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.

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In fact, the Softbank impact is more dramatic than one might initially have thought. The largest investment in the quarter was the Vision

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You Are Where You Live…

This will be complicated – and potenitally quite controversal. It is not at all meant to be a political commentary but where you live may directly impact your health. As the role of social determinants in one’s well-being are better measured and understood, there is the promise that they can be better managed. An analysis of the patchwork of differing state regulations, government priorities, economic conditions, and local norms and cultures shows fascinating patterns which provides commentaries on the state of health by state. Geography may be one of the most influential determinants of one’s health.

Undeniably the level of economic disperity across the country has increased dramatically, punctuated by the emergence of highly concentrated pockets of exceptional wealth. The Economic Development Group and its Distressed Communities Index (below) highlights the level of this fragmentation. Their analysis determined that three of every four new jobs were created in only 40%

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Silly Rabbit…

Last month General Mills announced to Trix’s die-hard fans that it would return to artificial dyes and flavors, after two years and a lukewarm consumer reception to natural colorings from turmeric, strawberries and radishes. Turns out consumers far preferred Red #40, Yellow #6 and Blue #1 dyes.

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For some time now, the healthcare industry has known that social determinants (items like food quality, residential address, access to education, etc) play a significant role in one’s health but the industry has struggled to properly assess, much less manage, such important factors. Coincident with this, my focus for some time has been about how close we are to actually developing tools to effectively accomplish this.

The premise is that multiplexing a set of disparate data sets will provide some startling  (and hopefully actionable) insights. For instance, one question we should be close to answering is “what is the quality of caloric consumption

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Spain is En Fuego…

When I arrived in Spain a few weeks ago the newspapers were bemoaning the extraordinary loss of global soccer star Neymar from Barcelona to Paris St.-Germain for a staggering $262 million transfer payment. Grown men were crying in the streets. A popular storefront in Ibiza captured the despair many felt, as they searched for meaning post-Neymar.

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Tragically, only days later, everyone was now crying in the streets after the horrific terrorist attacks in Barcelona. In addition to the obvious devastation, tourism is 14% of the Spanish economy and given problems elsewhere in European, Spaniards were expecting a bumper summer season of 38 million visitors.

Spain had been relatively insulated from Islamist terrorist attacks, although Barcelona which is in the Catalonia region of Spain has had a restive past with sporadic separatist violence. In three weeks, Catalonians are to vote in a referendum to determine if the region will separate

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Dramatic Capital Inflows Continue in 2Q17…Trouble Ahead?

In an environment of microscopic interest rates, it is particularly interesting to read the Preqin 2Q17 Quarterly Update which exhaustively tracks all things private equity and venture capital. At the end of June 2017 there were 1,998 funds in market raising a total of $676 billion – a staggering sum – indicative of global investors desperately looking for alpha. Admittedly, Softbank’s $100 billion Vision Fund skews the data somewhat but at the beginning of 2017, there were 1,834 managers raising $525 billion which were already all-time highs. In 2Q17 private equity funds raised nearly $121 billion across 206 funds; buyout funds accounted for $88 billion of the totals, which coincidentally was approximately how much was invested ($83 billion) in 1,001 buyout deals. This investment pace comfortably returns the private equity industry to levels not seen since the Great Recession nearly eight years ago. Amidst of all the distractions swirling around the Russia Probe
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Circulation and “On Demand” Healthcare…

This morning Circulation, one of our portfolio companies, announced a very exciting Series A financing of $10.5 million to scale one of the emerging leaders in the “on demand” healthcare economy. Circulation is the second of our Flare Ignite seed companies and with this financing, both companies have now successfully converted to be significant core holdings of the fund (Bright Health was the other). There are several elements to this story which are quite instructive. First and foremost, it is very rewarding to work closely with world-class entrepreneurs (Robin Heffernan and John Brownstein) who are also great friends of mine. Robin and I have worked together for nearly a decade over three companies – she was an investor at my prior venture firm, we backed her when she helped start one of our other portfolio companies, and now at Circulation. In parallel, I have been collaborating with
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Circulation and “On Demand” Healthcare…

This morning Circulation, one of our portfolio companies, announced a very exciting Series A financing of $10.5 million to scale one of the emerging leaders in the “on demand” healthcare economy. Circulation is the second of our Flare Ignite seed companies and with this financing, both companies have now successfully converted to be significant core holdings of the fund (Bright Health was the other).

