored when one considers that the top ten financings were 17% of all dollars invested yet were only 0.6% of the companies. Two of the top five venture deals were in healthcare.

Arguably even more striking as a barometer of venture investor risk tolerance is the dramatic pull-back away from companies which are raising capital for the “first time.” Only 497 of the 1,797 companies in 1Q17 raised venture capital for the “first time” which is the lowest number in 27 quarters and half of what it was just three years ago; together those companies only accounted for 10% of dollars invested in the quarter. First time entrepreneurs are not excited about this “disciplined and normalized” market.

Undeniably, corporate venture funds have played an important, perhaps even stabilizing, role in the venture capital industry. Corporates have consistently invested in between 270 to 350 deals over the last five years, with much of their participation being in Later Stage investments. Overall, Corporate VCs participated in 38% of all 1Q17 financings.

Exit activity is what makes the venture model sing, and the news in 1Q17 was encouraging. Overall exit values for venture-backed companies was $14.9 billion across 169 companies. While the number of exits has not been this low for the last 24 quarters (maybe reflecting corporate chieftain uncertainty in light of the election results), the value of deal activity is consistent with that of the prior eight quarters. Unfortunately, there were only 7 venture-backed IPOs but anecdotally investment bankers, who are normally an anxious lot, appear to be encouraged with both the number and quality of companies in front of the SEC waving their draft S-1s. Somewhat disconcerting, though, was that Snap likely overwhelmed the IPO market in 1Q17, raising $3.4 billion of the $4 billion of total IPO proceeds. The sector with the largest number of exits was Software (96) which was 57% of all exits, and compares favorably to the fact that Software was only 37% of all deals financed in 1Q17.

1Q17 exits

This introduces another interesting metric which investors are increasingly grappling with. Since 2013 the ratio of new investments to exits has been between 10 – 11x, which is nearly 3 to 4 points higher than what was experienced ten years ago. Of course, the math is crude given the timing differences, but undeniably, companies are staying private longer, and for some, that has been aided by aggressive hedge funds and mutual funds. For others, this may not be of their own choice. There are many market whisperers now speculating which of the 153 “unicorns” (per Venture Source) are facing a dystopian future should they not get liquid in the next 12 months.

For the past four years, there have been consistently between 60 and 70 new funds raised each quarter. Between 2014 – 2016, the venture industry has raised between $35 – $40 billion annually and appears to be on pace to raise in the low $30’s billion in 2017. This past quarter was the first one in recent memory when there had not been a $1 billion fund raised (Mithril was the largest at $850 million). Notwithstanding that, the ten largest funds raised accounted for $4.3 billion or nearly 55%, yet represented only 17% of all funds raised.

Other fun “quick hit” venture facts from this past quarter:

  • According to Preqin, $31 billion was invested in 2,420 venture deals globally
  • Since 2013, over $1.5 trillion has been distributed back to investors from private equity and venture capital firms
  • This liquidity may account for why there was $90 billion raised by 175 PE and VC firms
  • It is estimated that there are over 1,900 PE and VC funds “in market” now, targeting to raise $635 billion, inclusive of the unprecedented $100 billion Softbank Vision Fund
  • And staying with Preqin, at the end of 1Q17 it is estimated that there is $683 billion of PE and $159 billion of VC “dry powder” capital still to be invested globally

There were two other market developments that many found surprising. Given all of the political volatility, the Dow Jones Industrial Average had the quietest trading quarter since 1965, with average daily price movements of only 0.3185%; for the S&P 500 it was only 0.3172%. The lack of volatility has put many market analysts on edge – ironically.

And business lending (bank loans and leases) increased a very modest 3.8% year-over-year in 1Q17. Over all of 2016, business lending rose 6.4%. Admittedly corporate bond issuance increased 18% as large issuers locked in historically low interest rates (and maybe even paid off some bank debt). Why this is somewhat disturbing is the downstream impact on growth; Goldman Sachs estimated that this deceleration effectively created a $100 billion loan shortfall.

Maybe Softbank can fill that void.


