Next Things First


Reform: Finally, Some Discussion of the Real Issues by Rob Coppedge

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

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Rob Coppedge on John Cook’s Venture Blog (TechFlash) by charlottegee
January 2, 2009, 1:00 pm
Filed under: economy, innovation, venture capital | Tags: ,

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You can find Rob over on TechFlash, as a guest columnist for John Cook’s esteemed Venture Blog. Rob’s piece, titledGovernment 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



Venture Capitalist to Run the SBA by Rob Coppedge
December 19, 2008, 12:51 pm
Filed under: politics, start-ups | Tags: , ,

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



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



Potenital 30-40% Venture Returns? by Rob Coppedge
December 11, 2008, 10:13 pm
Filed under: economy, venture capital | Tags: ,

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.)



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, limeade.com