Having worked in the FinTech space many years ago, invested in the space for over a decade, and met with hundreds of talented teams in this area, I have observed the following ten traits among the most successful companies:
Rule #1: Unlock Economic Value Most traditional financial service firms have invested heavily in branch networks that create expensive cost structures which result in higher prices to customers. Mass-marketing channels and poor customer segmentation also result in higher costs and marketing expenses which translate to higher prices. Online-only financial services can unlock significant economic value and pass this along to consumers. Lending Club offers borrowers better rates and more credit than they can get from traditional banks, while offering lenders better rates of return than they can get from savings accounts or CDs. SoFi is disrupting the world of student loans with better rates to student borrowers and superior returns to alumni lenders relative to comparable fixed income investment opportunities.
Rule #2: Champion the Consumer Consumers are disenchanted and distrustful of existing financial institutions. Let’s take this historic opportunity to champion their interests and build brands deserving of their love. The team at Simple has envisioned a new online banking experience that puts the consumer first via transparency, simplicity and accessibility. Its blog reads like a manifesto for consumer-friendly financial service delivery. LearnVest is another company on a consumer-first mission to “empower people everywhere to take control of their money.” Its low-cost pricing model is clear and free of conflicts of interest that are rampant in the financial sector. There is plenty of margin to be made in championing the consumer. The speed at which consumer sentiment spreads online these days creates an opportunity to become the Zappos or Virgin Airlines of financial services in relatively short order.
Rule #3: Serve The Underserved In my last post explaining why the FinTech revolution is only just getting started, I described how the global credit crunch left whole segments of consumers and small businesses abandoned. Some segments at the bottom of the economic ladder have never really been served by traditional FIs in the first place. Greendot was one of the pioneers of the reloadable prepaid cards bringing the convenience of card-based paying online and offline to those who lacked access to credit cards or even bank accounts. Boom Financial is providing mobile to mobile international money transfer at unprecedented low rates and ultra-convenience from the US to poorly served markets across Latin America and the Caribbean, and eventually globally. No need for a bank account, a computer, or even a trip downtown to dodgy money transfer agent locations.
Rule #4: Remember the “Service” in Financial Service Just because you are building an online financial service does not mean that your service is only delivered by computer servers. When dealing with money matters many people want to speak to a live person from time to time or at least have this as an option just in case. Personal Capital delivers a high tech and high touch wealth management service via powerful financial aggregation and self-service analysis tools, but also provides live financial advisors for clients who want help in constructing and maintaining a diversified and balanced portfolio. These advisors are reachable via phone, email, or Facetime video chat. As a rule of thumb every FinTech company should provide a toll-free phone number no more than one click from your homepage.
Rule #5: Put a Face on It Chuck Schwab, Ken Fisher, John Bogle, Ric Edelman. These stock market titans may have very different investment styles but they knew that consumers want to see the person to whom they are entrusting their money and as a result they each plastered their face and viewpoints all over their marketing materials, websites, and prolific publications. If your startup wants consumers to entrust you with their nest eggs, you ought to be willing to show your face too. This means full bios of the management team, with pictures, and clear location for your company as well as numerous ways to be contacted. It’s also a good idea to make sure that your management team have detailed LinkedIn profiles and that a Google search for any of them will yield results that would comfort a consumer.
Rule #6: Be a Financial Institution, not a vendor The real money in FinTech isn’t in generating leads for FIs or displaying ads for them. That can be a nice business, but the real margin is in making loans, investing assets, insuring assets, or settling transactions. In just a few years Wonga has a become a massive online lender in the UK by instantly underwriting and dynamically pricing short term loans. Financial Engines and a new crop of online investment advisors make and manage investment recommendations for their clients. You do not need to become a chartered bank or an investment custodian as there are plenty of partners that can provide this behind the scenes, but if you can brave the regulatory complexity and develop the technology and skills to underwrite and/or advise exceptionally well, the opportunities are huge.
Rule #7: Use Technology Creatively The incumbents have scale, brand history, brick and mortar presence, and armies of lawyers and lobbyists. If FinTech startups are going to disrupt the incumbents, you will need to work magic with your technology. How clever of Square to use the humble but ubiquitous audio port on smart phones to transmit data from their swipe dongle and for using GPS and the camera/photo album to make everyone feel like a familiar local when using Square Wallet. MetroMile is a FinTech revolutionary disrupting the auto insurance market by offering pay per mile insurance so that low mileage drivers do not overpay and subsidize high mileage drives who tend to have more claims. They do this via a GPS enabled device that plugs into your car’s OBD-II diagnostic port and transmits data via cellular data networks in real-time. Start-ups playing in the Bitcoin ecosystem such as Coinbase and BitPay are certainly at the vanguard of creative use of technology and are tapping in to the mistrust of central banks and fiat currencies felt by a growing number citizens around the world who trust open technologies more than they do governments and banks.
