Iora Health – Bird in Flight

Yesterday Iora Health announced the close of a $100 million growth financing. We are thrilled to be an investor in what is emerging to be the leading company in the value-based primary care space. Iora is focused on Medicare patients over 65 years of age, managing over two dozen practices nationally. The care model is incredibly compelling as it focuses on an array of both clinical and social relationships with the members. Typical care teams are comprised of a primary care provider, health coaches, behavioral health specialists, nurses, clinical team managers and operations assistants, all collaborating to care for the whole person. Iora Health’s patients experience a 40% decrease in hospitalizations and a 20% decrease in ER visits.

Arguably the US healthcare system is at a point of inflection. Yup. We have heard that many times before. But wait – this now feels different. CVS buying Aetna, Cigna combining with Express Scripts, Amazon/Berkshire/JP Morgan “alliance” (is that the right word?), Roche’s $2 billion acquisition of Flatiron Health, Humana’s acquisitions of Kindred and Curo, Apple getting back into healthcare, etc. Domestically, more is spent on healthcare than in all other countries, and despite that, Americans are experiencing consistently worse outcomes. More innovation is needed and yet it is impossible to get away from the fact that great healthcare is still very much a human-to-human interaction.

Interestingly, with each substantive change to the regulatory landscape, the venture capital industry responded. Once the ACA was introduced at the beginning of this decade, VCs invested between $1 – $2 billion in the healthcare technology sector. With Obama’s re-election and the Supreme Court rulings reaffirming the status of the ACA in 2014, there was a step-function increase in the amount of capital invested annually to between $4 – $5 billion. With greater clarity now (after a turbulent 2017), the VC industry appears to be on a $6 – $7 billion annual pace.

Inflection Point JPEG.jpg

One must always be careful not to generalize, but hallmarks of robust financings in the healthcare technology sector tend to include a company’s ability to lower costs in the near-term as well as generating meaningful clinical impact on outcomes in the medium-term. Driving revenues is always welcomed but great financing success stories need to without ambiguity and with full attribution knock down the first two elements: lower costs, improve health. Iora does both – without debate.

Impact can be realized along two broad dimensions: clinical and social. Some healthcare technology companies offer significant social impact with uncertain and/or unproven clinical impact (many of the B2C healthcare apps). Other companies have significant clinical impact with limited social impact (biotech and therapeutic companies). Iora is focused on both. When evaluating companies, this is an important framework against which to map opportunities. Obviously, high impact on both the clinical and social dimensions is the aspirational quadrant to be in.

There are a handful of other elements to the Iora financing which proved helpful.

  • Team: While somewhat obligatory (of course, all VCs try to back great teams), the team Rushika Fernandopulle (Co-Founder and CEO) has assembled is world-class, has worked together for years, is mission-driven and clearly can scale the company. And has not been afraid to iterate the model.
  • Role of Strategic Partners: Such a collaborative care model relies on the strength and engagement of strategic partners; in this case, the company’s insurance partners have been particularly powerful. Healthcare is a complex beast and demands a level of collaboration unseen in other industries. Assembling aligned partners is critical, and in this case, has been very differentiated in the market. In this environment, client – vendor models don’t work as well as collaborative aligned models.
  • Compelling Economic Model: Management developed an ever-improving member acquisition model, underscoring the attractive member and practice economics. The cost of the clinical care model is well understood.
  • Syndicate Strength: All investors participated in subsequent rounds, underscoring the value of having knowledgeable and well-heeled investors even in early rounds, who can support the later stage financings.
  • Broader Context: In addition to the inflection point in healthcare discussed above, there are also other emerging contextual themes which strengthened the Iora narrative. Consumerization of healthcare and the convergence of health and wealth management are all part of the broader storyline that the team was able to tell, suggesting an even larger market opportunity.
  • Cool Company Name: Ioras are a small family of four passerine bird species found in Southeast Asia, notable for their beautiful plumage and the fact that three of their toes point forward, one points backward. More interestingly perhaps, ioras have unusually thin and proportionally longer bills. Hmmm. While having nothing to do with healthcare, it always made for an interesting conversation starter.

And while I am not yet a Medicare member, I do get my care from Iora…sort of like Sy Sperling’s Hair Club for Men moment – “I am not only on the Iora board, but I am also a client…”

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Grim Reaper…

Do you know how many people died worldwide last year?

According to the Ecology Global Network, 55.3 million people died which, one might say, compares “favorably” to the 131.4 million who were born (~250 births every minute) globally. The causes of death, while numerous, provide a somewhat morbid roadmap as to where one might expect future innovation. Venture investors look for technologies that will have the greatest impact on the largest number of people (“big market syndome”). Dow Jones VentureSource reported that the two most active biotech sectors in 2017 were the immuno-system and blood categories, which together raised $5.3 billion.

In particular, biotech VCs have done a marvelous job over the last few decades backing entrepreneurs who are developing therapeutics to address many of the most prevalent diseases. And now here comes the healthcare technology sector (software and services), which saw $5.8 billion invested in 2017 per Rock Health data. The promise of these novel technologies is to better manage the contributing conditions to underlying diseases (“social determinants”) and to also provide adjunct therapies (“digital therapeutics”).


