Category Archives: Insights

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2017 Healthcare Prognosis

The state of US healthcare delivery has certainly been top of mind in 2017. With so much potential change, we are frequently finding ourselves in discussions about how policy will change and impact our ecosystem. While never short of opinions, we also have a lot of questions ourselves. Rather than relying on our Magic 8 ball, we decided to crowdsource (a few hundred of the smartest people we know across healthcare) predictions on the future. We covered the impact of the Trump administration on the ACA (Affordable Care Act), how various healthcare IT subsectors will fare going forward, valuation sentiments, amongst other topics.

Our key findings are presented in the Venrock 2017 Healthcare Prognosis. You can read it here.

Running Through Walls: Culture Conscious

When Matthew Prince and Michelle Zatlyn met in business school, they didn’t envision a class project turning into a billion-dollar company, but that’s exactly what happened. Bryan Roberts, partner at Venrock and Cloudflare board member, talks with the co-founders about the early days of company building and how their initial mission statement has remained the same years later, a rarity among Silicon Valley startups. Prince and Zatlyn discuss their measured and thoughtful approach to hiring, and why slower growth helps them keep Cloudflare’s culture strong. They also share their experience with public policy, and a time when they took drastic measures to protect the privacy of a Cloudflare user.

Running Through Walls: Surviving a Slump

Bruce Cozadd was a musician in his early years, but a passion for science and business led him to enter the biopharma industry. Venrock partner Camille Samuels talks to Cozadd, now CEO of Jazz Pharmaceuticals, about his journey to co-founding Jazz and the people who helped him along the way. He shares the joys of starting Jazz with a team that had worked together in the past, but also highlights the downside: that his team lacked diverse prior experiences to rely upon while building a company. When Jazz’s stock price fell to just $0.53 a share, Cozadd persevered and relied on grit and determination to turn the company around. He also shares his wisdom about managing people through all stages of their careers, and reveals what his mentor taught him about treating people well no matter how difficult a situation the company is in.

Virta Can Reverse Type 2 Diabetes for Many

In medical school, we committed thousands of pages of medical textbooks to memory about diseases and how to treat them. Like generations of doctors, I memorized that Type 2 Diabetes is a chronic disease where the goal is to slow progression. That there is no cure or way to reverse it. That for most patients, it is a relentless journey towards feared complications like amputations, heart attacks, strokes, and blindness. And that my goal is to help patients avert these complications. About a decade ago, the paradigm began to change, when data emerged that bariatric surgery can reverse type 2 diabetes. But these surgeries, while effective, are expensive, carry meaningful operative risk, and require lifelong lifestyle changes that make them undesirable for many patients.

Two years ago, we first learned about an approach from an early stage company called Virta Health with results that are similar to bariatric surgery at a fraction of the price and risk. Virta Health is commercializing an approach for reversing type 2 diabetes pioneered by Drs. Steve Phinney and Jeff Volek based upon restricting dietary carbohydrates to induce a metabolic state called ketosis. When we dove into the results, they were the best we have ever seen. They were generated from several hundred “typical” people with obesity, metabolic syndrome, and type 2 diabetes based upon the clinical care and research conducted by Phinney and Volek on thousands of patients. We sent Virta’s data to diabetes experts, biostatisticians, academic doctors, and drug company researchers. All of them were impressed. They told us that these are the best results they have seen from any intervention other than bariatric surgery. Amazingly, most of the patients could reverse their diabetes, reduce or eliminate their medications, and live happier lives. For these reasons, and out of great confidence in Virta’s leadership team, we invested to help Virta scale their approach to serve more patients.

Virta is publishing their first clinical trial now. Virta’s data on 250 patients has been carefully collected by Indiana University, analyzed, and published after peer review. The results speak for themselves. After only 10 weeks, nearly 90 percent of patients eliminated, or reduced, insulin, patients lost 7percent of their body weight, and HbA1c measures fell dramatically. As impressive, 91 percent of patients willingly stayed on Virta’s program.

With any lifestyle change, the next question is whether “typical” people can stick with it. The world is littered with diet programs, exercise regimens, and support groups with more failures than successes. What stands out about Virta is that once patients start they can stick with it. When we talk to patients, the resounding feedback is that they feel so much better on Virta’s program that it is easy to stick with it. Notably, people do not feel hungry. They also report better sleep and more energy. These benefits coupled with weight loss are motivating and reinforcing.

