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What Venture Capital Can Learn from Emerging Markets

Venture capitalists are increasingly interested in emerging markets, and in working with local funds based in those markets (despite the fact that reverse innovation in venture capital seems counterintuitive). The reason for the interest in in part because the industry has suffered from poor returns on investment over the last decade; indeed, some sectors, including biotechnology, report negative aggregate returns. China and India, in particular, offer attractive liquidity and investment opportunities VCs haven’t seen for a while.

The interesting part of this shift is that VCs are taking a more holistic or “systems” approach to investing than they typically do in developed markets. Traditionally, VCs evaluate each investment as a discrete entity; the firms in their portfolio rarely interact with one another. In contrast, emerging-market VCs such as Nadathur Holdings (established in 2000 by N.S. Raghavan, one of Infosys’ co-founders) create intentional links between firms. Nadathur’s portfolio includes firms operating in drug discovery research, companion diagnostics, pharmaceutical analytics, reimbursement claims processing, patient relationship management, and specialty healthcare delivery for running clinical trials — and they all work together. In effect, the VCs at Nadathur Holdings serve as the executive team for a miniature healthcare innovation ecosystem.

Why do VCs in emerging markets take a systems approach? Because of three significant challenges innovators face in emerging markets:

  1. Innovation ecosystems are not well-developed. The supporting industries that an early-stage tech start-up needs simply don’t exist locally. VCs encourage upstream and downstream, often service-based, investments. These can be exited at lower multiples, with the trade-off of higher success rates for the R&D-intensive high-multiple investments.
  2. Technology-intensive firms are expected to generate revenues before they make an exit; local investors are reluctant to put money into start-ups centered on intellectual property. Portfolio firms upstream or downstream can help establish commercial proof, generate retained earnings and make it easier to get additional customers.
  3. Few local financial intermediaries (including VCs) exist. A portfolio that contains an entire ecosystem helps to decrease risk by allowing inferior business models to be refined or killed faster.Continue reading…

How VCs Use Advice From Experts

Recent media articles have scrutinized the use of doctors, scientists and experts by pharmaceutical companies and hedge funds, often casting them in an unflattering light. Experts can play a valuable role, but it is a case of caveat emptor – and sometimes for the expert, as well as the organization hiring him. Biotech or medical device companies that are trying to promote new products, for example, could undermine a medical expert’s perceived objectivity if financial ties are not clearly disclosed upfront.  Experts providing information to hedge funds must be particularly careful not to disclose non-public information about publicly traded companies and run afoul of insider trading restrictions.

Venture capitalists also commonly rely on personal and business expert networks to help gather investment information to make smart investments in private companies.   Because early-stage venture firms do not invest in public stocks or promote independent projects, experts can work with VCs and VCs can work with experts without risk of reputation or objectivity.

Here is how I and other venture capitalists use outside experts:

Personal networks, by far, tend to be most valuable. For example, sometimes I contact a childhood friend who is now an orthopedic surgeon at the Cleveland Clinic. If CCV is thinking about investing in a product related to surgery, I ask his opinion. His input is good — and it’s free counsel from a valuable source.

Like other VCs, I also look for expert guidance inside existing portfolio companies. I’m currently working on a project related to a software system for gene sequencing, for example, and I have consulted a chief technical officer at a CCV portfolio company who is highly knowledgeable in this space.

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Year End Pondering

It’s the end of the year – an opportune time to forecast how 2011 will unfold in health care. We are likely to see some surprises, such as the sharply rising importance of primary care physicians.

Here are some predictions about the new year:

More consolidation is on its way in healthcare under Obamacare, which heightens the pressure to improve the efficiency of healthcare delivery. As part of this, more and more healthcare provider groups, even the small ones, will feel compelled to go electronic once and for all.

Valuable new, cost-effective medical tools will begin to become widely embraced. One is telemedicine. Just imagine how much more effective doctors can be if they interact with patients remotely via cameras. The technology exists now, has been successfully used in a number of situations, and it is not expensive.  Soon insurance reimbursement models will permit and remunerate physicians for telemedicine “visits,” and then this will take off.

The use of genetic testing to segment patient populations and better target therapies will be one of the fastest growing segments of healthcare as a new wave of accurate, clinically actionable tests hits the market.

As health reform increasingly kicks in, there will be heightened emphasis on the importance of primary care physicians – a sharp contrast to the elevated importance of specialists for so many years. They will become the linchpins of health care and make more pivotal care decisions as more than 30 million more people enter the healthcare system and require access to them.

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Innovation, Not Legislation: Venture Capital is the Path to Improving Patient Safety and Reducing Waste and Error in the U.S. Healthcare System

Picture 89 All eyes are on Toyota’s recall of 8.5 million vehicles due to faulty gas pedals and brakes. The recall has sparked congressional hearings, a probe by the U.S. Department of Transportation, possible criminal charges stemming from a federal grand jury investigation and numerous civil lawsuits, all in the name of driver safety.

This aggressive response to Toyota’s mistakes is appropriate, even though the human toll from its miscues has been, thankfully, relatively modest – 34 alleged deaths and a few hundred injuries. Not to downplay this misery, but in stunning contrast, consider this: More than 100,000 Americans die annually in U.S. hospitals because of avoidable medical errors, according to the Institute of Medicine (IOM), which also says that medical errors rank as America’s eighth leading cause of death. This is higher than auto accidents (about 45,000) and breast cancer (about 43,000). And the problems don’t end here. Studies show that approximately 19% of medications administered in hospitals are done so in error, injuring about 1.3 million each year, according to the FDA.

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Catalyzing the app store for EHRs

Recently, Steve posted about the idea, floated by Ken Mandl and Zak Kohane, that EHRs (or health IT more broadly) could move to a model of competitive, substitutable applications running off a platform that would provide secure medical record storage.  In other words, the iPhone app model, but, for example, you could have an e-prescribing app that runs over an EHR instead of the Yelp restaurant review app on your iPhone.  We’re thinking about the provider side of the market here, as Google Health and Microsoft HealthVault are already doing this on the consumer side.

It’s nice to ponder these “what ifs,” but we’re a bit more action-oriented here and we’ve turned our attention to asking what it would take to make this happen.  It seems that there are two things that are needed. First, we need the platform.  Some of the most notable platforms started out as proprietary that were then opened up.  The IBM PC comes to mind as an example. Some were designed from the beginning to be open platforms with limited functionality until the market started developing applications.  A recent example is the development of iGoogle and the tons of applications that are available for free.  Finally, there was the purely public domain development from the beginning to end that we’ve seen in the Linux world.  Or perhaps we don’t need a common platform and maybe what is needed is to stimulate the market for health IT products that have open application programming interfaces (APIs) that allow for third-party application development?  Several ideas come to mind.Continue reading…

Interview with Al Waxman, Psilos Group

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Al Waxman is a healthcare entrepreneur who these days runs the Psilos Group, a venture firm that invests in health care services, health care IT and device and instrumentation companies. Among their better known investments are Active Health Management, Health Hero Network and Definity Health–now all acquired by publicly traded companies. This is a wide ranging conversation about Al’s investment philosophy, his desire to get VCs more involved in health care, his mistrust of politicians and where he thinks health care technology is headed. Here’s the interview.

Al will also be on a panel at Health 2.0 on October 6-7 talking about whether Health 2.0 can make health care more affordable.

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