Rule #8: Create Big Data Learning Loops Of all the technologies that will disrupt financial services, Big Data is likely the most powerful. There has never been more data available about consumers and their money, and incumbent algorithms like Fair Isaac’s FICO scores leave most of these gold nuggets lying on the ground. Today’s technology entrepreneurs like those at Billfloat, ZestCash, and Billguard are bringing Google-like data processing technologies and online financial and social data to underwrite, advise and transact in a much smarter way. Once these companies reach enough scale such that their algorithms can learn and improve based on the results of their own past decisions, a very powerful network effect kicks in that makes them tough to catch by copycats who lack the scale and history.
Rule #9: Beware the Tactical vs. Strategic Conundrum One challenge when it comes to financial services is that the truly strategic and important financial decisions that will impact a person’s financial life in the long run, such as savings rate, investment diversification and asset allocation, tend to be activities that are infrequent or easily ignored. Activities that are frequent and cannot be ignored, like paying the bills or filing tax returns, tend to be less strategic and have inherently less margin in them for FinTech providers. Real thought needs to go into how you can provide strategic, life changing services wrapped in an experience that enables you to stay top of mind with consumers so that you are the chosen one when such decisions get made. Likewise, if you provide a low margin but high frequency services like payments you must find a way to retain customers for long enough to pay multiples of your customer acquisition cost.
Rule #10: Make it Beautiful, Take it To Go A medical Explanation of Benefit is possibly the only statement uglier and more obtuse than a typical financial statement. Incumbent FI websites are not much better and over the past ten years many large FIs have heavily prioritized expansion of their branch networks over innovating and improving their online presence. As a FinTech startups you have the golden opportunity to redefine design and user experience around money matters and daresay make it fun for consumers to interact with their finances. Mint really set the standard when it comes to user experience and beautiful design, while PageOnce pioneered mobile financial account aggregation and bill payment. To deliver a world class consumer finance experience online today one needs to offer a product that looks, feels, and functions world class across web, mobile and tablet.
There has never been a better time to be a FinTech revolutionary, and hopefully these rules for revolutionaries provide some actionable insights for those seeking to make money in the money business.
The Occupy Wall Street protestors are gone (for now), but the real revolution against banking is still taking place at breathtaking speed, thanks to a new breed of technology entrepreneurs. The financial services industry, long protected by complex regulations, high barriers to entry and economies of scale, is ripe for disruption. Here’s my take on the macro environment, how consumer attitudes are changing and why technology and available talent make now the best time to challenge the status quo.
Global credit markets clamped shut in late 2008 and froze entire sectors of consumer credit. Mortgages became less available, millions of credit cards were revoked, lines of credit dried up, and banks essentially abandoned the small business and student loan markets. This left tens of millions of households in the position of “underbanked” (have jobs and bank accounts, but little to no credit) and the “unbanked” (no traditional banking relationship at all.) This credit crunch fueled demand for startups like Wonga, Billfloat, and OnDeck Capital to establish themselves and grow rapidly, and the reloadable prepaid card market pioneered by GreenDot and NetSpend soared. While credit has eased for certain segments in certain markets, there are still big opportunities to fill credit voids, especially at the lower end of the market.
The last few years have seen significant changes in banking, payment, tax, investment and financial disclosure regulations. While complex legislation such as the Dodd–Frank Wall Street Reform and Consumer Protection Act is hardly intended to unleash entrepreneurial innovation, and virtually no single person can comprehend it in entirety, it does contain hundreds of provisions that restrict incumbent business practices, and typically when there is change and complexity there are new opportunities for those that can move quickest and are least encumbered by legacy. Other regulations such as the Check 21 Act which paved the way for paperless remote deposit of checks, and the JOBS Act crowd funding provision are examples of technologically and entrepreneurially progressive laws that create opportunities for entrepreneurs and tech companies. Inspired by the success of pioneers such as microfinance site Kiva and crowd funding sites like KickStarter and indiegogo, I expect that once the JOBS Act is fully enacted and allows for equity investments by unaccredited investors we will see a surge of specialized crowd funding sites with great positive impact on deserving individuals and new ventures.