Virta achieves these results through a combination of clinical care delivered by doctors, diabetes educators, dieticians, and coaches enabled by technology. The Virta Clinic develops individualized programs for each patient. They then adjust medications by tracking weight, biomarkers, and patient feedback every day. Virta coaches provide coaching and education to help each patient achieve their goals, learn, and understand how their body responds.

Reversing Type 2 diabetes, and helping patients lose weight, saves a lot of money. Diabetes medicines are expensive. Most patients spend $5,000 to $15,000 per year on their medications. Insulin alone usually costs about $8,000 per year. With Virta, most patients are able to take fewer medications and many are able to take none. There are additional savings from fewer hospitalizations, fewer specialty care doctor visits, weight loss, and the extra activity that patients achieve with better sleep and more energy. And in many cases savings from averted complications that would have occurred with disease progression. We are proud to work with Virta. Virta is led by an exceptional team of the best and brightest clinicians combined with a world class software, data analytics, and technology team. Virta’s Founders, Drs. Phinney and Volek literally wrote the textbook on this approach and are paired with Sami Inkinen who discovered their work as a triathlete and brings entrepreneurial know how from his success Co-Founding Trulia. Virta’s goal is to reverse Type 2 diabetes in 100 million people by 2025. We hope that you tell people about Virta, and if you are a type 2 diabetic, that you try Virta and feel better.


Running Through Walls: The Doctor is Online

Hill Ferguson joined Doctor on Demand as CEO in 2016. Venrock’s Bob Kocher talks to Ferguson about his first day on the job and hallmarks of a successful founder to CEO transition, including the delicate balance of fixing problems while preserving what’s already great with the company. Ferguson was on the employee side of this transition in previous roles, and learned the importance of creating an environment where all employees, regardless of position, feel comfortable asking questions. They also discuss Ferguson’s product expertise, and how he views all products as solutions to problems. What products inspire him? Those that help humanity and create economic value while improving people’s lives. Hint: not foie gras delivery. Ferguson also shares the nuances of recruiting doctors for telemedicine and what a good day looks like for Doctor on Demand’s physicians.

Running Through Walls: Talk About (Your) Mistakes

Steven Aldrich, Chief Product Officer at GoDaddy, has thrived professionally at both large companies and startups, something Brian Ascher of Venrock notes is unusual during this interview. Aldrich shares lessons startups can learn from more established companies and vice versa, noting that startups often try to be scrappy and do things internally regardless of expertise, while hiring someone with expertise would save them time and money. Conversely, big companies need to encourage experimentation and find ways to maintain the sense of urgency that energizes a team around problem solving. Aldrich says having a growth mindset (Carol Dweck, Mindset) is at the bedrock of how he hires and manages, while fixed mindset folks have no place in Aldrich’s organization. Aldrich also talks about GoDaddy’s famous Super Bowl commercials and what impact they had on the company then and today. Spoiler alert: you will see a new GoDaddy commercial during the upcoming Super Bowl.

The Anticipation of a Journey

We closed Venrock 8 today. It is a(nother) $450 million fund which feels, for us, a bit like the littlest bear’s bowl of porridge—not too big and not too small, but just about right. We expect to follow a similar strategy as we have for the last several funds—finding great people addressing substantial needs in ways that most of the world thinks will not work. These investments will end up being made in a likely surprising variety of companies across technology and healthcare. We have nearly always invested in first time CEOs – people like John Stuelpnagel of Illumina, Jonathan Bush of Athenahealth and Matthew Prince of Cloudflare; and backed them pre product-market fit, when the likelihood, timing and scale of success is hard to pin down. We expect these traits will continue in Venrock 8.

We continue to believe that there are some really interesting problems to tackle, and therefore some very large businesses to build, but that is all in the future. Thus far, we have only taken on the responsibility of a large sum of money from people who are counting on us to return multiples of it, so that they can continue their work supporting a wide array of wonderful programs and causes.

As a result, I have to confess to being a somewhat reluctant blogger on this topic, as we are really at the beginning of an arduous journey towards a tenuous goal, more so than at an end, worthy of celebration. Given the current low return environment across most asset classes globally, recent venture performance has attracted a substantial oversupply of capital. For us and many others, this makes fund raising a reasonably efficient process, but does nothing to decrease the weight of responsibility placed on the firm. And, it means that we have to be even more insightful or early or proprietary with investment opportunities. Appropriately, our close-knit team feels more of the anticipation and nervousness of embarking on an all-consuming effort— to improve ourselves, focus on long term company success, and do our best for entrepreneurs 24×7— than the joy of successful completion.

