One of my old bosses used to say that, whenever some unpleasant email hit his inbox or a complaint was left in his voice mail. (He also would whistle loudly, high pitch to low pitch, sounding like a bomb flying to the ground, if something especially bad had transpired. I do this now, like when I open my gas bill.)
These days, well, the hits just keep coming. Every day I hope to see some good (miraculous?) news about the economy, about unemployment rates, about start-ups being formed and funded, but it is slow to come. Yesterday (waiting two days for Inauguration fever to pass), the AHA released an announcement dramatically titled “HOSPITALS REPORT ‘CAPITAL CRUNCH’ IS FORCING DELAYS IN FACILITY AND TECHNOLOGICAL UPGRADES THAT WOULD BENEFIT COMMUNITIES’ HEALTH AND WELL-BEING,” along with the (very nicely designed) report. From the press release:
“From cancer centers to expanded emergency departments to electronic health records systems, hospitals are postponing or delaying projects that could greatly benefit health care in communities across the country,” said AHA President and CEO Rich Umbdenstock. “Stopping these projects also means new jobs are not created within the health care field or for construction workers, contractors, IT specialists and others. The ripple effects of the capital crunch on employment are cause for great concern.” Stopping or postponing facility upgrades and technology investments has significant ramifications for communities served by these hospitals and for the health care system as a whole.
And a few highlights:
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More than 8 out of 10 hospitals said they have delayed projects to update or replace aging clinical equipment or use IT to automate clinical processes.
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More than six out of 10 hospitals reported that facility upgrades, and clinical and information technology projects would have increased patient care efficiency and improved quality of care.
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Nearly 60 percent of hospitals said the IT projects that are put on hold would have improved care coordination.
I have a feeling a few of those companies providing services to hospitals may need to update a few things–like their PowerPoints and “Market Opportunity” sections of the business plan–at least for now.
Don't Know What You Got (Till It's Gone) -- Via Hal
Related: Health Reform Passes! (In China)
Posted by CharlotteGee
Filed under: economy, start-ups, venture capital | Tags: capital gap, economy, innovation, long cold winter, Obama Administration, seattle, start-ups, venture capital
The snow storm that has left Seattle immobilized (the schools were closed a day *before* the storm, just for good measure) has created the perfect cold, wintry environment to read the just released National Venture Capital Association survey. It confirms the icy predictions we’ve been making over the past month – things do not look good for start ups and early stage companies in 2009. In fact, for those that will need the capital markets, things look quite bad.
Respected Seattle business journalist John Cook comments on the NVCA report:
I’ve been informally conducting my own survey of VCs, lawyers and entrepreneurs around town. The message I am hearing is not pretty, with one VC saying that nearly everyone is hunkered down. Long-time tech entrepreneurs such as The Cobalt Group’s John Holt and Jobster’s Jeff Seely have told me recently that it is about the worst economic environment they have seen.
The general feeling is that the capital markets may be shut for another 12 to 18 months, meaning that startup companies will have to learn to exist on the fumes of their previous venture rounds or get to profitability sooner than anticipated.
Running on fumes… Wow. I made the mistake of using that line with several start up CEOs recently and they almost took my head off. “What do you think we’ve been doing?” “We don’t have any fumes left… we ran out in the third quarter”.
Running on Empty: A 70s Flashback for Start Ups
Without access to capital many of these early stage companies won’t make it to the next gas pump. Unfortunately, with news like this NVCA survey and Coller’s Global LP Barometer, it doesn’t sound like the capital markets are going to show any sympathy.
Sure, there may be bigger problems out there. But when billions of dollars are spent to bail out industries that need to shed jobs, it is troubling to see the innovation and job creation engine of our economy seriously threatened by a lack of relatively small amounts of capital (mere rounding errors to the Treasury’s bailout accountants).
Posted by RobC
Yesterday’s news that Aetna is laying off around 1,000 people, or less than 3% of its workforce, coupled with a variety of other cuts in the works (See: Boston Medical to cut staff, services / Hospitals and nursing homes staggered by state budget cuts, Officials expect layoffs, closures / NY Governor’s Budget Slashes School Aid and Health Care Spending / Austin Regional Clinic cuts 60 jobs, closes Rundberg Lane clinic)—brings to question whether health care is indeed recession-resistant, as we so often hear. Or, perhaps it’s just that certain business models/organizational structures/policies are not immune … you know, only the strongest (smartest?) survive.