Another approach to how best frame the opportunity for VCs is whether the disease is avoidable versus unavoidable. Or communicable versus noncommunicable. Arguably, healthcare technologies should have relatively lower development costs and may have greater impact on the avoidable conditions. These technologies promise to meaningfully improve the overall healthcare system through which we all navigate, as well as modify individual behaviors that may exacerbate underlying disease conditions.

The dramatic increase in mortality rates for conditions that may, in part, be addressed by compelling new healthcare technologies now under development has not gone unnoticed either. Painfully, the devastating opioid crisis and surge in suicides has caused entrepreneurs to scramble to develop novel behavioral and addiction treatment platforms. One might hope that solutions coming to market now may turn the purple bubbles to orange, much like the biotech industry has done to a host of other diseases (see below). Interestingly, the Census Bureau blames, in part, the dramatic decline in the labor participation rate from 67% in 2000 to 63% today on the opioid crisis.

Mortality Disease

Of course, a population is not static. The United States has over 325 million people and a collective household net worth of $98.75 trillion (ratio of net worth to disposable income is 7:1). The intersection of health and wealth management is increasingly important as clearer insights emerge about the impact of wealth on health. The U.S. savings rate declined markedly from 5.98% in 2016 to 3.74% in 2017, making unexpected healthcare expenditures particularly perilous for many. The top 1% in the U.S. accounted for 39% of household net worth, according to recent quarterly Fed data (it was 30% in 1989). Clearly financial pressures will reduce investments a given population might make in its own well-being.

Frustrating to many U.S. healthcare economists is how to account for the phenomenon that the significant investment in healthcare in the U.S. is not directly leading to better relative life expectancies. Obviously, there are many confounding factors at work here (environment, diet, genetic) but one would naturally expect that a better capitalized healthcare system would generate relatively better life expectancies. More innovation will be needed to make the U.S. system more intelligent and anticipatory; that is, intervene earlier, often before there is even a specific issue (a “health expectancy” curve that measures quality of life over time is needed).


There are hidden costs with such an expensive healthcare system which are only now starting to be understood. A recent Kaiser Family Foundation survey found that of all families struggling to pay medical bills, 29% ultimately suffered a significant long-term decline in overall household income. Those reductions in income were meaningfully greater than the actual direct medical expenses incurred. Interestingly, and somewhat unexpected, MIT research published in New England Journal of Medicine determined that only 4% of household bankruptcies were due to medical expenses (common perception is that number was closer to 50%), perhaps suggesting that families will ultimately pay medical bills before other bills.

The Journal of the American Medical Association recently reported that people who lost 75% of their net worth in a two-year period were 50% more likely to pass away in the next 20 years. The cost of healthcare looms threateningly over the most vulnerable members of society, such as those who are already below the poverty line, which happens to be nearly 20% of all children in the U.S. The long-term costs to society with having one-fifth of the population at risk of growing up in poor health will be staggering. Is there a connection between the concentration of wealth and the overall health of a population? May well be.



Socio-demographics will also play a significant role over the next few decades in the general health of the U.S. population. By 2035, according to the Census Bureau, the number of people over 65 years of age will be more than half the population. By 2045, Whites will be less than 50% of the population. By 2060, there will be 404 million residents, with 17.2% being foreign-born. While population growth rates have moderated in recent years, the complexity of the population will increase, adding significant new and unexpectant pressures on the healthcare system.

Innovations in artificial intelligence and robotics should assist the broader healthcare system to improve care at lower costs. In 2016, there were 6 million consumer robots sold in the U.S.; analysts predict that number will be 42 million by 2019, many of which will have healthcare applications. It will be interesting to see when the number of robots and humans “created” each year converge. Ironically, robots have an even shorter life expectancy than humans.


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VCs Are Screwing Up Price of Australian Wool…

Against a backdrop of unprecedented global capital flows, three themes emerged in 2017 that underscored a fairly dramatic evolution of the venture capital model: (i) continued globalization of the venture industry, (ii) further concentration of capital with fewer firms, fewer portfolio companies and (iii) advent of novel cryptocurrencies. And I am pretty sure that all of this drove up the price of Australian wool by nearly 60% over the past two years.

This past year was a watershed for the US venture industry as it represented less than half of global venture capital activity for the first time ever. Notwithstanding that, it was another robust year with over $84.2 billion invested in 8,076 companies according to National Venture Capital Association (NVCA) data. While the number of companies was the lowest annual level in five years, the dollars invested was the highest amount in nearly 20 years. Quite clearly, investors are supporting existing portfolio companies with larger financing rounds. The top ten financings this past quarter accounted for 26.3% of all dollars invested yet only 0.6% of all companies – further evidence of investors “supporting their winners.”

In fact, the number of seed and angle financings has dropped by nearly 2,000 companies annually since 2015 while the level of activity for early and late stage companies has stayed relatively constant. The median age of companies at each stage of financing is meaningfully older now, in part as a result of larger round sizes providing longer runways. The average early stage financing was $6 million, which was 20% greater than the level in 2016.