There are several elements to this story which are quite instructive. First and foremost, it is very rewarding to work closely with world-class entrepreneurs (Robin Heffernan and John Brownstein) who are also great friends of mine. Robin and I have worked together for nearly a decade over three companies – she was an investor at my prior venture firm, we backed her when she helped start one of our other portfolio companies, and now at Circulation. In parallel, I have been collaborating with

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Crazy Crypto Times…

Several years ago, chatter started to emerge about Bitcoin and blockchain technologies. Given that one of our core healthcare investment themes at Flare Capital is broadly labelled “Payment Reform,” we have been getting smarter about the implications to the “business of healthcare” as these technologies became more robust, more established. Little did I know what this search would uncover. Analysts are already now talking about Digital Currency 2.0. How did I miss 1.0? Regularly there are spectacular stories of wild Bitcoin trading activity or some instance of fraud or a “flash crash” as what occurred two weeks ago, when the digital currency, Ether, collapsed from $300 to $0.10 in minutes. Undoubtedly, while these cryptocurrencies are still somewhat under construction, there is something profound emerging that may have far reaching impacts – maybe in healthcare but certainly on my industry, venture capital. crypto currency for blog The graphic above from the Digital
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Related Events?

As a partnership, we will make a few dozen investment decisions across any given fund and as a group we will make hundreds of other decisions together in simply running the firm day in, day out. When it comes to expanding the team though, that is a very different matter. Venture firms add very few people so each addition is a big deal. And as such, we are very excited that Vic Lanio has joined Flare Capital as a Senior Associate. What initially struck all of us about Vic was his passion for the “business of healthcare” and how he was thinking about the implications of the transformation we are all now witnessing. Vic’s depth of understanding of the emerging new business models and novel technologies that are coming to market is exceptional. The fact that he has worked for a handful of successful healthcare technology companies was critical. When
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“Service-enabled” Tech Models…

Around venture capital water coolers everyone brags about the latest “tech-enabled” service business model but in healthcare maybe these conversations need to be turned on their heads to focus on “service-enabled” tech models with the emphasis squarely on services. As the business of healthcare is transformed, many of the companies that appear to be scaling are fundamentally services businesses. Most healthcare SaaS businesses have always had a large services component, underscoring the balance (or tension) between services and product revenue. In fact, a review of recent funding data suggests that there are significantly fewer pure-play technology companies, raising less capital. Thanks to one of our star Flare Scholars, Carlos Rodriguez (recently of Harvard Business School), who looked at the aggregate of both Rock Health and MobiHealthNews 2016 funding data (340 transactions and $4.4 billion of invested capital), what is quite evident is that the more labor intensive sub-sectors of healthcare
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Really a Ho Hum Quarter?

Now that most of the investment data are in for 1Q17, analysts are using words like “disciplined” and “normalized” to describe the activity of the first 90 days of 2017 – obviously not how we would characterize the current political climate. As always, the headlines belie what might be seen as more turbulent private capital markets under the surface, as quite clearly there is a continued and pronounced rotation away from the earliest stages of investment. Modest but encouraging exit activity has continued to generate strong limited partner interest as 58 new funds raised $7.9 billion, according to NVCA and PitchBook data. Nearly $16.5 billion was invested in 1,797 companies in 1Q17, which was the fewest number of companies in the last 22 quarters. Much of this decline was in the Angel/Seed stage which over the past handful of years has accounted for roughly 55% of overall deal
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People Are Expensive…

With much Presidential fanfare, perhaps slightly misplaced, the Bureau of Labor Statistics (BLS) just announced that the economy added 235,000 new jobs in February. Buried below the fold was the fact that healthcare positions accounted for 26,800 of those jobs or 11.4% of the total. The BLS goes on to observe that healthcare will continue to be the single fastest growing occupational category, which challenges one to reconcile the promise of efficiency gains with new technologies with the drumbeat of ever-expanding healthcare job rolls. When will the healthcare system see the benefits of technology’s operating leverage?

Just over a year ago, the BLS published a comprehensive employment survey which projected employment through 2024 across the 819 occupation categories that it tracks. Nine of the top 15 fastest growing categories are in healthcare (although surprisingly, the fastest growing category was “wind turbine service technicians”). In fact, 2.3 million of the

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Potential Next Steps – Where to Invest…

Emerging healthcare technology themes quickly reveal themselves at this time of year with the frenetic JP Morgan conference and the industry chatter leading up to the HIMMS (Healthcare Information and Management Systems Society) conference, which is in full swing in Orlando this week. It is also a time to reflect on some of the industry milestones from the prior year. All of this is made more complicated this year by the priorities of the new administration, which have yet to be clearly articulated. It certainly appears that on the heels of the investor euphoria in 2014-2015, that the healthcare technology sector went through an appropriate period of assessment and consolidation in 2016. Now with the broader public equity markets setting new highs on a regular basis, the momentum from the movement to value-based care should endure with an even greater emphasis on de-regulation, price transparency and increased patient responsibility. Arguably,
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Engineering Mosquitos…

Perhaps it was the title of the panel (“Engineering Mosquitos to Fight Malaria”) right before I was to speak that caused me to feel that I was at the wrong event. Or maybe it was because I had just met several senior health ministers from across the developing world. The “Rethinking Malaria Leadership Forum” hosted last week at Harvard Business School brought together delegates from many different disciplines to explore emerging strategies to combat this awful disease. Malaria wasn’t a disease that I had particularly focused on, even though as a child I had lived and traveled in parts of the world confronting this scourge, so I was passingly familiar with it. What little I knew about malaria suggested that some of the healthcare technologies proliferating today (telehealth, connected devices, analytics) might actually have an impact. But what a complicated situation. Per World Health Organization estimates, there were 212
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Whoa Nelly – A Pullback on the Reins…

Maybe you thought that the investment pace was going to slow even faster than it did in this past quarter, which dropped nearly 20% when compared to 3Q16? Per the National Venture Capital Association, in partnership with PitchBook, 4Q16 marked the sixth consecutive quarterly decline in deal volume. What is perhaps more surprising was that the $12.7 billion invested last quarter was the lowest quarterly amount since the end of 2013.