Within a few weeks of Occupy Wall Street in Sept 2011, protests had spread to over 600 U.S. communities (Occupy Maui anyone?), hundreds of international cities (did I see you at Occupy Ulaanbaatar Mongolia?), and every continent except Antarctica. Regardless of what you think of such protests, it is safe to say that as a whole we are more skeptical and distrustful of financial institutions than virtually any other industry. Clay Shirky’s term “confuseopoly”, in which incumbent institutions overload consumers with information and (sometimes intentional) complexity in order to make it hard for them to truly understand costs and make informed decisions, is unfortunately a very apt term for the traditional financial services industry. There is thus a crying need for new service providers who truly champion consumers’ best interests and create brands based on transparency, fairness, and doing right by their customers. Going one step further, peer-to-peer models and online lending circles enable the traditional practice of individuals helping one another without a traditional bank in the middle, but with a technology enabled matchmaker in the middle. Perhaps the ultimate example of bypassing the mistrusted incumbents is the recent acceleration in the use of Bitcoin, a digital currency not controlled by any nation or central bank but by servers and open source cryptograpy.
As a Product Manager for Quicken back in 1995 I remember sweating through focus groups with consumers shaking with fear at the notion of online banking. Today it is second nature to view our bank balances or transfer funds on our smartphone while standing in line for a latte. And while Blippy may have found the outer limit of our willingness to share personal financial data (for now), there is no doubt that “social” will continue to impact financial services, as evidenced by social investing companies eToro and Covestor. You can bet it will be startups that innovate around social and the incumbents who mock, then dismiss, then grope to catch up by imitating.
I think we will look back in 20 years and view the smartphone as a technical innovation on par with the jet plane, antibiotics, container shipping, and the microprocessor. While the ever improving processing power and always-on broadband connectivity of the smartphone are the core assets, it has been interesting to see such widespread capabilities as the camera, GPS, and even audio jack used as hooks for new FinTech solutions. While there are over a billion smartphones worldwide, the ubiquity of SMS service on virtually all mobile phones means that billions more citizens have mobile access to financial services 24×7 no matter how far they live from physical branches. Cloud and Big Data processing capabilities are further fueling innovation in financial technology typified by the myriad startups eschewing FICO scores in favor of new proprietary scoring algorithms that leverage the exponential growth in data available to forecast credit worthiness.
Financial institutions have long employed armies of developers to maintain their complex back office systems but until recently the majority of these developers worked in programming languages such as COBOL which have little applicability to startups. While COBOL has not gone away at the banks, more and more of the technical staff spend their time programming new features and interfaces in modern languages and web application frameworks that provide highly applicable and transferable skills to startups only too happy to hire them for their technical training and domain experience. In addition, successful FinTech companies from the early days of the internet such as Intuit and PayPal have graduated experienced leaders who have gone on to start or play pivotal roles in the next generation of FinTech startups such as Square, Xoom, Kiva, Bill.com, PayCycle, OutRight, Billfloat, and Personal Capital.
These are just some of the reasons now is a great time for financial technology startups and why venture capital is flooding in to the sector. In my next post I will offer some suggestions for FinTech revolutionaries.
Spray and pray…. Try before you buy… Foot in the door… Take your pick, these describe the dominant seed investment strategy today in Silicon Valley. The start-up world’s current angst around the “Series A crunch” is in great contrast to my seed experience, where most efforts progress to further financings and several are on their way to being standout successes in the Venrock portfolio.
For me, seed investing is not a low cost, little-time-required option on the A round. It is a big investment of time and effort in order to be intimately involved in the formative stages of a company, despite the fact that the dollars-in and percentage ownership don’t hit usual venture fund metrics. Since the commitment front-runs the money and ownership, it is something we only do when we are so compelled by the people and the idea that we “have” to jump in long before it makes “traditional” sense. Our mission is to help in whatever way we can, in hopes of increasing the company’s speed, likelihood and scale of success. It also allows us to emphasize our approach as long term, supportive, performance oriented company builders. Let’s face it, money is cheap, but time and effort are really expensive – for both entrepreneurs and venture capitalists.
A “deep involvement” approach requires making far fewer commitments than most others who have embraced seed investing in recent years – whether angels or venture funds. I have done about one a year across a variety of the more capital efficient healthcare subsectors – healthcare IT, diagnostics, and services. Castlight Health and Ariosa Diagnostics are among several recent examples that illustrate our approach.