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People Are Expensive…

With much Presidential fanfare, perhaps slightly misplaced, the Bureau of Labor Statistics (BLS) just announced that the economy added 235,000 new jobs in February. Buried below the fold was the fact that healthcare positions accounted for 26,800 of those jobs or 11.4% of the total. The BLS goes on to observe that healthcare will continue to be the single fastest growing occupational category, which challenges one to reconcile the promise of efficiency gains with new technologies with the drumbeat of ever-expanding healthcare job rolls. When will the healthcare system see the benefits of technology’s operating leverage?

Just over a year ago, the BLS published a comprehensive employment survey which projected employment through 2024 across the 819 occupation categories that it tracks. Nine of the top 15 fastest growing categories are in healthcare (although surprisingly, the fastest growing category was “wind turbine service technicians”). In fact, 2.3 million of the expected 9.8 million net new jobs to be created by 2024 are in healthcare; that is, nearly 1 in 4 new jobs. Over 1.3 million of those jobs will be relatively high-skilled medical work with meaningfully above average pay levels (there are 1.5 million Uber drivers). Nearly 10% of the projected 160 million employed Americans in 2024 will work in healthcare. Interestingly, and unrelated, the 145.8 million employees today possess $92.8 trillion in household net worth (pre-Inauguration).

Across all of healthcare the median annual wage in 2014 was $61,700, although the compensation range was quite wide. Practitioners (i.e., surgeons, physicians, dentists) enjoyed median wages of $187,200 – the highest of all categories – while healthcare support jobs had median wage of $26,400 in 2014. Disappointingly, there is estimated to be a $20,000 pay gap between men and women doctors per Fortune research released for International Women’s Day last week. Perhaps not surprisingly, healthcare workers tend to have higher wages on the West Coast and in the Northeast.


For the U.S. economy to add a net of 9.8 million new jobs by 2024, there will need to be 46.5 million new job openings created to account for the 35.3 million “replacement needs.” The dynamic around “replacement needs” is fascinating when applied to healthcare. Given practitioners tend to be older, 3.1 million highly compensated jobs will be created to accommodate the expected net growth of 1.3 million high-skilled healthcare workers. Hard to see that many of those jobs will be held by robots.

There appears to be another fundamental socio-demographic force at work in healthcare today. Researchers at Rutgers University recently released a 15-year study which shows that many “disadvantaged” men (immigrants, less educated, poor) are occupying what historically have been considered positions held by women, particularly in healthcare. While the prevalence of women healthcare practitioners has increased markedly since 2000, most of these positions still are held by men (except for pharmacists and veterinarians). With the bifurcation of the employment landscape to either high and low paying jobs, significantly more men are holding low-skill healthcare jobs than they were in 2000. Sociologists have coined this phenomenon as the “employment trap door.”

The economist Joseph Schumpeter popularized the concept of “Capitalist Creative Destruction” in the early twentieth century. As a venture capitalist, I have been fascinated by the implications of his theories and am often tempted to apply them to the healthcare system. The great promise of novel technologies coming to market today is to drive dramatic operating efficiencies, which unfortunately continue to be quite elusive. One would expect that technology should lower both the financial and human capital intensity of the business of healthcare.

Simply put, the calculus around productivity (output divided by input) is further complicated as the system moves from “fee for service” to value-based models. As patients become consumers of healthcare, the notion of output needs to be redefined, accounting for a number of new variables around patient satisfaction and quality. As the system straddles these two payment models, several structural inefficiencies persist. Simply chipping away at existing “fee for service” workflows likely will never get step-function improvements in productivity.

Given that the behavior of most executives reflects what they get paid to do, it is instructive to look at compensation frameworks. While the proliferation of new technologies demands that executives become digitally literate, it has also led to a very crowded C-suite with the creation of a bundle of new titles – Chief Transformation Officer, Chief Analytics Officer, Chief Information Security Officer, etc. – adding to overall operating costs. These jobs have become meaningfully more complicated given the threat of hacks, as well as the explosion of mobile apps, novel sensors and wearables, just to name a few. As the healthcare system moves to value-based models, C-suite bonuses are increasingly tied to metrics such as patient satisfaction, quality and safety; not just financial benchmarks. These new models reward (and penalize) executives for meeting a host of new targets, which makes it difficult to both strip-out legacy costs while introducing new costs to manage to a number of different and new objectives.