As a team, we know how fortunate we are to sit in these seats, bearing witness to the formation of so many companies, led by extraordinary people with noble ambitions. We take the responsibility seriously, both as stewards of others’ hard-earned capital and as hopeful catalysts of a better world.

Running Through Walls: Apple Intern to Entrepreneur

Matt Rogers, co-founder of Nest, started his career as an intern at Apple and it was during that first week on the job when he met his co-founder Tony Fadell. While speaking with David Pakman of Venrock, Rogers talks about stretching people to help them grow, why he and Fadell chose to reinvent the thermostat, and why Apple is a breeding ground for entrepreneurs. Nest was going after a market dominated by well-entrenched players, but Rogers says they were prepared for a fight and ultimately these older companies have made it easy for Nest to stay one step ahead. Rogers also recalls a low point in the company’s growth – a product recall – and how they navigated that situation with transparency and continued focus on the whole customer experience. Now a part of Alphabet, Rogers says it’s hard to know what to expect when your company is acquired, but building a good relationship with the acquirer is key. Roger’s kryptonite? Large crowds!

Five Lessons From The +$15B Virtual Goods Economy

While it’s tempting to dismiss virtual goods as a niche product category limited to online role-playing games or emoji “stickers,” the impact of this market is actually much bigger than you might think. Dating back to the earliest social networks, virtual goods have played a critical role in shaping the behaviors and business models behind major trends in online engagement. Here are five ways developers and entrepreneurs can directly benefit from those learnings.

Lesson #1: Maintain Flexibility In Your Business Model
Like many online publishers, some of the earliest social game developers focused on monetization opportunities via digital advertising. Launched in 2001, one of the first to gain traction with this approach was a massive multiplayer online (MMO) role-playing game called Runescape.
The game was set in a medieval fantasy world, and featured an inventory of hundreds of virtual items which players could use to level-up their characters — attainable by completing missions or bartering with each other.

Even in the earliest days, some of the most active players expressed a willingness to pay for these items in order to enhance their experience. In fact, three surveys conducted between 2005 and 2009 suggested that at least one in five MMO players already traded game goods for real money.
Unfortunately, a sizeable portion of this trading was taking place in “black markets.”
The developers behind Runescape had certainly taken note of the behavior, but chose to clamp down on it in order to preserve the “sanctity” of their game. The official policy was to actively prohibit the buying of gold, items, or any other products linked with the game, for real world cash.
As a result, players found ways to build their own secondary markets — effectively achieving a hacked-together style of freemium economics.

Today’s modern startups have learned that ignoring the behaviors of their most engaged customers comes at a great risk. While Runescape earned its developer a respectable $30M in advertising revenue in 2008, that figure paled in comparison to an overall virtual goods market that was already valued at over a billion dollars annually (based primarily on the gaming market).
Quite a missed opportunity for a game that Guinness World Records crowned the “World’s Most Popular Free MMORPG” (2008) that same year!

Lesson #2: Fringe Behaviors Can Open Up New Markets
Runescape may have been one of the first major MMOs to fuel a “black market,” but it certainly wasn’t the last. With the rise of games like World of Warcraft, the unofficial market for virtual goods transactions grew considerably.
Among the most notable outgrowths of this trend was the practice of gold farming, whereby some players focused their time solely on accumulating in-game currency for resale. In effect, these players approached the game as their primary employment, with a relatively predictable minimum wage.

To get a sense of scale, it was estimated that the gold farming market was already worth nearly two billion non-virtual dollars globally by 2009. One article in the New York Times from 2007 estimated that 100,000 people were employed in this practice in China, with worker salaries ranging from $40 to $200 per month.
Often these operations were run as small businesses, with “bosses” earning a profit of nearly 200% on top of worker costs. In fact, this practice became so lucrative that at one point prison inmates in China were forced to play World of Warcraft in lieu of manual labor.

In addition to gold farmers, the demand for illicit virtual goods also gave rise to third-party platforms focused solely on facilitating exchanges between players. In a testament to how mainstream this market was as far back as a decade ago, a significant portion of this industry initially migrated to eBay.
However, citing a violation of its terms of service, the auction site began cracking down on virtual goods sales in 2007. This move pushed virtual goods transactions towards less transparent destinations such as Internet Gaming Entertainment (IGE).
Today there are hundreds of platforms offering “secure” opportunities to buy and sell everything from in-game currency to entire player accounts. We’re even witnessing the emergence of these transactions for casual mobile games. Days after the launch of Pokemon Go, there were already a bevy of leveled-up accounts for sale across dozens of sites. Although sales of mobile game accounts are still a small component of the secondary market, they will likely take on far more significance in years to come.