2017 VC


The life sciences sector saw an extraordinary amount of activity in 2017 which was at a ten-year high with $17.6 billion (21% of total) invested in 1,046 companies (13% of total), both underscoring the capital intensity of this sector but also the greater level of investor enthusiasm around personalized medicine and a more accommodating FDA.

Globalization of the venture capital model is awkwardly juxtaposed to an administration raising trade tariffs. While the flow of goods may be more constrained, the venture model has been successfully “exported” as more than half of all venture investments were made outside of the U.S. in 2017. According to Preqin, global venture activity was $182 billion in 2017 across 11,144 companies. Case in point: in 2017 over 271 billion yen ($2.6 billion) was invested in Japanese venture deals as compared to 64 billion yen ($600 million) in 2012, per Japan Venture Research. Corporate venture programs accounted for 26% of all activity last year in Japan, increasing to 70.9 billion yen ($670 million) from a mere 1.2 billion yen in 2011. As point of reference, Japanese companies have $940 billion of cash on their balance sheets.

An important barometer as to the overall health of the venture industry involves the level of IPO activity, which surprisingly continues to be quite modest in light of strong public equity markets. Notwithstanding that there were 24 venture-backed IPOs this past quarter (and 58 for all of 2017), which was the highest level in 10 quarters, analysts had expected greater IPO activity. Twenty-one “unicorns” (companies privately valued at over $1 billion) went public in 2017 versus only 10 in 2016. Notably, in the second half of 2017, “unicorns” collectively raised $26.7 billion in private capital, continuing to avoid the public markets. Of this amount, 91% was invested in “pre-existing unicorns” versus the 9% in “first-time unicorns.”

Overall venture-backed M&A exit activity was also disappointing, yet again. According to NVCA data, there were only 769 venture-backed exits for $51 billion in value. Distributions from venture funds to limited partners declined 12.9% in 2Q17 (the most recent quarter tracked by Cambridge Associates) which was the third lowest quarter in the last five years. The larger financings referenced above allows for companies to stay private longer.


2017 Exit


The other closely watched indicator of the health of the venture market is the amount of capital raised by venture funds. In 2017, venture firms raised $32.4 billion over 209 funds (average fund size of $155 million), the lowest marks over the past four years. One might expect that as liquidity improves, venture firm’s fundraising pace will accelerate. The top ten funds accounted for nearly 75% of all capital raised yet was only 22% of the firms, rendering the average somewhat meaningless as the industry is characterized by larger multi-billion dollar, multi-sector funds that coexist with smaller specialized firms.


2017 Exit


PricewaterhouseCoopers recently reported that frenzied fundraising activity will lead to a doubling of assets managed by all private equity, hedge funds and other alternative vehicles to $21 trillion by 2025 globally, of which $10.2 trillion will be in private equity; the $10.2 trillion is equivalent to 50% of the market capitalization of the New York Stock Exchange or 100% of all publicly traded stocks in China. Today there is $1.6 trillion of committed but uninvested capital, $1.0 trillion of which is private equity.


dry powder 

Bain estimated that there was $180 billion of “public-to-private” buyout activity in 2017, which was twice the 2016 level but still only around 40% of the highwater mark of 2006, which was the busiest year ever.

Can we talk about SoftBank, which touches both the globalization and concentration themes referenced at the outset? Many believe that SoftBank’s Vision Fund is wreaking havoc on both valuations and round size. Last week, DoorDash, which had set out to “only” raise a $200 million Series D, closed on $535 million from the Vision Fund. In 2017, the Vision Fund invested $37 billion in 40 companies (44% and 0.5% of 2017 U.S. totals, respectively). Since 1995, SoftBank has lead $145 billion of investments.

Over-funding companies risks being as dangerous as under-funding companies. There are a set of product, team and commercial milestones companies typically are expected to have achieved at each round of financing. This profile tends to frame the appropriate size of the subsequent round of financing. According to Silicon Valley Bank, which looked at data from 2011-2017, the median Series D financing is just under $14 million in size, which is 1/38th the size of the DoorDash round. We have clearly entered an era when capital is aggregated around a relatively small number of companies, invested by a relatively small number of firms.

Rev run rate

Anyone with a pulse could not escape the third theme which was the explosion of cryptocurrencies. In 2017, there was $6.5 billion raised via Initial Coin Offerings (ICOs), much of that in 2H17. Notwithstanding last week’s issuance of dozens of subpoenas from the Securities and Exchange Commission and that Bitcoin has traded down 45% since its mid-December 2017 highs, there has been $1.7 billion raised in ICOs so far this year. This year 480 ICOs were launched, of which 126 closed at a median size of $12 million. Two of the ICOs – Telecom ($1.5 billion) and ($850 million) – captured most of the attention. Only four IPOs since the beginning of 2017 were larger than the Telecom ICO, which did not go unnoticed by the venture community.

Token Data tracks 902 ICOs and discovered that 142 of them failed before raising capital and another 276 failed after fundraising, for a failure rate of 46%. Less understood is what happened to another 113 ICOs that “semi-failed” and can no longer be found – they are AWOL, having ghosted their investors. determined that $233 million from ICOs were invested in projects that simply failed, while a recent MIT study estimated that there has been anywhere from $270 to $317 million of outright ICO fraud. In January 2018, the Japanese crypto exchange Coincheck was hacked for $500 million.