In mid-2008, I partnered with Todd Park (x Athenahealth, now CTO of the U.S.) and then Gio Colella (x RelayHealth), both of whom Venrock had funded previously, to explore the opportunity to create a company at the intersection of web – healthcare – consumer. We worked for six months on the project and, in early 2008, seeded and incubated Castlight Health. In that initial round, we invested $333,000 and proceeded to build the company brick by brick, eventually investing $17 million for nearly 20% ownership. Over the last four years, Venrock has devoted every possible resource and connection possible – countless strategy sessions, customer meetings, management recruiting, follow on investor introductions, and the Board now includes a second Venrock partner in Bob Kocher, who still spends more than a day a week with the team. Today, Castlight has the opportunity to become a pivotal participant in the creation of a functional healthcare delivery market, improving care while saving billions of dollars.
Ariosa is a similar story, but one whose roots are found in an unsuccessful Venrock seed investment. We lost $300,000 after nine months in a diagnostic start-up when the CEO, John Stuelpnagel (x Illumina, a Venrock investment), came to the Board with the message that we all had better things to do than continue to push that particular rock uphill. Soon thereafter, in 2009, we seeded the combination of a terrific first time entrepreneur/CEO in Ken Song, then at Venrock, with John as Executive Chairman to tackle new approaches to prenatal molecular diagnostics. Three years later they are leading the race to provide an entirely new and improved standard of care to expectant mothers – where they can confidently assess genetic abnormalities with no risk to the baby at ten weeks of pregnancy.
Success in venture investing is really hard to come by, and with seed investing even more so. No matter what the strategy, there will be failures and even more pivots before those few that succeed become great. That said, as with Castlight and Ariosa, when it works, it is awesome. You can assist in a company’s formative stage; create close and productive relationships with entrepreneurs; as well as build your ownership over subsequent financings. Early help in the project typically leads the team to want to work with no one else but you – in essence, you have become part of the family. This month I made my seed investment for 2012 – a stealth company, also in the healthcare IT space. I think these entrepreneurs would tell you that our track record as active participants in prior seeds, as described by those CEO’s, was the over-riding factor in their decision to work with Venrock. We will do our best not to disappoint them.
In the end, our, and every VC’s, goal is to create great returns for our LP’s. We believe that a targeted, time intensive approach to seed investing is orthogonal to others’ and increases the chance of creating great companies by affording them resources early on that they would not get in other seed models. But it requires a leap of faith and trust between entrepreneur and VC – a leap we are eager to take.
(Post co-authored by Nikhil Sahni and Bob Kocher. A version of this post also appeared at HealthAffairs Blog.)
America’s health care market does not work well. It is inefficient, asymmetric, and in most cases not particularly competitive. The Affordable Care Act (ACA) legislated a myriad of changes to reform and improve insurance markets with exchanges as a centerpiece. While exchanges and reforms like subsidies, guaranteed issues, age bands, community rating, reinsurance, and risk adjustment are all helpful, a huge opportunity remains to segment the health care market around different categories of patient demand.
Basic economic theory states that a well-functioning market is aligned between supply and demand. Ideally, suppliers and customers align around the preferences of the customers – the unit of alignment is driven by the demand side. When we examine health care, we see demand falling into three segments: healthy people who have episodic needs, chronic disease patients with predictable needs, and highly complex patients with less predictable needs. Given the high variance between the three submarkets, we believe that each of these segments should be thought of as a discrete market and served by different types of insurance products, payment models, and health care providers.
We believe that this is necessary since each of these segments values providers differently. For a healthy patient with periodic needs, convenience and experience are likely to matter more than continuity with a provider and care team. Conversely, chronic disease patients are likely to value clinical outcome attainment, complication avoidance, and care coordination very highly. And complex patients will need and value the customization, access to research, and specialization that the latest medical breakthroughs can deliver. Not only are the sources of value different, but so are the delivery systems and payment models needed to align incentives for value.
Re-Envisioning The Health Care Market
Healthy patients. For healthy patients with periodic needs, an episodic approach is also the most economically efficient. These patients do not require the fixed cost of a large system of care and instead should purchase discrete specific services — ideally a bundle of care to deliver a specific pre-defined outcome. In this model, a patient buys insurance and broad access to providers and, when a health need arises, receives a budget for his or her episode of care. We favor reference-based pricing so the patient can purchase an episode outcome without additional cost sharing while retaining the option to pay more if he or she chooses. The market is thus incentivized to manage to a specific outcome in the most cost-effective way and to compete on delivering extra value for those patients who are willing to pay more.
