Next Things First

Running on Empty by Rob Coppedge

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”.

A 70s Flashback for Start Ups

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


The (Even Longer?) Long Cold Winter by Rob Coppedge
another kind of long cold winter

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:

  1. It will (at best) not be a good year to raise a new institutional venture fund;
  2. 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
  3. 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

More on the Cold Winter… From an Entrepreneur’s Perspective by Rob Coppedge
December 11, 2008, 11:55 am
Filed under: Uncategorized | Tags: , , ,

[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,

A Cold Winter for Start Ups by Rob Coppedge

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

Why Seattle? A few thoughts on the Health Care Technology Network… by Rob Coppedge

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

More Wake Up Calls by Rob Coppedge
October 6, 2008, 6:00 am
Filed under: economy, health it, start-ups, venture capital | Tags: , , ,

Since my posts over the weekend, I’ve been thinking more about the issues health care’s recession resistance and the attractiveness of investing in early stage companies in this sector.  I have been reminded of several data points that should serve as another wake up call to venture investors considering the space (not to mention those who give them capital):

  • Health care services and related health care information technology make up over 80% of health care spending (total spending is more than $2 trillion)
  • However, venture investing in the services sector makes up less than 8% of health care-related venture investments (the bulk of early stage capital  goes into the casino of biotechnology investing)
  • Of this 8%, the vast majority is dedicated to “traditional” health care facilities-based business models.


This creates a substantial opportunity for health care-savvy investors who can recognize value in new business models that can grow, and even thrive, during recessionary periods.

Unfortunately, from what I hear from CEOs of these sorts of start ups who have been knocking on VC doors this year, few investors see the opportunity so clearly or can effectively separate the wheat from the chaff.

Perhaps the chaos on Wall Street  will bring the attractive fundamentals of the health care services opportunity into clearer focus.

Posted by RobC