Join Me Monday Night to Talk Digital Healthcare

As many of you know, I help lead the Tech Council at Boston College.  It is a strong group with active chapters in NY, SF and Boston.

Monday the 12th we have a great event in Boston. Healthcare is becoming the foundation of the Boston economy and it is being transformed as technologists tackle the problems of improving care and improving the economics of care.

Come to District Hall, the innovation center of The Seaport, to talk with 100 local tech and healthcare investors & execs about how to build HCIT businesses in this turbulent regulatory and reimbursement environment.  We’ll get started with a strong panel featuring PE leader Matt Carroll from Westview Capital & the Founders of Imprivata, Cyft & Definitive Healthcare.

Open to any and all, even folks that went to Holy Cross.  Details here:  Hope you can join me.


Building a Successful Corporate Venture Arm

Companies are creating Corporate Venture Capital (“CVC) funds at a healthy pace as shown by CB Insights in the chart below.  I suspect a few Fortune 1000 Boards and CEOs are wondering if they should have a fund or if their existing fund is set up correctly.  Below is a framework for building a successful team making strategic minority investments.

CVC Growth

Start with a clear review of purpose.  There are several valid reasons CVC units are formed, but you should be disciplined about the mission of your CVC unit.  Some CVC units, like that at Salesforce, are built to create or support an ecosystem around a company platform.  Units can be focused on “crowdsourcing” R&D with early stage investments in companies conducting core research to prove product viability.  This strategy is very common in the life sciences industry.  A CVC can focus on monetizing internal R&D via spin-outs, as practiced by many research hospitals.  A CVC team can also be built to seed and diligence a future M&A pipeline as Cisco has done successfully for decades.  In some cases, CVC is just a higher ROI use of cash than internal projects or dividends. Whatever the reason, be disciplined about the purpose and avoid building a CVC just because a competitor has one.

Next, be brutally honest in assessing what value you can, and are willing, to deliver to a portfolio company.  Cash is a commodity.  You will be selling a strategic value such as distribution, assistance in getting to international markets, expertise to scale manufacturing or build a supply chain.  This is your value prop and your CVC effort should be organized around delivering it and targeting companies that value it.

Once purpose and value are established, think about scope.  Decide if a dedicated fund is the right answer for your company.  There are hybrid models like Touchdown Ventures with an outsourced team.  There are also narrow funds close to your industry where you might become an LP.  If there isn’t one in your industry, consider starting one with institutional or corporate partners.  The dedicated fund offers the most impact and control, but it is not the only option.

If you are building a dedicated team, the next issues to consider are sponsorship, structure and staffing.  By sponsorship, I mean an internal champion.  Successful CVC programs have an internally visible, very senior leader.  The leader pushes a large organization to deliver on its value prop to the portfolio.  Comcast Ventures is a great example, where company co-founder Julian Brodsky as a senior sponsor could cause the organization to support the portfolio.

The structure reference is primarily to legal structure, but also includes financial commitments and external messaging.  Your CVC is most likely to be a syndicate partner, so your structure and messaging need to resonate with your fellow investors.  These investors will be most comfortable partnering with something they recognize – a dedicated legal entity with a defined capital commitment.  Set up a dedicated entity and get the board to approve a commitment amount that you can announce to the market.  The other argument for a separate entity is that it provides some comfort to portfolio companies who can be fearful of sharing an ownership interest in their IP directly with a large, well-funded participant in their market.

QuoteWhen staffing the CVC unit, you need to blend external expertise and credibility with internal relationships and credibility.  Sourcing, structuring and supporting a portfolio of start-ups is likely not an internal capability.  You should hire externally for the leaders and externally facing executives of the CVC effort.  Equally, a group of new hires will struggle to deliver on your value proposition as the new hires lack the internal knowledge and relationships to make the organization responsive to the portfolio.  The team needs the capability to source externally and deliver internally, so select your people accordingly.  I like what GV, formerly Google Ventures, did in this regard.  They had a broad bench of execs that supported the CVC, many on an as-needed basis tuned to their expertise.  Making the CVC a portion of an executive’s role is a great way to organize functional support in areas like finance and legal.  A dedicated person from the functional unit to support the CVC creates the benefit of a future experience curve without the overhead of full-time resources.  Forward thinking CVCs also have a dedicated HR exec, not for HR within the CVC, but as a resource to help the portfolio.

To attract and retain a staff, you must get the compensation plan right.  Dozens of flavors exist, but the effective ones all have some form of “carry”, an explicit connection between investment success and team pay.  People with the experience to help build companies have many employment options.  Creating a competitive pay plan requires offering upside beyond base salaries. You want the team’s upside tied to results delivered to shareholders, not a bonus for simply making an investment.  The upside incentive should also be shared with the internal resources that were key in delivering your value prop to the portfolio.  The details of comp plans are a separate long topic, but prepare to connect it to results and find a way to be tax efficient.  Your HR department is going to need to think differently for this business unit.