To meet demand for bundled payments organized around episode outcomes, the supply-side should realign into specialized care units that focus on a few procedures, organ systems, or disease areas — a broad PPO network. This has historically proven successful for elective conditions: the Dartmouth Spine Center has a surgery rate of 10 percent –- lower than the national rate –- with 100 percent of patients reporting their needs were well met. Other examples of episodic providers include ambulatory surgery centers, orthopedic and cardiovascular specialty hospitals. We also foresee capitated systems managing population health procuring discrete episode services from specialty providers, since these providers should be able to offer equal or better outcomes at lower prices than an Accountable Care Organization (ACO), integrated delivery system, or multispecialty group.
Patients with chronic disease. For chronic disease patients, the primary outcome goal is to minimize a condition’s short-term inconveniences and long-term complications. The market should thus incentivize a long-term perspective centered on patient engagement, adherence, and side-effect prevention. On the demand-side, customers should purchase care from a provider able to care for all aspects of a patient’s condition, which creates incentives for all players –- patients, doctors, providers, and drugmakers –- to manage cost. The basis of competition should be the ability to deliver annual health and complication avoidance at lower costs.
In this model, incentives are most aligned when providers are paid using a risk-adjusted capitated payment. To compete, providers should organize in organizations such as ACOs, Patient-Centered Medical Homes (PCMHs), multispecialty groups, or integrated delivery systems with strong capabilities in managing risk, population health, and costs. Examples of these types of systems are Group Health, Geisinger, Kaiser Permanente, Healthcare Partners, and CareMore. In this model, incentives for patients to adhere to treatment plans, and remain in the system of care, are reinforcing.
Complex patients. Finally, there are certain conditions that are too complex to fit into either market, such as complex cancers, high acuity conditions, and rare diseases. These conditions often exhibit both chronic condition and episodic characteristics and are best managed by academic medical centers or high-acuity specialty facilities like comprehensive cancer centers and children’s hospitals.
Our view is that the current fee-for-service system is the best approach for handling these cases. To constrain inflation and encourage competition, fee for service should be coupled with utilization review, incentives to use evidence-based care, and transparency around risk-adjusted outcomes and expected out-of-pocket costs. Paying for these as episodes will not work because high patient heterogeneity exists and the size of the market cannot support competition at the episode-level. Moreover, it is hard to define quality and value for many of these types of patients and conditions.
The Way Forward: Turning Theory Into Practice
These payment models and provider organization approaches maximize value by encouraging healthy patients to get their conditions fully resolved for a fixed price, chronic disease patients to access a care team rewarded for avoiding complications, and complex patients to receive customized care and access from specialists. Furthermore, each of the three submarkets –- healthy patients, chronic disease, and complex and rare conditions –- is large enough to be self-sustaining and attractive. We estimate that the chronic condition market is $1.1 trillion, the episodic care market is $760 billion, and the residual fee-for-service complex and rare conditions market is $900 billion in 2011.
The three markets are growing at similar rates. (See exhibit 1, click to enlarge.) If the economics are aligned, they will also be able to create growing value for patients through productivity gains, falling prices, better outcomes, and far better patient experiences. Fortunately, each of these markets and provider models exist today in many geographies. They are just not widespread enough or coexistent.
Giving consumers more insurance options. Transforming theory into a tangible system presents certain challenges, which we believe will be overcome in the next few years. First, patients need insurance product choices. The advent of state exchanges and community rating are catalytic events that could lead to this reorganization if exchanges permit reference-based pricing plans and allow integrated delivery offerings with narrow networks. The employer market is already moving down this path with the marked increase in defined-contribution health benefits supported by private exchanges, where higher cost sharing and narrow network plans are often offered. We are also seeing many more employers shifting to reference-based pricing and episode bundling approaches for elective conditions to rewards employees for selecting high-quality, lower-cost providers, and to encourage providers to offer a full course of care for a bundled price.
Provider restructuring. On the provider side, theoretically overhead should not increase, but should decrease. The largest providers that can pull in adequate populations will focus on patient and population health, a trend already being seen with groups like Partners Healthcare shifting to an ACO and capitated payment orientation. Competition will also lead to emergence of more specialized providers for acute and episodic care among community hospitals. Already for complex and rare conditions, regional centers like the Mayo Clinic and traditional academic medical centers exist. The push to submarkets should accelerate the provider landscape transformation and reduce the extraneous providers that lack focus and a niche.