At any rate, it’s never a good thing to read headlines about layoffs and budget cuts, and it’s especially scary in the health care industry, as it has the potential to affect so many people on such a personal, basic level.
Our eyes are a-watch on 2009 and the changes and challenges and (we hope) good things a new year, a new administration and a new way of looking at health care can bring.
Predictions?
Posted by CharlotteGee
Filed under: economy, health it, health policy | Tags: economy, health it, health policy
During a speech last week in DC in front of the Department of Health and Human Services Health Policy Forum (with nearly 50 of America’s thought leaders on disruptive healthcare), Ben Sasser, the Assistant Secretary of Health, commented that the projections for Medicare Part A funding were wrong. The Department figured out last week that Part A funding will be bankrupt prior to the end of Obama’s second term!! And solvency of Medicare will not be the only healthcare (HC) issue this administration will need to tackle.
President-elect Obama, Senator Baucus and others are crafting numerous initiatives they plan to bring forward early during the new administration’s first term. Most of these initiatives are geared toward *reforming* the healthcare system. There are innumerable issues that need to be addressed under the auspices of HC reform. Access, quality, efficiency, diminishing medical errors, minimizing duplication, waste and affordability are *simply* a few of the issues the administration will need to contend with.
It appears the incoming Obama HC team believes, right or wrong, that a big push into HC IT infrastructure will pose as the spark toward adoption of more widespread reform. There are both economic and political reasons why it makes sense to tack the IT spend onto the current stimulus package under consideration.
From an economic perspective, a big push into HC IT will result in jobs being added to the only sector of the economy that has demonstrated job growth over the last two quarters. Heading into 2009, job growth is going to slow in the HC sector as federal and state Medicaid funding is severely cut during the next round of budget cuts. (Consider: In New York State, Governor Patterson’s staff already has informed hospitals to plan for their worst nightmare.)
Combined with the tightening of the credits markets, hospitals are going to be hard pressed to offer services to the poor, uninsured and under-insured. “No margin, no service” will become the rule of the hospital landscape in 2009. Both the credit markets and financial issues will most certainly impact the ability of hospitals to pursue large capital intensive IT initiatives.
The AMA news recently reported that “Despite changes to federal rules that allow hospitals to donate health IT to physicians, studies show neither hospitals nor physicians are jumping at the opportunity.” No doubt, the cuts in state funding, the increase in the uninsured, and thus the increased financial stress on hospitals that offer services to the uninsured, will make it impossible for hospitals to spend money on IT without government assistance.
Therefore, *if* the incoming administration *believes* that a HC IT initiative is necessary as a stimulus for job creation and broader HC reform, the timing for tacking on a HC IT initiative as part of the current stimulus package is perfect.
From a political perspective, tacking on a HC IT spend to the current economic stimulus package will virtually assure its passage. The Democrats are working very hard to get a *comprehensive* stimulus package ready for President-elect Obama’s signature within a few weeks of entering office. All indications point to the fact that the monetary figure will be enormous — but many economists believe that deficit (Depressionary) spending and contemporary New Deal programs are *necessary* if we are to avoid a significant deepening of the current recession. That theory will give proponents of a HC IT initiative the ammunition necessary to obtain the necessary support for a 5-year, $50-billion IT package.
Perhaps most important: After the passage of an enormous stimulus package, it will be difficult for the new administration to obtain support of an exceptionally expensive comprehensive healthcare reform package — strictly based upon the cost of such an effort. By taking the $50 billion IT spend (and SCHIP spending) out of the HC Reform package, the overall cost of healthcare reform will *appear* lower … and perhaps more palatable to fiscally conservative members of Congress.
Bottom line? Healthcare IT is estimated to be at least a $50 billion industry in the United States. Anybody who chooses not to participate could be giving up a potentially large amount of revenue.
Submitted by Howard J Luks, MD
We really like this quote from Steve Jobs that one of our contributors sent across this morning… a fairly interesting (and totally Jobs-ian) way to look at things:
“We’ve had one of these before, when the dot-com bubble burst. What I told our company was that we were just going to invest our way through the downturn, that we weren’t going to lay off people, that we’d taken a tremendous amount of effort to get them into Apple in the first place ― the last thing we were going to do is lay them off. And we were going to keep funding. In fact we were going to up our R&D budget so that we would be ahead of our competitors when the downturn was over. And that’s exactly what we did. And it worked. And that’s exactly what we’ll do this time.”
