Healthcare Venture Capital

Archive for the ‘healthcare’ Category

What They Don’t Teach You About VC In Business School – Part 1

In healthcare on December 5, 2011 at 9:57 am

During my MBA, I was lucky enough to be taught by some of the great practitioners and researchers in the field of venture capital, including legends like Bob Higgins, Bill Sahlman, Josh Lerner, and Felda Hardymon – the All-Star team of VC in my opinion.

However, there are a few things that weren’t discussed openly in the hours of case studies and classes I took on entrepreneurship and venture capital.  Today I will tackle one of them: career planning in venture capital.

Rob Go of NextView Ventures perfectly captures this in a post today over at his blog discussing what it’s really like to be a VC – one of the few very realistic and pragmatic perspectives I have read on the topic. As Rob states:

 VC is a risky career path. It’s a lot of fun for a couple years.  But after two years, even if you were an operator before, your skills become stale and you are realistically not going to be as good at your former craft as you were before joining venture.  Your hire-ability is still pretty high at that point, but in years 4-6, you start running out of options.  It’s also on those years that you face the pressure of establishing yourself as a partner in the firm and hope to get meaningful economics in the fund.  As as I’ve blogged about before, the deck is kind of stacked against you.  Here’s why: a typical VC will do about 2 investments per year.  A principal or junior partner might be on a slightly slower pace.  So in years 4-6, you are realistically responsible for ~3 investments.  This is also the time when your partners (or other firms) are making the decision to make you a meaningful partner in the fund. So, in a way, your prospects as an investor are largely linked to these 3 investments.  Those odds aren’t great, in a world where most startup companies fail and only about 20%-10% drive a meaningful return to the fund. Do you really want to be evaluated on those 3 shots on goal, when a) it may be way too early to tell if any of them are winners but losers are usually identified more quickly, b) broad market fluctuations have a huge impact on the success of these companies, and c) most VC’s will agree that there is a huge amount of luck involved in this business?  Tough odds.

This is critical – as a young partner or principal in your firm, you will be judged on the outcome of your first 3 to 5 deals.  Indeed, I will sharpen that and say that in this era of shrinking firms and a shrinking VC industry as a whole, you will likely be judged on the outcome of your first exit.

As the data shows, somewhere between 57% (healthcare) and 76% (IT/Internet) of investments return less than 1x invested capital according to Cambridge Associates numbers which I analyzed in a paper last summer with Bruce Booth from Atlas.  The data also shows that median time from first investment to exit is between 6 and 9 years.

Sorry to say it, the deck is stacked against you.  But it doesn’t have to be if you think through it carefully from the outset.

If you are a young partner at a firm, how do you put points on the board early in your career and in a timely fashion?

Of course you do all of the obvious stuff: source great companies, network constantly, make yourself valuable to other partners and portfolio CEOs, and be first in and last out every single day. In short, earn their trust.

But the best to prove your value is with mark-ups or early winners. Inside the hallways of venture firms, money talks.

You do this most easily by investing in “momentum stage” companies – define momentum as you wish – but typically it’s companies having revenues or in a market that is frothy enough that a 12-24 month mark-up from a new investors is possible.

This is of course easier said than done. But it probably excludes filling your bench of 3 to 5 deals with early stage, science-heavy investments or academic spinouts that are years from market or will necessarily take inside-only capital for several years to come.

In healthcare it might mean leaner early stage, asset-light biotech with near term milestones or revenue stage HCIT, medtech, or services. In internet and IT, it probably means either finding a category defining game-changer (high risk) or more likely by investing in a company with revenue or traffic traction of some sort.

It’s much harder to prove your value as a partner after 5 years at a firm by going back to them and showing an unrealized portfolio full of companies that have done tranched insider financings or flat rounds. Even if those companies are largely going according to plan, that’s probably not good enough to get you promoted or to build your track-record such that you can take it to another firm.

If you are 3 to 5 years in and don’t have some of these momentum stage companies in your portfolio and you still haven’t had an exit, then stop reading this post and go find a great company with momentum now.

Career planning in VC is about portfolio planning from the outset. You can never time markets, but you can enrich your odds by thinking through.

Thanks Rob for inspiring me to finally post this.



BÂRRX: Chalk One Up For The Good Guys

In healthcare on November 21, 2011 at 7:04 am

It was just over 16 months ago that I wrote a blog post outlining my new investment in BÂRRX Medical.

And what an incredible 16 months it has been for the company.