Lesson #3: Adapt To New Platforms
Over the past several years, it has become clear that smartphone screens have become the most important battleground for consumer attention. As of 2014, the number of mobile users officially surpassed the number of desktop users, and the gap continues to widen.
Mobile gaming has become a strong beneficiary of this trend. Not only have mobile games already surpassed console games in terms of total revenue, but they’re also growing at nearly five times the rate.
In fact, mobile gaming currently represent a staggering 85% of all app revenues, in any form.
Newzoo games market segments

According to a recent study by Slice Intelligence, the average paying player on mobile spends $86.50 per year on in-app (virtual goods) purchases. Some games far exceed that, with Game of War: Fire Age bringing in a whopping $549.69 per paying user, and over $2M in total revenue per day at its peak.
With those kinds of economics, it’s no wonder the game’s developer, Machine Zone, could afford to drop $40M on an ad campaign featuring Kate Upton.
The rapid acceleration of this market is evidence that the appeal of virtual goods has successfully made the jump from desktop experiences to the casual smartphone market. In fact, it’s no coincidence that the same freemium model of gameplay demanded by early MMO players has emerged as the dominant framework among mobile games.
By tweaking the same model for games with shorter duration, developers successfully leveraged virtual goods in opening up an entirely new base of casual users.

Lesson #4: Engage Your Community of Makers
While developers dictate the structure of a game, users dictate its culture. Following the patterns of social engagement across the web, there is often a small subset of highly engaged players who create the customs, quirks and content that imbue a game with its lasting appeal and sense of community.
When given the tools to make things and earn recognition, this subset of users can unlock creative new experiences for all players.
One great example of this trend comes from the world of Second Life, which grew to over 1M monthly active users since its launch in 2003. Much like earlier social networks and immersive worlds, it was free to create an avatar on the platform and engage with other users. The twist came in the form of the company’s revenue model.
Second Life charged users for the purchase and rental of virtual real estate, on which landowners could build businesses (such as nightclubs and fashion outlets) and potentially earn a profit from other players. In addition, users were given the opportunity to create and sell unique virtual goods to each other.


Empowering the creativity and entrepreneurial spirit of the platform’s makers gave rise to a massive market for virtual goods. In 2009, the total size of the Second Life economy reached $567M, and by the platform’s 10 year anniversary, Linden Labs estimated that approximately $3.2 billion dollars (USD) worth of transactions had taken place. A handful of top users were reportedly cashing out over $1M in earnings per year from virtual businesses in real estate, fashion, and events management.
More recently, Valve has benefited from this phenomenon within its Steam platform for PC gaming. As of January 2015, the company announced cumulative payouts of $57 million to community members that had made in-game items, with average earnings of $38,000 per contributor. As an additional signal of market potential, Steam even announced it would facilitate the sale of virtual items for third-party games outside of its ecosystem.
Both examples demonstrate that by allowing a subset of creative users to take greater control of product experience, developers can exponentially increased both the scope of their products and community engagement.

Lesson #5: Social Capital Is An Effective Motivator
Following on the success of Second Life, Minecraft rode a similar wave into mainstream popularity after its launch in 2009. Often referred to as a “sandbox game,” Minecraft is a virtual environment where users can create their own maps and experiences using building blocks, resources discovered on the site and their own creativity.
Since launch, the game has reached 100M registered users, of which about 60M use a paid version.
Like Second Life, much of the content that makes Minecraft unique comes from its players. However, the two worlds differ in terms of the nature of incentives those players are offered. While some have managed to charge other players to engage with their content, Minecraft’s developers actually started discouraging the practice. Instead, Minecraft’s appeal was in the robustness of its creation tools, the ability to co-create with other community members, and the recognition for building something truly amazing.

Another unique attribute of the Minecraft community was that makers took their engagement beyond the virtual world itself. According to Newzoo, Minecraft-related YouTube videos were watched 4B times in May of 2015 alone. The community even crowdsourced support for an official Minecraft LEGO set, which sold out almost immediately upon release.
While Minecraft may not have directly pushed users to create external content, it acknowledged their passion for self-expression, collaboration and even bragging rights. In doing so, the game touched off a broader movement among makers that exponentially improved the experience for everyone involved.
A Look Ahead
Since their initial adoption nearly two decades ago, virtual goods have come to represent a core part of our engagement on the web. From in-game items to full-blown currency, they have been adapted by online communities to promote an ever-expanding set of experiences. By continuing to monitor their evolution, we’ll undoubtedly gain valuable insight into the changing rulebook for building lasting digital products.