Click here to read more…
Filed under: capital gap, economy, start-ups, venture capital | Tags: capital gap, economy, long cold winter, start-ups, venture capital
another kind of long cold winter
Consistent with what we’ve been predicting offline, the WSJ reports that a critical number of institutional investors are reporting their private equity allocations to finally be met or exceeded. The article references Coller Capital’s periodic (and always interesting) Global Private Equity Barometer:
One of the big drivers of private-equity investment seems to be running out of steam, as research shows two-thirds of investors expect to reach or exceed their target private-equity allocations by the end of next year.
A survey of 107 investors by Coller Capital, a so-called secondaries firm that buys stakes in private-equity funds from investors, found 66% of investors expected to reach their target private equity allocations. The total included the fifth of respondents who expected to exceed their target allocations.
In their report, Coller goes on to say that institutional interest in private equity hasn’t decreased — just their ability to play:
The problem for investors is not appetite, but stretched allocations and a shortage of cash.
Portfolio management is predicated on ratios — and since the public equity market has tanked, the private equity allocation has grown larger as a percentage of the pie. What this doesn’t take into account is that the private equity valuations often trail the public markets (and significantly — by definition and design, they do not have the volatility of publicly traded, highly liquid securities).
So, for venture capitalists looking to go back to market for new funds and early stage companies looking to raise new capital, this news might add a few months to their long cold winter. We don’t know exactly how this will play out, but the net effect doesn’t look promising:
- It will (at best) not be a good year to raise a new institutional venture fund;
- Because of the uncertainty of the markets, compounded by the lack of new capital coming in (see #1), existing VCs are going to be extremely hesitant to place new capital; and
- So … start-ups are going to have a really really hard time getting capital, growing and perhaps even surviving.
Time to invest in a nice warm coat, gloves and hat … ?
Related posts: A Cold Winter for Start Ups / More on the Cold Winter … From an Entrepreneur’s Perspective
Posted by RobC
This week El Paso Corporation reopened the high yield debt market which had not seen a new issue in five weeks. The natural gas production and pipeline company placed $500 million of 5 year notes at a staggering 15.25% yield.
But 15.25% is a good deal! That’s 25 basis points lower than an index of the 100 largest issues. A broader index yields over 22%. Is your Visa card starting to look cheap?
Because bonds have a par value, and often a coupon, it is arguably easier to see the true price of bonds as compared to equities. So the high yield market provides a useful data point on the price of risky assets. Adding a risk premium to the high yield market, it’s easy to see that the cost of venture capital today is 30-40%. In other words, company valuations are down and venture investors can buy equity for relatively cheap.
Risk taking has the potential for handsome returns in this market. At 30%, a $5 million investment would be worth $18.6 million after five years.
Why does venture capital have such a large risk premium over high yield bonds? Bonds are senior to equity in a bankruptcy; often bondholders can recover a portion of their investment from asset sales. Venture capital investments are almost always some form of equity and are not easily sold until the company is successful. Of course, venture investments are a bet on an unproven technology or concept.
But venture capital has advantages. The whole point of a venture capital investment is to develop a product or service that reduces costs or provides a cost-effective improvement in quality. Both are needed – especially in health care – regardless of the broader economic environment. Plus, venture companies are often a clean slate. New ventures do not have a bloated cost structure that was built for another time.
Investors with the skills to recognize valuable innovations will be rewarded with the most attractive risk-return trade-off in over a decade. But keep some dry powder to help portfolio companies weather what will likely be a very difficult fundraising environment for the next two to three years.
Posted by EWright (Eric Wright cut his teeth in early stage venture and now sinks them into the energy issues at Xcel Energy.)
Filed under: Uncategorized | Tags: economy, health it, start-ups, venture capital
[Fearing this might get lost in the comments, I wanted to highlight Henry's note... we agree completely with his views: capital efficiency is king and start ups that combine the right mix of opportunism and discipline can survive and thrive in this environment. However, I do think there is a difference between disciplined capital efficiency (which relates to internal company decisions) and the systemic misalignment (e.g. mess) we seem to have now (which is all about external factors)... something to think about... Rob]
Yep, it’s true. “Money’s too hard to mention.” Silver lining? The benefits of undercapitalization are many. You hew closer to the most urgently needed customer value, delivering features and benefits in a very agile way (i.e. monthly and quarterly, not annually), and setting your company up for explosive growth when the alligator arms re-grow. (Alligator arms are what some people get when the bill comes to the table and their wallet suddenly is out of reach). Also, well-capitalized companies often end up overspending, delivering too much complexity, and learning bad habits that are hard to unlearn later. Yes, 2009 may be an endurance test. The companies with the most money are often the most risk-averse. But the risk takers, mavericks, angels, and (just maybe) a select few health industry innovators will reap the rewards in 2-3 years of some huevos today.