In 2015, median compensation for the top 300 U.S. CEOs declined 3.8% while for the top 200 healthcare executives, median pay increased by 8.0% to $6.9 million (112x the median pay of all healthcare jobs), according to Modern Healthcare. Interestingly, over 50% of the compensation frameworks for the top 20 publicly traded hospital companies now have bonuses tied to patient satisfaction, usually accounting for 15-30% of total compensation, according to research conducted by Frederic W. Cook & Co.

For healthcare technology companies (the vendors to the healthcare system), compensation levels are quite different. Just over 40% of senior executives at those companies earn between $151,000 to $250,000, while 20% earn less than $150,000. Approximately 5% earn greater than $400,000 per research from The Tolan Group. Just under 20% had no opportunity for annual cash bonuses, while 10% could only receive additional equity. There exists a classic bell curve to the data with the mid-point of the bonus potential in the range of 25-50% of base pay.

Crawling through the rest of the BLS report highlighted a handful of other interesting nuggets. The “home health aides” category is projected to be the fifth-fastest growing category (38%) to 348,000 people in 2024. Three spots down the list was “nurse practitioners” which is expected to grow by 35%. Arguably much of the healthcare labor to be added is likely to be in non-hospital settings, which hopefully will provide some degree of operating leverage to the healthcare system as technologies offer workers the ability to provide care in other less expensive settings.

At the bottom of the BLS list were other occupational categories that had meaningfully less rosy forecasts:

  • Something called “locomotive firers” will decrease by 70% to only 5,000 jobs
  • “Switchboard operators” and “photographic process workers” will decline by 33% each
  • While “postal service mail carriers” will decline by 26%, there will still be 219,000 mailmen in 2024. Email can only go so far I guess. Separately, I am fascinated by the U.S. Postal Service (USPS) which generated $71.5 billion in revenue in 2016 while losing $5.6 billion. The USPS employs nearly 640,000 Americans all-in to bring bundles of paper to our homes everyday, nearly all of which we immediately throw away.

Finally, there are thought to be 2.8 million Americans who have served in either Iraq or Afghanistan, which is 22% more than the number of new healthcare jobs that will be created by 2024.

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Potential Next Steps – Where to Invest…

Emerging healthcare technology themes quickly reveal themselves at this time of year with the frenetic JP Morgan conference and the industry chatter leading up to the HIMSS (Healthcare Information and Management Systems Society) conference, which is in full swing in Orlando this week. It is also a time to reflect on some of the industry milestones from the prior year. All of this is made more complicated this year by the priorities of the new administration, which have yet to be clearly articulated.

It certainly appears that on the heels of the investor euphoria in 2014-2015, that the healthcare technology sector went through an appropriate period of assessment and consolidation in 2016. Now with the broader public equity markets setting new highs on a regular basis, the momentum from the movement to value-based care should endure with an even greater emphasis on de-regulation, price transparency and increased patient responsibility. Arguably, if V1.0 of the healthcare technology sector was triggered by the HITECH Act of 2009 (Health Information Technology for Economic and Clinical Health Act) which mandated the implementation of EMR infrastructure touching off the explosion of consumer digital health apps, the sector is now entering the V2.0 phase. Much of the commentary today is focused on “AI” (artificial intelligence) and “VR” (virtual reality) solutions to make the healthcare system “capital light” to drive meaningful operating efficiencies from the significant investment of the past three years.

A cottage industry has been created since November 9, 2016 to predict the future regulatory framework for healthcare. If there is an emerging consensus, it tends to center around a handful of core themes. It certainly appears that burdensome federal ACA mandates are under fire which will lessen the role of the federal government while moving more power to the states (likely via block grants). Individual mandates and age band requirements that increase cost of coverage for the young and healthy are likely to end. Much of the Republican commentary seeks to correct what is not working such as leveling subsidies to avoid significant price increases, create greater consumer choice and to move away from narrow networks. And it is quite clear that there are several third-rail features which will not go away such as allowing for pre-existing conditions, allowing children until the age of 26 to stay on their parent’s plans, and retaining a set of consumer protections such as prohibition on annual and lifetime coverage limits.