In other examples of the convergence of globalization and cryptocurrencies, Venezuela just launched its own state-sponsored cryptocurrency called the petro; evidently $735 million has already been sold. Go figure. Late in 2017, the People’s Bank of China shut down crypto exchanges and ICOs, given concerns over loss of state control. To all of this, Warren Buffet proclaimed last month that he would be pleased to buy put options on every flavor of cryptocurrencies out there.

Valuations are increasing everywhere you look. Even the price of a kilogram of Australian Merino wool is up nearly 60% in the last two years and now costs $14/kg. Between Australia and New Zealand, there are estimated to be 103.5 million sheep, which shockingly is nearly a 100-year low for the local sheep population. In fact, the ratio of sheep to people in New Zealand has dropped to 7:1 – it used to be 20:1 nearly 35 years ago. Given the good times, and the prevailing herd mentality (sorry), Australian wool analysts point to the fact that every venture capitalist now has added slick new Allbirds wool shoes to their uniforms (I have three pair) which is screwing up the pricing of wool.




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Tinder for Healthcare

This is likely not about what you think…

It has been just over a month since returning from the JP Morgan Healthcare conference and my shoes are still wet. San Francisco is an amazing city, but less so in torrential rain when you must scramble from hotel to hotel, eagerly looking for your next 30-minute meeting with someone you may never see again. Trying to return emails or look up the location of your next get-together while holding an umbrella, racing between traffic, is challenging at best. Swipe right…or was it left.

Yet we all go – and actually look forward to going, in large measure to gauge the pulse of the industry and to assess what are some of the most critical themes for the upcoming year. This year, in particular, JP Morgan was a “can’t miss” event given the recent extraordinary healthcare M&A activity and the high-water mark pace of healthcare technology investments for 2017. Per Startup Health, there was $11.5 billion invested globally in the sector, while Rock Health calculated $5.8 billion invested domestically. The thousands of us wandering around San Francisco were eagerly searching for the “signal through all the noise” and were not disappointed. Quite clearly the healthcare sector is at a point of inflection as it navigates a set of major forces, many of which merge into one another.


Industry Consolidation and Vertical Integration: Interesting combinations and alliances are forming across the industry, all in an effort to capture more of the healthcare spend and improve overall margins (CVS/Aetna, Humana/Kindred, Albertsons/Rite Aid, Optum/DaVita, etc). Horizontal consolidation offers the promise of significant cost reduction, as redundancies are taken out and larger entities can improve purchasing leverage. Vertical combinations will allow companies to direct downstream patient/member/consumer healthcare spend and offer more compelling integrated care models. Non-healthcare players appear now to be ready to enter the industry in profoundly disruptive ways, further driving consolidation (see Amazon).

“Retailization” of Healthcare Continues Apace: Providers and payors continue to pursue strategies to engage and activate the member/patient and treat them more like rational healthcare consumers. In large measure in response to dramatic cost pressures, the system at large is requiring the consumer to engage in ways not previously seen. High-deductible plans, greater choice among providers, as well as a deeper appreciation that an informed consumer likely will lead to better outcomes, healthcare entities will continue to force this wave of consumerism driving compelling investment opportunities.

Innovative Value-Based Care Models: After some initial enthusiasm with the introduction of alternative payment models three years ago (see MACRA – Medicare Access and CHIP Reauthorization Act of 2015), which somewhat underwhelmed, providers taking on greater outcomes risk for greater potential payments and greater margins. The transition away from “fee-for-service” frameworks will be in fits and starts given implications to rearchitecting workflows and IT systems, but it seems inevitable and will accelerate as outcomes data from value-based care models become known.

Role of Government: The political commotion, while distracting and at most times frustrating to witness, masks some of the real transformation in policy coming out of Washington. And while the fog of confusion is oftentimes dense, the current administration is chipping away at the pillars of the Affordable Care Act (no individual mandate, allow insurers to sell “skimpy” plans, etc). Medicaid is in the crosshairs of regulators as states begin to impose work requirements, while increasingly entrepreneurs and investors are exploring novel ways to address the needs of that population. Changes to reimbursement models will also have a significant impact in 2018. For instance, Centers for Medicare and Medicaid Services (CMS) has introduced a new reimbursable Improvement Activity provision to its Merit-based Incentive Payment System (MIPS) which will improve prospects for telehealth and remote patient monitoring. Additionally, recently appointed new FDA Commissioner Dr. Scott Gottlieb has articulated a compelling innovation agenda, most notably with the “pre-certification program” whereby companies and developers (versus products) are approved and encouraged to accelerate development programs.

While this list is in no way comprehensive and ignores important issues such as the opioid crisis or exciting advances in personalized medicines, many of our recent discussions hit on these broad themes, and with reasonably consistent interpretation of their impact on the healthcare technology sector. Innovators will build the solutions which will drive a more integrated system as the healthcare market navigates this inflection point. Specifically, a number of investment opportunities are emerging in this environment, and fortunately, continue to map closely to our areas of thematic interest. Excuse the buzzwords.