With all the preparation in place, the hard part begins.  Below are a few tactics that will make your effort successful once you are in the market:

  • Deliver your value prop – The best marketing to prospective portfolio companies is over-delivering for your current portfolio. Be aggressive about it and benchmark your progress with frequent feedback from your CEOs.
  • Target a few co-investors – Co-investor relationships are built on a trust that can only be created by working together. Accelerate that process by targeting a handful of core co-investors.  Prove your value to these folks, they will become your reference to the rest of the market.
  • Embrace speed – Nearly all CVCs make decisions too slowly. They wait for too many levels of approval or a scarce time slot on the CEO’s calendar. Streamline your approval processes and invest in diligence resources to match the market cycle time for syndicate formation and term sheet approval.
  • Learn to partner – Big companies can derail small companies when they insist on warping the portfolio company product roadmap and go-to-market plans toward the agenda of the big company.  If you need that degree of influence, buy the business rather than invest.  Learn to be a minority investor and be mindful that the portfolio companies are not your business units.

I hope the above is helpful.  My final advice to those thinking about building or revamping a CVC: Never put a lawyer from your M&A team in charge of the effort.  No idea why this gets done, but it does and it’s a direct path to a large write-down.



Brad Feld thinking about burn rates and Unicorns

As is often the case, Brad Feld has useful insights.  His post from last week about over thinking the Unicorn class is most interesting for his comments on burn rate.  Worth a read here

Can an Algorithm Help Start-ups Get Credit?

The team at CB Insights is great at delivering high level data on trends in the private funding market. I use their data frequently in my analyses.

On Tuesday they announced a private company scoring product called Mosaic.  The product seems designed as a proxy for the Dun & Bradstreet credit reports that business partners use to evaluate established companies as counterparties.  The CB team believes the reports will be used to improve a start-up company’s outcomes when trying to attract vendors, lenders and investors.  If it works, start-up companies will get better access to growth resources.  This is an interesting idea and it will be fun to see how it evolves.

The CB team built Mosaic algorithms from digital “signals” such as number of job postings, social media traffic and sentiment, product announcements and web traffic.  The Mosaic score will be broken down into Momentum (social traffic), Market (sector trends) and Money (how much raised and from whom).

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The most valuable of the three score components over time may be the “Market” score.

The Momentum score will favor companies that have great PR, not necessarily great product.  If vendors / lenders begin to use that score, companies can work to game it with increased PR effort.

The Money score is hard to do well without private P&L data that CB will not possess.  Vendors & lenders already know who a start-up’s VCs are, how much they raised and when.  I am not sure the Money score will be impactful for lenders as a bank can get actual company financials from the company applying for credit.

The Market score, however, can quantify what lenders, follow-on investors and others do instinctively from being in the idea flow.  They make a decision about the attractiveness of the sector.  The flaw with instinct is we humans overweight the last data point, the recent flame out or last week’s successful IPO.  If the Market score can deliver a medium-term metric targeted narrowly enough to be applicable this can lead to better lending / investing decisions and more access to capital for successful companies.

I think Mosaic is a great effort by the CB team even if it hits only part of its intended mark.  My guess is that among the targeted audiences of vendors, lenders and investors we will see different usage.  If the scores prove valid over time, executing vendor agreements might end up being a lot easier and faster for start-ups.  Lenders will still rely on company P&L data, but might get better at sub-sector allocation within tech. Follow-on investors will start using Mosaic today. Any reliable screen that can help investors speed the process of getting in front of likely winners will get traction.  We will know it really works when someone markets a fund that buys private company stock based on Mosaic algorithms.

VCs Work for School Teachers

The New York Times awoke to the surge in private market investing yesterday with an article that contributed relevant quotes about why many CEOs prefer to avoid an IPO.  They even found a tech CEO who admitted to being “terrified” of the public markets.  Ouch.  The NYT article can be found here

The article highlighted for me how often the public –  and even experienced journalists – forget the fundamental structure of our industry.  The NYT writes:

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The author, and much of the population, are forgetting the basics.


Are the Unicorns Deceptive?

The private market is so healthy that even Silicon Valley journalists are publishing the “B” word (“Bubble”, not the one that rhymes with rich).  The robust private market has made the tech IPO an after thought; so much so that we are headed for the lowest issuance since 2009.  The chart below highlights how the Unicorn wave is so strong that 41 private companies raised illiquid private rounds ABOVE where Box priced its initial public offering in a liquid market at a very respectable SaaS multiple of about 7.5x run rate revenue.

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Are we in a bubble?  Journalists are hitting the Wayback Machine and dusting off old S-1s to find Year 2000 metrics we can compare to today’s market to answer the “Bubble / No Bubble” question.  In all the looking backward, they might have missed the reality of today’s market.


Tech Market Update – Gartner CEO Summit

Include PE Buyers in your M&A Process Curious Incident of the Disappearing IPO

Our friends @Gartner_Inc invited me to speak yesterday at their Annual CEO Summit. I met some interesting people. Two of the speaking Analysts are leading projects around B2B buying processes and behaviors. Gartner has done some interesting analysis here, including creating a framework of Enterprise Buying Personalities. Worth checking out if you are a B2B marketer.

My segment was an update on the Tech Capital Markets generally, and the fundraising environment in particular. The slides from the discussion can be found here.

While reviewing our market data in preparation for the talk a couple of points jumped out at me:

  • The IPO market overall, but particularly in tech, is really off this year. Take a look at the data beginning on Page 12 of the deck. Dan Primack forecasted yesterday in his daily post that we are headed for the lowest number of VC-backed IPOs since the 2009 recession.
  • Public investors like Fidelity may not be crossing over into the private markets in search of outsized returns. They may be doing it as the lack of tech IPOs is offering them fewer alternatives to add new tech names to portfolios.
  • Take a look on Page 22 to see what investors in the latest round for @Snapchat could have bought instead….