Filed under: health 2.0, health it, health policy, politics | Tags: electronic medical records, emrs, health 2.0, health it, health policy, Obama Administration, politics, venture capital
In light of all the distraction recently generated by discussions of health care IT (and even, cue the smoke machines, Health 2.0), I was very pleased to find Senator Tom Coburn, MD, and Regina Herzlinger’s piece in the Huffington Post.
In a week that for many of us has been dominated by reading the “wouldn’t-it-be-cool-ifs” of messenger bag-carrying technology evangelists, it was refreshing to see a call for a much needed national debate around the *real issues* facing the health care system.
With little fanfare, Congressional leaders may be near to agreeing on the most sweeping expansion of government in a generation – the de-facto takeover of the health insurance market by the government. Congressional Democrats are already icing the champagne. When the President’s “Medicare for all” plan is coupled with the budget, which contains a “down payment” of $634 billion over the next decade for health care, government-run health care may be inevitable.
All sides in this debate acknowledge that the U.S. has long needed easier access to health insurance. This need has gained urgency for the many Americans who are fearful of losing their employer-sponsored insurance in the midst of a recession. Unfortunately, the President’s plan will not only endanger the U.S. economy, but millions of patients as well.
They make clear that the issue here is cost containment. Or, perhaps better, that solving the “access” issue without controlling costs may be politically expedient but is a recipe for disaster.
The fundamental problem is that the President and congressional leaders lack realistic plans to control the health care costs that are already crippling U.S. global competitiveness. As a percentage of GDP, our businesses spend roughly 70 percent more on health care than competitors in other developed nations, yet we hardly receive 70 percent more in real value.
We talk a lot about cost containment – and in the world of health care venture capital, some of the most exciting investment opportunities address just this set of issues. But translating these decidedly market-focused ideas into terms that are politically palatable is difficult. Denying reimbursement for treatments, no matter their relative value or efficacy, has interest groups rushing to mount the barricades. However, as Coburn and Herzlinger point out, there is a risk of even greater hazard if we don’t engage the cost containment challenge now:
In the end, the Democrats’ health care reform will require drastic rationing… Consider Canadian patients, who may wait a year or longer to get radiation therapy. Or ask one of the nearly 1.8 million Britons who are waiting to get into a hospital or have an outpatient procedure. Or talk to the German breast cancer patients who are 52 percent more likely to die from the disease than Americans.
Concerns about rationing and patient outcomes are not demagoguery. How else can a government control costs in the real world? Many experts, including the Congressional Budget Office, dismiss as wishful thinking the Democrats’ claims of achieving efficiencies through bureaucrats’ dazzling implementation of information technology and other technocratic tools.
And this is where the real world collides with the health care technology bandwagon. It goes without saying that health care lags behind in the implementation of back office and administrative information technology. And certainly this is due in some part to all the factors that are debated regularly in the blogosphere. However, it is also due to the basic fact that there has been little ROI for physicians implementing these technologies.
I worry that we are just further confusing the issue. As my colleague Alan Buffington points out:
Isn’t it interesting that no matter how many times they are corrected, politicians and media folk refuse to distinguish between health care and health insurance. Failing to make this distinction is what causes the problems discussed in the article.
If you watch the blogs, Twitter or CNN, you will have proof that the problem Alan points out is deep and widespread. The problem with health care is that it is “hard” – complex, path dependent, interlocking, huge, with substantial ethical and moral considerations. For most people (especially politicians), this is way too much.
Posted by RobC
Filed under: economy, innovation, venture capital | Tags: long cold winter, venture capital
You can find Rob over on TechFlash, as a guest columnist for John Cook’s esteemed Venture Blog. Rob’s piece, titled “Government should support the innovation economy,” provides a bit of the good, the bad and the ugly (but never fear … it ends on a somewhat positive note).
An (ugly) excerpt:
So, as we move into 2009, we expect the companies “waiting it out” will finally launch fundraising efforts—and the demand for capital will significantly outstrip the supply.
Angels won’t be able to keep up and the traditional venture community will remain focused on less risky deals and on reserving capital for existing portfolio companies. While I hope to be proved wrong, we [at Faultline Ventures] are predicting that these trends will lead to continued loss of early-stage jobs and the unwinding of early-stage businesses.
Worse, this will have a chilling on our Innovation Economy—shutting down a major engine of economic growth and job creation.
Check out the entire post to see how we might be able to uncover some of the good.
Posted by CharlotteGee
Filed under: politics, start-ups | Tags: long cold winter, Obama Administration, venture capital
For those who aren’t following the Obama Administration Cabinet Appointment Ticker, the story is out that a venture capitalist will be appointed SBA Administrator. In the context of all our recent posts on the challenges facing small businesses, this could be a good sign that the new Administration is going to try to stimulate the early stage market. The Sun is out again and we are trying to find good news to report.
Mills is a venture capitalist and a founding partner of the New York-based equity firm Solera Capital. She has been an adviser to Maine Gov. John Baldacci on economic matters. She’s also president of the MMP Group in Brunswick.
Posted by RobC
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
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: Uncategorized | Tags: Health Care Technology Network, health it, nashville market, seattle, seattle market, start-ups, venture capital
A few weeks ago, my colleagues at iMedExchange hosted the first meeting of the Health Care Technology Network. It was a remarkable event, especially considering that given the local density of health care-oriented start-ups this was the first time we had all had the excuse to be at the same table.