  • Advances in Artificial Intelligence and Machine Learning quite simply will make the healthcare system “smarter” and more responsive to provider and patient needs. Whether analyzing genetic data sets or reams of image data, delivery of care will improve as these technologies proliferate. Arguably, though, the healthcare sector is moving from an early development phase where entrepreneurs developed a number of more narrow, undifferentiated algorithms to more fulsome products with AI and ML capabilities built into a larger solution offering (see Aetion, HealthReveal)
  • While blockchain platforms have drafted behind the investor euphoria with cryptocurrencies, undeniably these new platforms will become platforms for many secure healthcare environments which have massive data integration needs. Expect real substantial companies to be built here (see Curisium)
  • Ever improving care coordination tools will be built to assist patient/member/consumers through their healthcare journey. A more integrated care delivery system demands better tools to assist in activation, engagement and navigation (see Welltok)
  • Personalized medicine and digital therapeutics continue to capture investor interest. A number of venture-backed companies are emerging which hold great promise for “software-as-a-therapy.”
  • Services represent much of the $3.2 trillion healthcare spend in the United States annually. Exciting novel care models, either for specific sub-patient populations or more broadly applicable, will be an important focus area for investors this year. Outcomes and cost of care data for providers who are at-risk are compelling. In many cases, these results are quite disruptive and can be readily integrated into larger provider networks (see Iora, Bright Health).


Again, this list is neither comprehensive nor exhaustive. There are several other topical areas of interest, many of which will contribute meaningfully to the success of our fund. The great frontier in healthcare is the home, with providers and technology companies striving to develop healthcare solutions and services in the home that people will embrace. A trusted branded full-service comprehensive offering will be developed that will deliver high quality care remotely and in the home.

Another emerging area of interest is clearly around social determinants and how might they be more effectively assessed, accessed and managed. Will radical new models emerge that will be patient-centric and dramatically improve health equity? A greater appreciation of what makes one well includes a host of basic services, many of them would not be considered traditional healthcare services, and yet the healthcare system may be called on to provide access to such services. A more holistic understanding of one’s condition is required to be able to more effectively provide care.

And while much of JP Morgan is a blur, there were a few other lasting impressions. As a jet-lagged East Coast participant, I was often on the street at 4:30am PST heading to that one Starbucks that is open at that hour and was staggered by the number of homeless people. There is a cruel juxtaposition as an investor contemplating innovative models in the social determinants space to see those with abject needs surrounded by leaders of the healthcare industry.

I was also struck that I actually never met anyone who worked at JP Morgan that entire week. And I was particularly disappointed to learn that there were more CEOs presenting with the name “Michael” than there were women presenting.



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Ontario Healthcare Tech Scene, Hey

Two decades ago I would occasionally find myself in Ontario given the developing innovation corridor between Toronto and Waterloo, affectionately referred to as “Silicon Valley North.” Last week I visited again and saw the emergence of a strong healthcare tech ecosystem, leveraging historic strengths in telecom infrastructure and the recent (and significant) commitments to the artificial intelligence sector. Out of a coordinated series of university initiatives, Thomson Reuters recently reported that over $350 million had been invested in the AI sector over the past three years in Ontario, employing over 1,100 AI researchers alone. “Silicon Valley North” is the third most important AI cluster in the world according to Element AI. This past week, Salesforce said it would invest $2 billion in the Canadian tech sector.

My meetings were on the Canadian side of the Niagara Falls, which I had not visited since I could barely peer over the protective handrails. Niagara Falls is actually three waterfalls, the highest of which is 165 feet. At peak flow rates, over 45 million gallons of water passes over the falls per minute. Let me help you with that: one million gallons would almost fill a football field-sized swimming pool that is ten feet deep. During winter evenings, the mist freezes to create a drip sandcastle effect at the base of the falls which melts when the sun rises.


Many of the entrepreneurs I met were developing fundamental technologies, often addressing infrastructure issues in healthcare – not light-weight engagement apps. While accessing capital was a common complaint given only a few local funds, notably all of the entrepreneurs were scaling their businesses with quite modest burn rates and were knocking down important milestones. With great pride, many pointed to some of the significant local success stories such as PointClickCare (EHR provider for long-term care sector) which had raised $145 million and had nearly 1,000 employees. Some of the other companies cited were developing genetic computational systems or AI-based drug discovery platforms or other broad healthcare management platforms.

Perhaps this is not so surprising given the concerted efforts to strengthen the local healthcare ecosystem. In January 2017, the Ontario Bioscience Innovation Organization published a report highlighting a set of initiatives centered around (i) commercialization, (ii) local healthcare system engagement, and (iii) global engagement with leading multinationals. Such a dedicated effort so far as resulted in $109 million of capital invested in 45 companies and has seen those companies grow the combined employee base by 49%.

Contributing to this success was undoubtedly the broader technology ecosystem. Ontario is the second largest of the 13 provinces and territories in Canada. With 13.5 million people covering 415k square miles, Ontario accounts for 40% of the Canadian population but has 60% of the tech sector’s employment (2014 census data counted 280k tech workers). Over 810k people work in the healthcare industry.