By implication then, there are several exciting market opportunities that should develop over the next few years. Quite clearly value-based payment models will endure, such as MACRA (Medicare Access and CHIP Reauthorization Act) and MIPS (Merit-based Incentive Payment System) which were implemented in 2016 by CMS (Centers for Medicare & Medicaid Services) to reward providers for efficiency and quality. Products and service to assist the healthcare consumer will be important with wider adoption of HSAs, greater price transparency and other reward systems all underscore the industry embrace of “personalized” healthcare. Expect to see greater innovation in the Medicare Advantage marketplace with the increased convergence of health and wealth management. According to Fidelity Investments, the average 65-year old couple on Medicare will still spend approximately $260,000 during their remaining lives. Below summarizes certain in- and out-of-favor healthcare technology opportunities.


In 2015 total healthcare costs per capita in the United States exceeded $10,000, a notable milestone. In aggregate, the cost of private health insurance, hospital care, physician and clinical services, and prescription drugs in 2015 increased 5.8% over 2014 levels to total $3.2 trillion. Across all sectors of healthcare, there was $12.5 billion of venture capital investment in 2016 according to Dow Jones VentureSource which was a decline of 25% from 2015, largely due to significant decline in biotech investments.

The healthcare technology sector continued to see robust investment activity. According to Rock Health, there were 296 venture financings although the amount of capital invested declined slightly to $4.2 billion from $4.6 billion in 2015. Interestingly, the average round size declined 8.0% in 2016 to $13.8 million. The stage of financing activity revealed another important dynamic in 2016 as just over 50% of all transactions were considered to be Seed or Series A financings. There was a marked increase in the percentage of Series B financings and importantly, nearly 15% of investments were bridge financings. Arguably, 2016 was the period of rationalization given the tremendous amount of investment activity in 2014 and 2015; companies in 2016 either hit their initial milestones and were able to raise a Series B round in 2016 or were less fortunate and were bridged to a more narrow set of endpoints, most likely to a sale. Monthly data provided by Fairmount Partners showed a notable and consistent deceleration in financing activity in 2H16 as well, perhaps tied to uncertainties stemming from the presidential election.


Just three categories accounted more than $1 billion of overall financing activity in 2016: genomics and sequencing ($410 million), analytics and big data ($341 million), and wearables and bio-sensing ($312 million). The next three most activity categories included telemedicine, digital medical devices, and population health management, which underscores the diversity of products and services in the healthcare technology sector. This activity also highlights the V2.0 phenomenon the industry is now entering as more sophisticated solutions are being developed to drive actionable insights that will improve clinical care at lower costs.

This past year continued to see robust M&A activity in the healthcare technology sector as well. According to Fairmount Partners, there were 160 M&A transactions, which while slightly down from the 183 in 2015, was markedly greater in terms of disclosed transaction value – $16.0 billion versus $8.2 billion, respectively. The average revenue and EBITDA multiples paid in the disclosed transactions were 4.4x and 13.1x, respectively. A majority of these M&A transactions included companies selling solutions into the provider space.

The public markets were less forgiving in 4Q16, in large measure due to the regulatory uncertainty. After a very strong 3Q16, the Leerink Healthcare Technology/Services public stock index declined 9.3% this past quarter, ending the full year only slightly positive (up 1.7%), effectively surrendering the gains for the first nine months of 2016. The 4Q16 pain was limited to two specific categories in the index: PBMs/Distributors (down 18.7%) and Providers (down 17.2%). The Healthcare Technology and Brokers categories were both ahead more than 20% for the year, possibly indicating who the net winners and losers might be under TrumpCare.

As we head into healthcare technology V2.0 phase what might be expected over the course of 2017? With some fanfare, late in 2016 Rock Health shared the results of their recent consumer health survey that digital health had reached a “tipping point” as approximately half of all respondents had adopted at least three types of digital health products (which was up dramatically from the 19% in 2015). A majority of respondents wanted a copy of their medical records, 87% wanted to control who has access to their healthcare data, and 39% expressed strong willingness to pay health expenses out of pocket.

Recognizing that there are still another 28 million Americans uninsured, and the new regulatory framework is still a long way from being promulgated, the following are just a few possible developments that drive a number of our investment themes. Exciting start-ups are being launched to address these opportunities.