I was asked to speak about why I chose to move to Seattle to set up Faultline Ventures (if you are inteersted in reading more about the event and my comments, iMedExchange blogs about the event here).
Despite the crticial mass of resources in this region (human capital, entrepreneurial culture, academia, innovative payor and provider organizations, etc), there was broad agreement that it is difficult (if not impossible) to raise venture capital for health care companies locally. One of the most interesting comments of the evening came from the CEO of an early stage company that is actively raising money and has intentionally positioned itself in the software as a service industry (not health care) with potential investors… because there are more of them.
The sheer number of innovative early stage health care companies in the region should be enough to draw outside capital to the region (it is why we moved here)…and I believe capital it is the last key ingredient needed for this regional cluster to see explosive growth… but with the lack of new investment activity by exisiting funds it is unclear that the venture market will (or can) respond to the opportunity.
If the Health Care Technology Network catches on as a formal group for regular networking (and potentially the promotion of the opportunities in this cluster) it could help the cause of attracting capital. It could certainly provide an platform for raising awareness of companies operating in this region. The most successful organization of this type, the Nashville Health Care Council, has succeeded in bringing cohesion and a professional framework to the Nashville market place.
As someone said at the first meeting of the Network: “Seattle is a brand”. Now, for those of us in the health care business, we need to make sure we agree on what that brand is conveying to our industry and begin turning up the volume.
(By the way, visit some of the very interesting companies in attendance at the first meeting of the Network: iMedExchange, Array Health Solutions, Clarity Health Services, Health Phone Solutions, Health Unity, Limeade, QTrait, Raffetto Herman and SnapForSeniors.)
Posted by RobC
THERE IS NOTHING CONSTANT BUT CHANGE.
My dad will be very excited that I worked this phrase into some sort of professional usage.
Private equity over the past five years (and perhaps more, excluding a short stint in the 90s) has been synonymous with gargantuan LBO deals. Deals in which excessive liquidity in the system allows for large amounts of leverage, and financially engineering a very attractive return given consistent cash flows. Since the dot-com implosion, these mega-deals have overshadowed the rest of the private equity asset class, especially venture capital and early stage strategic growth equity.
With the recent and inevitable credit crunch came the fall of many of these giant deals. But I do not think private equity is dead … its face is just changing. There is a fundamental difference between the environment necessary for these mega-deals to prosper, and that necessary for value-adding venture and growth investors to prosper.
Buyout shops need leverage in order to financially engineer their profitability. This means they need willing creditors, and ultimately liquidity. Unfortunately, these occur in cycles, and we are on a down cycle.
In contrast, venture investors and growth equity investors rely substantially less (if at all) on leverage for returns. Instead, they target disruptive innovation that can change established business processes and rely on the support of risk-tolerant capital partners to fuel their growth with a combination of equity and specialized value added. However, with many institutional investors so invested in buyout funds, I wonder how long it will take traditional fund investors to make a change in their asset allocation to fuel the next wave of venture capital funds.
This means that if you do believe that “there is nothing constant but change” (as I do after years of hearing it from my father), then you ought to be pretty excited about the opportunity set for venture and growth equity investors, especially relative to other current private equity opportunity sets.
Submitted by Jory Caulkins
Morgan Stanley, Mergers & Acquisitions
Filed under: consumer engagement, health it, venture capital | Tags: health it, venture capital, consumer engagement
Our post on Health 2.0 has generated even more feedback. Here’s the latest:
Health care is a very attractive industry for venture investing. There are numerous reasons for this, but in this gloomy economic environment, two are paramount: the inelastic demand for what the industry produces (health!) and the incredible amount of inefficiency gumming up and increasing the cost of care delivery. It is an industry begging for the sort of innovation that early-stage, venture-backed companies can provide.
In this context, the Health 2.0 “trend” is interesting to me. The basic premise is sound: take a successful concept from another industry and apply it to health care. The social media concept has been successful in some other industries, namely entertainment (a la Facebook.com) and business (a la LinkedIn.com). Websites like these deliver value primarily around information sharing, providing platforms and distribution for user-generated content and facilitating electronic “networking.”
These are important, relevant services. However, while the excitement about the possibilities is huge, I question the amount of value these Web 2.0 services create for consumers or providers of health care.
What about information sharing, distributing user-generated content or electronic networking creates health care value? Sharing information could be valuable, but in health care accuracy is critical, and there is no verifiability to socially generated content (generally speaking). Electronic connections and networks probably aren’t significant in the context of health care on an individual basis. And how many “amateurs” do we want to hear pontificating about their health, wellness regimens, remedies, etc.
On further examination, isn’t this just “noise” distracting us and diverting capital away from the more fundamental problems and technological challenges of the health care industry? Health 2.0 seems to ignore the mountain of existing systemic inefficiencies – creating a solution without a distinct (or at least a relevant) problem in mind.
Ultimately, I think social media in the health care industry can provide some value in creating communities and support groups. However, as businesses, these generally have a low hit rate and do not have a reliable revenue source or expandable business model.
As a health care investor, I am excited about Health 2.0 only because it is distracting my competitors from the real opportunities in the health care space.
Submitted by Jory Caulkins
SSARIS Advisors, LLC
(If we only knew how he really felt … )