The advent of a successful healthcare tech community often springs from the intersection of the established healthcare delivery system (Ontario has over 460 hospitals) with tech entrepreneurs looking to solve important healthcare problems. Pressing societal health issues also contribute to deep sense of mission. As in every other geography, aging population, chronic diseases and limited access to services drive the need for innovation. As of 2016, nearly 2.3 million Ontarians (that is a word) were over 65 years old (nearly 17% of the population). In 2014, 18.1% of the population smoked and 17.9% were defined as “heavy drinkers” – probably considerable overlap – according to Statistics Canada. Over 54% of adults were deemed overweight or obese; 21.1% of all children. These issues are not at all unique to Ontario. Recognizing this, the provincial government in its Action Plan for Health Care 2106-2018 aggressively advocated for resources to be moved to more community based models and away from acute care settings.

As I left Niagara Falls, I could not shake the stories of the 15 people who deliberately went over the falls, some in barrels (why a barrel?), some in canoes, some with just a life vest. Two people – Steve Trotter (1985, 95) and John Munday (1985, 93) – actually went over twice! As I studied the healthcare census data – 37.1% of males 20-34 years old in Ontario are considered “heavy drinkers” – I could not help but wonder what Steve and John had been drinking.


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Rounding the Bend, Heading For Home…

The 3Q17 year-to-date funding data point to several important emerging themes and may clarify where the broader healthcare technology sector is heading. Through nine months the investment pace has been nothing short of robust with StartUp Health and Rock Health data tallying $9.0 billion and $4.7 billion, respectively, although there are signs of recent moderation ($2.5 billion was invested in 3Q17 according to StartUp Health, suggesting a more muted 4Q17 level).

More specifically, according to StartUp Health there are now three sub-sectors of the healthcare technology sector which have already attracted more than $1.0 billion of capital YTD (Big Data/Analytics ($1.3 billion), Personalized Health ($1.2 billion), Medical Device ($1.0 billion)), underscoring both the maturity and depth of these market opportunities. Notably, seed investment activity was 28% of the total deal count 2017 YTD, which is the lowest annual level since 2010, further suggesting that we are now entering a period of consolidation, when emerging category leaders come of age, separating themselves from the pack. Furthermore, average deal size increased from $14 million in 2016 to $18 million YTD 2017. In 2016, Accenture determined that only ten companies accounted for 38% of all private equity fundings in the healthcare technology sector; expect to see that continue in 2017.

The strong fundamentals are not lost of public stock investors either. The Leerink Healthcare Tech/Services stock index increased 30% over the first three quarters of 2017, trading at a heady 15.5x and 15.3x 2017 and 2018 EBITDA, respectively. EBITDA margins for 2017 and 2018 for this cohort are estimated to be 23.4% and 20.2%, underscoring the profitability of the successful companies in this sector. Accordingly, aggregate revenue growth forecasts for that same group of companies in 2017 and 2018 are 19.1% and 15.3%, which implies 4.3x and 3.7x 2017 and 2018 valuation multiples of revenue.

One emerging paradox then is the relative lack of M&A activity in the healthcare technology sector, particularly considering the growth characteristics of the sector and acquirers with strong public currencies. TripleTree tracked 242 closed M&A transactions in 3Q17, although only 45 disclosed deal metrics; notably, the average revenue multiple in those transactions was 2.8x, meaningfully below the level of publicly traded companies in the sector. Total 3Q17 transaction volume was $16.2 billion which was a decrease of 45% from the prior quarter. Crosstree Capital Partners identified only 7 deals in 3Q17 with announced values of greater than $250 million, suggesting that much of the M&A activity was small, likely distressed sales of companies that were not able to scale. This is not surprising given the amount of venture capital that was deployed in 2015-2016, which afforded start-ups only 18-24 months of runway.

Another topical item has been “healthcare Artificial Intelligence” (AI) and what the likely impact of these solutions will be on healthcare. Rock Health estimates that stand-alone AI vendors will account for nearly $500 million of investments in 2017 (or nearly 10% of all activity) and that 80% of those companies are principally B2C focused. Anecdotally, with increased customer fatigue and elusive ROI for many of these products, we may be at an inflection point here as well. AI vendors will need to modify business models to allow them to take on more risk, aligning with customers to help solve fundamental clinical issues versus simply flagging at-risk members / patients. According to a Pricewaterhouse Coopers (PwC) industry framework, healthcare AI is mid-way through the second of four phases (“Data Fusion” phase) when customers are experimenting with AI solutions and industry alliances emerge. By 2020, PwC calls for the “Commercialization” phase when meaningful clinical impact will start to be realized. Soon will come the day when AI is no longer tracked separately and it is simply part of every healthcare technology company’s product offering.