  • Transparency of provider networks will underscore the move to more consumer-centric purchasing behavior. New tools and services will be developed to facilitate the consumer assuming more financial ownership as to assessing both outcomes and quality (value)
  • More distributed healthcare delivery models will emerge to take advantage of new telehealth and multi-channel interactions. Provision and access to care will be made more affordable and convenient through the usage of passive and “always on” monitoring platforms and support systems. Traditional “bricks and mortar” providers will manage significantly more patients per square foot of real estate
  • Brands will become even more important
  • Advent of specialized clustered service offerings around certain chronic diseases (mental health, diabetes, end-of-life, fertility) will be bundled and branded
  • Personalized and precision medicines will continue to be developed along with better diagnostic tools (and regulators will struggle to catch up). This will transform everything from drug discovery processes to clinical decision support.
  • Continued convergence of the management of both health and wealth will bring financial institutions closer to the healthcare industry, with potentially some fascinating partnerships emerging
  • Technology companies will continue to develop broadly horizontal management platforms for consumers to manage health and wellness needs


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Engineering Mosquitos…

Perhaps it was the title of the panel (“Engineering Mosquitos to Fight Malaria”) right before I was to speak that caused me to feel that I was at the wrong event. Or maybe it was because I had just met several senior health ministers from across the developing world. The “Rethinking Malaria Leadership Forum” hosted last week at Harvard Business School brought together delegates from many different disciplines to explore emerging strategies to combat this awful disease.

Malaria wasn’t a disease that I had ever particularly focused on, even though as a child I had lived and traveled in parts of the world confronting this scourge, so I was passingly familiar with it. What little I knew about malaria suggested that some of the healthcare technologies proliferating today (telehealth, connected devices, analytics) might actually have an impact. But what a complicated situation.

Per World Health Organization estimates, there were 212 million malaria cases in 2015 which tragically resulted in 429k deaths – and some believe there may be another 60 million cases which go unreported. Staggering. Furthermore, it is believed that 3.2 billion people are susceptible to the disease – nearly half the world’s population. In 1955, the World Health Assembly launched the first coordinated global effort to eradicate the disease, and while there has been marked improvement over the ensuing decades, malaria is proving to be one of the most complex biological disease systems.

In 2000, there were 262 million cases and 839k fatalities, which had been nearly cut in half 15 years later. As is evident by the map below, there are now 91 countries battling malaria. Thirteen countries, mostly in sub-Saharan Africa, accounted for 75% of all cases. Quite clearly the regions most afflicted are arguably the least equipped to battle this disease. For instance, given the political instability and the failure of government, Venezuela now has more cases than all the other South American countries combined.




In 2000, funding globally for prevention and treatment was estimated to be $200 million and is now running approximately $2.5 billion annually. It is estimated that the United States accounts for 35% of this amount. For many of last week’s participants at Harvard, the U.S. presidential election has now introduced yet another very disturbing risk to the global response to malaria – where does the U.S. stand going forward? Foreign aid the past few years has declined as attention was redirected to disease outbreaks such as Ebola and Zika.

Notably, while there are a handful of therapeutic treatments and effective antimalarial drugs, adequate diagnostic tools in the field are limited, leaving prevention as the approach that has had the most significant impact on lowering incidence levels. Insecticide-treated mosquito nets (known as “ITNs”) have a dramatic impact on transmission rates. Efficient distribution of ITNs require basic in-country logistic capabilities, which is often times the most challenging issue. This “last mile” of care delivery in territories ravaged by war and poverty are often non-existent. The heterogeneity of country responses demand a more coordinated strategy while respecting trans-boundary issues.

Vector control. What a fascinating framework to manage a disease, which in this case is to eradicate all mosquitos in an affected region. As was pointed out repeatedly, mosquitos have been around for 200 million years and are marvelously adaptive. There are more than 400 different species of mosquitos. The average life span for a male mosquito is between 1- 2 weeks and 6 – 8 weeks for females. In fact, in many countries mosquitos are exhibiting high levels of insecticide resistance, which is obviously very troublesome. Going after mosquitos does not even address the underlying cause of the disease which is the parasitic protozoa that are carried by mosquitos (so disease eradication is premised on wiping out the “messenger”).