Today’s exciting news that BÂRRX is being acquired by Covidien has me beaming from ear to ear for lots of reasons.

Not only am I proud to have been associated with such a stellar and professional management team, led by the incredible duo of Greg Barrett and David Utley, but I am also thrilled to know that almost 100,000 patients were treated and cured successfully with BÂRRX devices over the past several years.

Rarely do the stars align in an investment like they did here:

1. Tireless, hungry, and inspiring management team

2. Incredible clinical data – including a randomized double blinded New England Journal of Medicine study

3. Dramatic published cost-effectiveness data

4. Positive recent medical society guidelines

5. Strong reimbursement rates despite the current backdrop of cuts

6. Rapidly growing global presence, revenues, and clinical acceptance

I could not be more thrilled for the 100 or so men and women who have made BÂRRX such a great company since its first round of capital in 2003.

I’ve learned a lot from this company and its management team. Namely – if you do things right clinically, for doctors, for patients, for your employees, for your shareholders, and the healthcare system, good things will happen.

I also learned that investing in category defining and leading companies really matters.

So to all who think healthcare VC investing has been left for dead, please think again.

We’re not going anywhere.  

The recent pullback is of course temporary.  When the inevitable bubble bursts in other sectors of venture capital investing, does anyone doubt that healthcare venture will again be in favor, as it was just a decade ago after the carnage of 2000 and 2001?  After all, history may not repeat itself but it sure does rhyme (to quote George Zachary from CRV).

Fact Check:

  • People are still getting old.
  • People are still getting sick.
  • Healthcare still is the only net area of employment growth in the economy.
  • Whether we like it or not, healthcare is nearly one-fifth of our economy.
  • Large-cap healthcare companies still need to acquire innovative and growing private companies to boost their growth rates.

Thank you BÂRRX for restoring my faith that the good guys do actually finish first sometimes.

When The Sales Guys Run The Company…

In healthcare on October 31, 2011 at 9:46 pm

One of my favorite passages from Steve Jobs by Walter Isaacson is really worth thinking about. Jobs speaks candidly about his views of company building, management, and start-ups today:

I have my own theory about why decline happens at companies like IBM or Microsoft. The company does a great job, innovates and becomes a monopoly or close to it in some field, and then the quality of the product becomes less important. The company starts valuing the great salesmen, because they’re the ones who can move the needle on revenues, not the product engineers and designers. So the salespeople end up running the company. John Akers at IBM was a smart, eloquent, fantastic salesperson, but he didn’t know anything about product. The same thing happened at Xerox. When the sales guys run the company, the product guys don’t matter so much, and a lot of them just turn off. It happened at Apple when Sculley came in, which was my fault, and it happened when Ballmer took over at Microsoft. Apple was lucky and it rebounded, but I don’t think anything will change at Microsoft as long as Ballmer is running it.

I hate it when people call themselves “entrepreneurs” when what they’re really trying to do is launch a startup and then sell or go public, so they can cash in and move on. They’re unwilling to do the work it takes to build a real company, which is the hardest work in business. That’s how you really make a contribution and add to the legacy of those who went before. You build a company that will still stand for something a generation or two from now. That’s what Walt Disney did, and Hewlett and Packard, and the people who built Intel. They created a company to last, not just to make money. That’s what I want Apple to be.

Steve Jobs (Kindle Locations 9752-9764). 

Jobs makes two critically important points here:

1. Product matters. Founders understand this better than anyone else.  Companies that lose their founders often lose their way. This is not an indictment of sales people – many of whom are wonderful people as much as it is an admission that founder-led businesses do best. That’s been shown time and time again – and I really believe it to be true. The best companies I have the pleasure of being involved with or observing have been the ones where the founders played a critical role from inception through product launch and growth.

2. Too many companies are being “built to flip” these days.  VCs have figured out this game as well.  There are very few VCs backing truly innovative big ideas these days – whether it’s in healthcare or tech.  With 10 year fund lives and a real paucity of returns for the past 10 years from most of tech venture as a whole, the sandbox that most VCs play in has become smaller and smaller.  The entrepreneurs get this too – why try to build a lasting company from some foundational science or cutting edge new technology when the challenges are so great and the VCs wont even bother investing?  It makes me wonder whether the Apples of tomorrow are actually getting started today or not?  This is why I am so excited about Peter Thiel’s Breakout Labs and some of the great companies that big thinking VC firms are backing these days.