Two other important themes presented themselves over the last few months: (i) dramatic and large company M&A activity (CVS – Aetna, Humana – Kindred, UnitedHealth – DaVita, etc); and (ii) quite an accommodative regulatory environment. At its essence, the transition to value-based models is driving providers and payors to manage greater elements of the patient / members’ healthcare journey. With possible Medicare and Medicaid cuts coming, the specter of very significant pricing pressure is very real. And recently introduced is the competitive concerns of what a healthcare-focused Amazon means to established businesses as the patient / member becomes even more of a healthcare consumer. If nothing else, with scale should come a stronger hand when negotiating customer contracts.

Health M&A

Undeniably the new FDA Commissioner Gottlieb has created a more accommodative regulatory framework for healthcare technology start-ups, from establishing pre-certification pilot programs to lowering the hurdles for direct-to-consumer genetic health risk tests. Expect to see a wave of novel diagnostic devices, disease management platforms, monitors, etc be introduced to the market without the historic burdensome regulatory pathway. Notably, in 2017 the FDA cleared 51 connected health devices. Additionally, the Creating High-Quality Results and Outcomes Necessary to Improve Chronic Care Act (CHRONIC Act) was passed in 3Q17, which expanded Medicare coverage for telehealth services.

Arguably, the two themes above are beneficial to healthcare technology start-ups. For the established companies, new revenue opportunities and new risks that need to be managed require innovative new products and solutions, sourced (or acquired) by start-ups. Coupled with a more forgiving regulatory environment, expect to see faster “time to market” which has been one of the chronic issues confronting many early-stage healthcare technology companies – rarely is it that the product does not work but rather a window was missed due to poor product / market alignment.

Another interesting perspective to handicap where investor focus will be over the next few years is to look at the gravest threats to the human condition today. Quite clearly, we are struggling with a national addiction crisis as well as confronting a host of devastating neurodegenerative diseases. It is also more understandable why behavioral issues are so front and center in healthcare VCs minds now. As shown below, our biotech VC brethren have had a dramatic impact on many other chronic diseases.

Mortality Disease

So, as we turn the page on another year, there are several emerging opportunities that should continue to gain traction. At their essence is the imperative to have greater presence, real-time, “in line” healthcare infrastructure, implying a handful of elements:

  • Dramatically greater level of data sharing with improved interoperability, particularly in the clinical setting, needs to improve after nearly a decade since widespread electronic medical record adoption, to address widespread data asymmetry in healthcare
  • Novel care delivery models will continue to develop and be more robust, from telehealth to other modalities to meet the patient where it best suits him / her, particularly in the home – healthcare system needs to move from a paradigm of healthcare consumption to one of healthcare experiences, and price accordingly
  • Deeper levels of patient engagement, both active and passive, acknowledging that healthcare complexity requires that much of the coordination and navigation will need to be done on behalf of the member / patient / consumer
  • Employers will continue to play a larger role in what defines success for healthcare technology companies, as the employer has clear and measurable ROI requirements
  • Computational care driven by AI and personalized medicines


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3Q17: Turbulence Ahead at Cruising Altitude?

With Bitcoin blasting through the $7,800 per token ceiling last week (then promptly dropping $1,000 in last two days), Apple now worth $900 billion, and unemployment at 4.1%, it is a good time to look at 3Q17 funding data. The venture capital industry continued to power along in 3Q 2017 as 1,706 companies raised $21.5 billion. While a slight decrease from the activity in 2Q 2017, the annualized pace suggests that 2017 will be one of the most active years on record for capital deployed. Notwithstanding the evidence that mutual funds and hedge funds have pulled back somewhat from their investment pace in 2014-2016, sovereign wealth funds and SoftBank’s recently upsized to $98 billion Vision Fund (closed in May 2017) have continued to drive overall investment activity.


In fact, the SoftBank impact is more dramatic than one might initially have thought. The largest investment in the quarter was the Vision Fund’s $3 billion investment in WeWork, which means that 14% of the capital invested in 3Q17 went to 0.06% of the companies. Year-to-date there were 61 venture financing rounds that were greater than $100 million; in 3Q17 alone, there was $8 billion invested in $100+ million rounds and SoftBank was 52% of that amount. In its first six months, the Vision Fund has invested $18.4 billion in 15 companies already, which is just over 40% of total venture capital invested in last two quarters.

The number of large financings somewhat masks the fact that the overall number of investments is declining markedly. In fact, this past quarter was the lowest deal total in the past 24 quarters extending all the way back to 4Q11. The most dramatic retrenchment occurred in the Angel/Seed and Early Stage rounds, which likely correlates to elevated pre-money valuations, which at $15.9 million for Series A deals year-to-date is over twice the valuation levels from 2008 -2013. Late Stage valuations over that same period were between $50 – $100 million, and through 2017, the average Late Stage valuation was pegged at $250 million.

Most of the buzz this past quarter involved cryptocurrencies and the explosion of Initial Coin Offerings (covered here). Notwithstanding the very legitimate concerns by regulators and the IRS, there were 140 ICOs that raised in aggregate $2.2 billion in 3Q17 according to CoinSchedule. In most cases, these companies do not have an existing product, provide little to no substantive due diligence materials, and the issued tokens trade with extreme volatility. Whether these tokens go on to be an enduring source of financing is not clear, but in the moment, this is a very tempting (and fast and inexpensive) way for entrepreneurs to finance interesting projects with no pesky shareholders. One other emerging issue: according to Motherboard, a single Bitcoin transaction requires 215 kilowatt-hours of electricity which is enough to power the average U.S. home for one week. As a point of comparison, venture capitalists have invested $23.2 billion in 2,272 Software companies year-to-date, highlighting how material ICOs have become.