For such a disease, healthcare technologies potentially serve as a great democratizing force for access to quality care delivery. Most of the health ministers and foundations who participated at this forum had significant experience with sophisticated predictive models. Of course, such tools, while potentially very powerful, are dependent on credible and timely data from the field. In addition to better data capture and reporting, the promise of greater penetration of cellular infrastructure, low-cost sensors and connected devices like digital thermometers offer potentially more effective management of distributed populations and “care-at-a-distance” models. For example, the Malaria Elimination Initiative at the University of California, San Francisco has developed evidence-based solutions by country and in so doing has built a very sophisticated malaria map.

Another interesting map was created by NASA using “gridded population data” which slices the globe into 28 million cells (each cell is approximately 3 x 3 miles). The yellow regions below are comprised of cells with more than 8,000 people each which equates to nearly 900 people per square mile (or about what we see in the Commonwealth of Massachusetts – which to be clear is a blue state, not a yellow state). When superimposing the two maps, one initial reaction is that malaria does not necessarily correlate to areas of high population densities.


As the health ministers from Namibia and Kenya pointed out several times to me, public health is often viewed as an unattractive career for many of their brightest minds, and yet initiatives around increasing awareness through robust community activities, delivering ITNs, and indoor spraying programs have shown outsized impact. Many of the forum participants were looking to pharma to discover and make available break through therapeutics and/or sophisticated genetic tools to modify mosquitos – undoubtedly essential and promising advances. Others seemed to be searching for low cost surveillance technologies. Others struggled with how to architect appropriate funding schemes to support public health initiatives and build local innovation ecosystems.

Harder to satisfy was the desire for competent and effective government in many of these countries that would marshal the resources to eradicate such a devastating disease.

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Whoa Nelly – A Pullback on the Reins…

Maybe you thought that the investment pace was going to slow even faster than it did in this past quarter, which dropped nearly 20% when compared to 3Q16? Per the National Venture Capital Association, in partnership with PitchBook, 4Q16 marked the sixth consecutive quarterly decline in deal volume. What is perhaps more surprising was that the $12.7 billion invested last quarter was the lowest quarterly amount since the end of 2013.

Arguably this retrenchment reflects concerns about valuation levels and the lack of “unicorn liquidity” as many later stage companies stayed private and/or struggled, and crossover investors backed away from new commitments. In 2016, of the 111 IPOs, only 37 were venture-backed companies. The average offering size was only $71 million. Notwithstanding unprecedented public consternation surrounding the election, the public markets experienced rather modest volatility; in fact, the VIX (the CBOE Volatility Index) languished in the mid-teens for much of this past quarter while hovering in the mid-20’s over the summer, post-Brexit.


With near historic low levels of unemployment and quite compelling GDP growth, the tightening monetary policy positions of the new administration suggest that bond yields will increase in the face of modestly higher inflation. GDP growth for 3Q16 was just revised upward again to 3.5% and the whisper estimates for 4Q16 suggest growth this past quarter was around 3.0%. All of this makes the marked slowdown in venture investing at the end of 2016 even more confounding, which was quite pronounced in some important sectors such as consumer service (40% decline in dollars invested) and e-commerce (62% decline). Alongside a handful of notable company struggles, the trouble with some high profile late stage companies seems to have rippled back to the early stage marketplace.

But by no means is it all doom and gloom on the investment front. For the entire year $69.1 billion was invested in over 8,100 deals and venture firms raised $42 billion. The median round size for early stage financings was $5.3 million last year versus $4.5 million in 2015, while later stage rounds stayed essentially flat at $10 million in size. It does appear, though, that much of the end of year pull-back in deal activity was seen in the sub-$5 million round size; in 2014 there were over 3,500 such deals while last year there were only 2,350 deals. Other highlights include:

  • For 2016, $33 billion was invested in 3,100 software companies, which continued to be the largest industry category and is nearly 4x in dollars invested as the next largest category, pharma and biotech ($7.8 billion and 515 deals, respectively)
  • Healthcare services and systems attracted $3.3 billion across 488 deals
  • The top ten financings in 4Q16 totaled $1.4 billion or in other words, 11% of invested capital went to 0.6% of the 1,744 companies which raised capital
  • Of the 8,136 deals in 2016, 29% were first round financings totaling $6.6 billion, which implies that nearly 90% of the total venture capital invested last year ($69 billion) was for follow-on rounds
  • Over $30 billion (or 44%) of the total investments in 2016 involved a strategic investor in the syndicate which underscored the important role corporates play in the venture capital industry (both as direct investors and LPs in venture funds). Notably in just 4Q16, corporate participation was just under 30%, perhaps signaling a “corporate pull-back”
  • Not surprisingly, corporate investors tend to invest later; 69% of their participation was in deals greater than $5 million in size
  • Just over 40% of last year’s investment activity was considered growth equity which is down from 46% in 2015
  • As point of reference, overall private equity investors closed on 3,538 transactions with a total value of $649 billion – VCs were just less than 10% of all private equity activity last year
  • 14 states had three or fewer venture financings in 4Q16, signaling that the VC model remains concentrated in a limited number of geographies

At its essence, investor confidence to make new commitments stems from perspectives about the exit environment and prospects for meaningful liquidity; the news here is less compelling – and getting worse. The weakness in IPO activity has been well chronicled (although, according to Renaissance Capital, if one had purchased a basket of all the 2016 tech IPOs, the return would have been 39.8% which is 5x better than the NASDAQ’s performance). In total, the 111 IPOs in 2016 raised $24.2 billion which was the lowest amount since 2003 and 33% below 2015 levels. Of the $46.8 billion in M&A activity for the 726 venture-backed companies sold in 2016, the median transaction value was $90 million which compares quite unfavorably to the median pre-money valuation of the growth equity rounds in 2016 of $141 million – that kind of stings. As a point of comparison, there were 1,040 M&A venture-backed exits in 2014 for a total value of $82 billion.

According to PitchBook, there were 3,538 private equity transactions in 2016 with a total value of $649 billion. This was a modest decline of 12% and 14% from 2015, respectively. Interestingly, the technology sector was nearly 25% of the total value and a high-water mark over the last 15 years.

There is another important emerging theme at play here, which is the increasing privatization of equity ownership. At the mid-point of 2016 there were 5,734 public companies in the US, which was approximately the same number as 1982 when the economy was roughly half the size. In 1997 there were 9,113 public companies. Clearly the stepped-up roles of private equity firms and sovereign wealth funds are contributing to this development. As shown below, the amount of capital held by those investors has increased nearly 5x over the last dozen years.


One of the implications of this increase in the number and size of the private pools of capital is the amount of the “capital overhang” sitting on the sidelines, waiting to be invested. Cambridge Associates has calculated that there is approximately $450 billion of capital which has been raised but has yet to be invested.


Globally, fund managers raised $602 billion of private capital across 1,228 funds according to Preqin Ltd, which are both modestly down from the 2015 levels of $637 billion and 1,486 funds, respectively. More specifically, venture capitalists for the year raised $41.6 billion over 253 funds; 50 funds closed on $7.3 billion in 4Q16 – the lowest quarterly total since 3Q15. Recent fundraising softness may, in part, be attributed to short-term VC benchmark performance. According to Cambridge Associates, the VC Index recently has trailed the Dow Jones US Small Cap Index – 3.3% vs 6.7%, 1.1% vs 10.7% and 3.4% vs 12.4% for 3Q16, year-to-date and prior one year, respectively. Other interesting elements that emerged in the 4Q16 fundraising data include

  • The top ten funds in 4Q16 totaled $4.7 billion or 64% of total capital yet were just 20% of the number of funds
  • Across all of 2016 there were seven funds raised which were larger than $1 billion in size
  • Per PitchBook the median fund size in 2016 was $75 million versus $40 million for 2015, reflecting the prevalence of $1.0+ billion funds
  • There were 22 “first time” funds launched in 2016 which raised $2.2 billion which was 9% and 5% of the totals, respectively, further highlighting the bifurcation of the venture industry between large and small focused firms


And in other parts of the world, the venture model continues to scale in important markets. For instance, in China there was $31 billion invested domestically in 2016, even though the number of deals declined by 42% according to KPMG. China was approximately 25% of global venture activity. Ominously, though, China’s debt to GDP which was 131% in 2008 and spiked to 235% in 2015, is projected by many analysts to increase to nearly 350% by 2020. In Israel, VC’s raised $1.4 billion in 23 new funds, which was 7% ahead of 2015 levels and is estimated to be $1.6 billion in 2017.


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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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