Posted by Henry Albrecht, CEO, limeade.com
Filed under: innovation, private equity news, venture capital | Tags: economy, health policy, innovation, long cold winter, politics, start-ups
Our methods are not scientific and I don’t know what you can reliably extrapolate from our results, but you heard it here first: It is already a very cold winter for health care start ups.
In the past week, I have received numerous calls from companies either (1) suspending their fundraising activities and cutting back to bare bones operations or (2) flat out closing up shop. After nearly 15 years in and around venture capital, I have never seen so many interesting, well positioned companies go through this existential crisis at the same time (not counting the decimation of waves of nonsensical business models in the early 2000’s).
Perhaps it is an effort to clean things up before the end of the year, but I am not so sure that what we are experiencing now isn’t a harbinger of much worse things to come. A few trends worth considering:
1. Waiting it Out. Many early stage companies pulled (or never launched) their fundraising efforts during mid-2008, hoping to relaunch in early 2009.
2. A Dustbowl. By all reports, venture capitalists with “dry powder” have pulled back and are sitting on their hands waiting to get a handle on the cash needs and time to exit for their current portfolio companies. Not that there has been much venture for early stage health care companies recently anyway, but this is creating a veritable Dustbowl.
3. A Dustbowl, Inside a Chasm? Not only is the industry segment traditionally (and especially now) underventured, but there is little capital for the size of deals needed by early stage health care companies. These companies need $500,000 to $5 million, but few if any are placing this kind of capital in health care start ups (much easier to raise $10-25 million, even in this market). This “Capital Gap” is a big problem, and will be hard to address with the capital and investors in the market now. Larger fund sizes mean larger deals – and most firms with long term health care specialty have been raising much larger fnds. And for funds that have been dabbling in the early stage, opportunities to move up the risk curve to positive EBITDA deals is very attractive in this market.
4. The Limitations of Angels. The only good news for companies raising capital this fall has come from regional angel networks – but these pools of capital are limited and often regional in their focus.
So, as we move into 2009, we expect to see the companies that have been trying to wait out the market finally launch fundraising efforts out of necessity – and the demand for capital will significantly outstrip the supply. Angel networks won’t be able to keep up and the traditional venture community will remain focused on less risky deals and reserving capital for their existing portfolio companies (which may not see an exit for much longer than originally expected).
While I hope to be proved wrong, we are predicting that these trends will lead to the continued loss of jobs in early stage businesses and potentially the lack of introduction of new innovation into the health care market over the next 12 months. The good news is that well capitalized businesses will have a hey day in this sector, as there is considerable opportunity to build and grow health care services companies in this market (even industry novices can pick up on the increasing clamor for efficiency, quality and cost effective access – all require new, technology driven solutions). But without the proper capital, there is certain to be a chilling effect on innovation and growth.
Sadly, I expect to be getting more phone calls from entrepreneurs scaling back and shuttering operations during this cold Winter… which might last well into next Fall…
Posted by RobC
Filed under: Uncategorized | Tags: economy, health it, medicaid/medicare, Obama Administration, politics, uninsured/underinsured
The Center for American Progress, Obama transition team chairman John Podesta’s think tank, has just released a blue print for health care reform (The Health Care Delivery System: A Blueprint for Reform).
The book’s goal is clear – even stated right up front:
This book offers recommendations and path¬ways to systematically promote quality, efficiency, patient-centeredness, and other salient characteristics of a high-performing health system. The blueprint it lays out is a vision of how different parts of the system should be structured and how they should function. Even more specifically, it proposes policies that the next administration and Congress could enact over the next five years to improve our health system.
Since the people involved in creating this report are almost certain to end up in (or in close orbit around) the new Administration – and since every sign suggests that health care “reform” is going to be top of Obama’s list of priorities – this is an essential read for people in the industry.
We would love to hear your thoughts: from the perspective of health care’s importance to economic recovery to its role in the decline of American manufacturing; from the fiscal impossibility of continuing growth in spending to the moral imperative of taking care of our older and sicker populations. The ways that the public and private sector work together to “reform” and “change” the system will create a range of opportunities for innovators and have the potential to impact America’s social and economic well-being for generations to come.
Posted by RobC