Arguably this retrenchment reflects concerns about valuation levels and the lack of “unicorn liquidity” as many later stage companies stayed private and/or struggled, and crossover investors backed away from new commitments. In 2016, of the 111 IPOs, only 37 were venture-backed companies. The average offering size was only $71 million. Notwithstanding unprecedented public consternation surrounding the election, the public markets experienced rather modest volatility; in fact, the VIX (the CBOE Volatility Index) languished in the mid-teens for much

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Israel – Such a Complicated Corner of the World…

As I reflect on a head-spinning five days in Israel last week, it struck me that for all that is going on around that country, people seem remarkably poised. Next to the lead article in The Jerusalem Post about the delivery of two F-35 jet fighters (which was very big news, maybe in part because they were six hours delayed due to fog – really?) was an article discussing the Health Minister’s announcement imploring the public to refrain from eating donuts during Hanukkah because “there is no need for us to fatten our children.”

The phenomenon of the “Start-up Nation” is well-chronicled now, which does not make it any less impressive whenever witnessed firsthand. Since 2012, it is estimated that there are approximately 1,100 start-ups created each year; on average, over the last four years nearly $4.4 billion of venture capital was invested in Israel. In 2015

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Life Expectancy Gradient…Role of Healthcare Technology

It is readily accepted that social determinants and education levels directly influence life expectancy gradients; that is, the central issue to well-being is not simply poverty but more fundamentally an issue of inequality. The profound promise of technology in healthcare is its role as the great democratizing force across all strata of society by improving access, engagement, care coordination and outcomes at lower costs. The journal Health Affairs published an important study this summer which showed that more healthcare dollars are spent in affluent neighborhoods even though the medical needs tend to be greatest in poorer communities. Evidence suggests that members of these communities forgo healthcare at higher rates due to issues of access and economic consequences associated with the “consumerization” of healthcare (i.e., high deductible plans, cost shifting, etc.).

Worldwide life expectancy improved from 26 years in 1820 to 31 years in 1900 to 49 years

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Pins and Needles…3Q VC Data

Given the obvious anxiety and frustration that surrounds us all, the US venture industry is also exhibiting some fatigue as we finish the 88th month since the last recession. This is the fourth-longest period of economic growth in US history (admittedly, at 2.1%, the growth over this period of time is the slowest since World War II). According to the National Venture Capital Association, this past quarter $15 billion was invested in 1,810 deals which compares unfavorably to both the prior quarter ($22.1 billion, 2,034) and 3Q15 ($21.1 billion, 2,559), signaling perhaps a period of digestion given how much had been invested during 2014 – 2015 window. Notably, this was the lowest quarterly deal volume since 4Q11, a period spanning 19 quarters. What is most interesting is the activity beneath the headline data. Year-to-date annualized investment activity suggests that 2016 will see approximately $74 billion invested
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Our Newest Seed Has the Coolest Name…

Venture investors have the great honor of backing some of the most talented, passionate people in the world, all trying to solve really big problems. And sometimes, their companies also have really cool names. Last week we hit the trifecta – we backed a brilliant team going after a big problem with a cool company name – Circulation. This is my third time working with Robin Heffernan, a twice successful entrepreneur with a PhD in Chemical Engineering from Harvard. Robin worked with me as a venture capitalist at my prior firm years ago and then was one of the first employees of an exciting portfolio company of ours (which she was instrumental in sourcing). Third time is a charm – it is a great privilege to work with her again as she scales Circulation with John Brownstein, her co-founder, who is the Chief Innovation Officer at Boston Children’s Hospital and
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Singapore Rocks…

Somewhere Over the South China Sea – What a fascinating yet complicated time to be in Singapore. In addition to the great spectacle that is Formula 1 Grand Prix racing, the weekend Singapore Summit (Asia’s version of Davos) convened business and political leaders from around the world and also served as the set-up for SWITCH (Singapore Week of Innovation and TeCHnology). A number of significant themes emerged over the three days, many of which were a function of dramatic advances in technology and healthcare. singapore-2016-1 In addition to the obsession with the US political scene (I find myself apologizing to my guests whenever I travel overseas now) and whether the Fed will raise interest rates this week, of greatest concern at the Summit appeared to be the possible, no likely, turmoil due to the rapid pace of change and the immaturity of social systems. Inevitably
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