There was considerable discussion on the state of the exit market and the level of liquidity. With the prevalence of very large Late Stage financings, many high-quality companies are choosing to stay private longer. According to PitchBook, there have been only 530 venture-backed exits year-to-date with aggregate exit value of $36.4 billion ($69 million per exit on average, which likely is below invested capital in many cases). More troubling has been the lack of any meaningful IPO activity. While overall there were 29 IPOs which raised $4.1 billion, only 8 of them were venture-backed. Importantly this was a decrease of 30% from the IPO level in 3Q 2016 and was driven by the 70% decline in technology IPOs. In stark contrast, per Dealogic data, IPOs in China raised $8.6 billion year-to-date.

Exits come in many shapes and sizes. Companies that shut-down are one of the (many) hazards of the job (it is not unusual for great performing venture funds to write-off 25+% of invested capital in any given fund). Per TechCrunch, through the first three quarters of 2017, the top ten venture-backed companies that failed had raised in aggregate $1.7 billion and included some very recognizable names such as Jawbone, Beepi, Yik Yak and Juicero. Ironically, in 3Q17, $1.7 billion was invested in 788 Angel/Seed stage companies.

An interesting lens through which to assess the state of the exit environment is how many companies are funded each year as compared to how many are exited. The chart below shows that ratio to be at a highwater mark of over 11x, underscoring that companies are staying private much longer. Interestingly, it is estimated that the cumulative value of all unicorns today is approximately $575 billion which reflects significant unrealized value for many venture funds.


invest to exit

The time to exit is very important as well and something that is tracked closely. While venture firms tend to be more focused on multiple of invested capital to determine whether a given investment was successful, many fund investors think in terms of IRRs – and time is not your friend in that discussion. Over long durations, the venture capital asset class consistently generates the most attractive net returns to investors, but according to Cambridge Associates, short-term venture capital returns recently have lagged other asset classes. For instance, 2Q17 IRRs for venture capital, private equity and the S&P 500 index were 2.0%, 5.1% and 3.1%, respectively. Year-to-date and the one-year performance for venture, private equity and S&P 500 are 5.3%/9.3%/9.3% and 8.8%/17.4%/17.9%, respectively. Longer holding periods hurt IRRs. Private equity investors have been able to exploit low cost debt to finance large recapitalizations, while public companies have enjoyed unprecedented significant global liquidity flows and record stock prices.

Time to exit no table (002)

Despite generally robust venture capital distributions over the last several years, the venture industry in 3Q17 only raised $5.3 billion across 34 funds, which was significantly below the 2Q17 pace of $10.9 billion across 60 funds. Average fund size in 2017 to-date is $156 million while the median is only $60 million, indicating that a relatively small number of very large funds were raised. In fact, of the 157 funds raised in 2017 so far, 68 have been below $50 million in size with another 26 between $50 – $100 million; 10 funds were greater than $500 million. There were only 25 first-time funds, underscoring again that the venture industry continues to consolidate around a relatively small number of larger firms.

The “Funding Gap” is alive and well. The amount of capital invested continues to meaningfully outstrip the amount venture funds raise, showing that there are other types of investors piling in to fill the gap. Optimistically, one might argue that the venture investors are getting great leverage on their early stage dollars. On the other hand, the pessimist might argue that, once the music stops, non-venture investors will return from whence they came, leaving many venture-backed companies hung up and dependent on a relatively small set of investors. Given that the current economic expansion is now over 100 months old, and the average expansion lasts only 58 months, the optimist may be looking over his/her shoulder.


Raised vs invested wo table (002)


There are always a number of other nuggets in the quarterly funding data that are worth flagging, which provide additional commentary on the current state of the venture capital industry.

  • California continues to be the most active state (it’s also one of the largest geographies) with 580 financings in 3Q17 accounting for $8.7 billion ($15 million average deal size) as compared to New York (#2) with 188 and $5.1 billion ($27 million average – WeWork effect?) and Massachusetts (#3) with 121 and $2.6 billion ($21 million average – biotech effect?)
  • All other states combined were $5.1 billion across 817 companies ($6 million average – really capital efficient) further underscoring the capital concentration concerns
  • The Top Ten financings captured $5.9 billion which means 0.6% of the companies accounted for 27% of the capital invested; all of those companies were in California, New York or Massachusetts except for one (Vets First Choice, which is in Portland, ME, which is kind of northern Massachusetts)
  • Secondary funds raised $29 billion year-to-date, per Preqin, with another 44 funds in market to raise $31 billion, which signifies greater liquidity for LPs as well as suggesting a level of maturity to the private capital markets
  • Per PitchBook, this past quarter debt-to-EBITDA levels in the buyout world hit 5.8x which is the highest levels in the last ten years….hmmm.

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