Watching this great talk by Mike Maples reminded me to blog about a topic that I have been thinking about alot recently: capital efficiency in start-ups.
First, three sets of facts to think about.
1) Some of the biggest VC backed exits of the last 20-30 years raised very little in venture money. Examples:
-Cisco – raised $2.4M in 1987 ($4.5M in 2008 dollars)
-Ebay – raised $5M from 1997-1998 ($6.7M in 2008 dollars)
-Microsoft – raised $1M in 1981 ($2.3M in 2008 dollars)
[Yes I’m sure there are also many counter examples like Google ($25M+ raised), Starbucks ($30M+) etc]
2) It has been well documented that the cost to start technology-based companies has only come down in the last 10 years, particularly true in the internet space. But also true in certain historically capital inefficient areas like enterprise IT where today’s best sales models are lean and mean.
This has led to a robust angel and early stage network (institutional folks like Maples, Harrison Metal, Founders Collective, First Round, Andreesen Horowitz, and tons of individuals)
And of course VC fundraising isn’t getting any easier and many predict that the VC industry needs to shrink dramatically to survive.
3) Yet despite structural forces that have made starting technology and internet companies less expensive, there appears to be no change in the world of healthcare start-ups.
There are several reasons for this including the fact that anything that requires a clinical trial or FDA approval is defacto going to be more expensive and high risk than any internet company would be. It is routine to invest $50M – $100M in a biotech or medical device company these days prior to an exit.
With all of the associated development and FDA risk, I am increasingly finding it hard to invest in most of these stories. But let’s put all of medtech and biotech aside and just focus on health services and IT.
Yet even in the area of healthcare IT and services, I am finding it hard to discover capital efficient models.
Despite all of its success, athenahealth raised $90M of private capital over 10 years before it was able to go public. Initiate Systems was just bought by IBM in what seems to be a great exit – yet it took 10 years and $65M of invested capital.
Where are the capital efficient models in healthcare?
I don’t mean Health 2.0 – with a gaggle of companies many of which lack a discernible business models or totally reliant on ever shrinking pharma ad-dollars.
Healthcare has always been slow to adopt learnings from the rest of the economy, so I am hopeful that the capital efficiencies at work in internet and software companies today will be adopted by the newest generation of healthcare start-ups soon.
Otherwise, it’s tough to conclude anything other than the only way to play healthcare IT and services as a venture investor will be in the very late-stages ($10+M revenue)