The biggest barrier today is linking benefit designs and reimbursement models with patient segments. Once commercial payers approach providers with products that segregate patients into these segments with corresponding reimbursement, providers will rapidly reorganize to serve the segments that they are most competitive at supporting. While this approach does generate more ACOs and PCMHs, the past year has shown that these can be formed relatively quickly to meet demand. The emergence of retail-oriented primary care providers also indicates that episodic care models are able to proliferate and scale in response to demand.
Addressing changes in consumer health needs. One additional challenge will be how patients react when health needs change mid-year. All patients regardless of submarket will have certain basic aspects: insurance, preventive care, and consumer protections. The value in longitudinal care is irrespective of submarket and hugely valuable to reducing the growth of health care costs. As health needs adjust for patients during the year, we see two potential solutions. First, patients will still have access to other submarkets to receive the necessary care. Second, the pool of patients who will need product adjustments will be significant, and the value cannot be ignored by payers. Thus, some supplemental plans may emerge that enable patients to gain access to additional types of providers.
Matching patient needs and demand with specific types of providers and reimbursement approaches is better for patients. If incentives are aligned with the types of value desired by different types of patients, price increases should no longer outpace value creation, and providers will compete and differentiate in ways that are most valued by their core patient constituencies. Doing this through the creation of well-functioning submarkets — instead of forcing a single, ill-functioning market — should also unleash productivity gains as providers specialize around narrower segments and stop investing in services that they do not do well, do at scale, or need.
Overcoming the barriers will be a significant challenge. However, we are already seeing some shifting in the health care landscape, in addition to certain provisions in the ACA which will come online in the upcoming years and add further movement.
Network Effects are magical. They are the pixie dust that makes certain Information Technology businesses, especially on the Internet, into juggernauts. They can be found in both consumer and enterprise companies. Network Effects are special because they:
Network Effects are like a flywheel–the faster you spin it the more momentum you generate and enjoy. But not all markets lend themselves to Network Effects. They are not the same as Economies of Scale where “bigger is better.” To be certain, Economies of Scale can give strong competitive advantage and defensibility to the first to get really big (or Minimum Efficient Scale as the economists call it.) For example, SAP and Oracle benefit from having massive revenue bases which enable them to employ armies of engineers who develop rich feature sets and also to hire huge sales forces. However large these companies are today, though, their growth rates, especially in their early years, were far more modest compared to those Network Effect companies whose growth resembled a curved ramp off of which they launched into the stratosphere.
There are four main types of Network Effects:
Example include Operating Systems like Microsoft Windows, Apple App Store, and Amazon Web Services.
Each of these four types of network effects can be extremely powerful on their own. Yet, even more power is derived when a business can harness multiple types of network effects in synergistic ways. Google, Apple and Facebook do this for sure, but a less well known example is Venrock portfolio company AppNexus that operates a real-time online advertising exchange and technology platform. The exchange aggregates advertisers, agencies, publishers and ad networks for marketplace liquidity, but also offers a hosting and technology platform for other AdTech companies and ad networks to augment their own businesses. And the vast troves of data AppNexus processes every millisecond flows back into the system as optimized and targeted ad serving.
Network Effects are what you want fueling your business. Sometimes you just need to get clever about discovering and harnessing them.
(A version of this post also appeared at AllThingsD.)
The oldest adage in start-up’s, for entrepreneurs and VC’s alike, is “the key to success is the quality of the people.” Markets and innovative approaches are important, but my experience supports this notion unequivocally. I have had the good fortune to be involved from an early stage with several billion dollar companies, and most found success after a material pivot from their original approach – Athenahealth, Ironwood Pharmaceuticals and Sirna Therapeutics to name a few. “I invest in people” is the start-up ecosystem’s version of motherhood and apple pie, but how do you identify “Great” prospectively?
Whether explicitly or not, everyone has their own answer to this question, and based on the success rates, those answers by and large stink. I don’t have a Magic 8 Ball on the topic, but two things make this the issue I wrestle with most: (1) the often-unpredicted success or failure of “nobodies” or “sure things” respectively, and (2) the outsized rewards for locating great, juxtaposed with the probability of abject failure when settling for good. The A+ entrepreneurs with whom I have partnered have come in unusual packages – simply put, there has been no central casting: a biology post-doc who thought about opening a microbrewery B&B; a large animal veterinarian who went to business school in his late 30’s; an x EMT who was also nephew to the President among others. The best VC’s seem to show the same diversity of background.
I now focus on these attributes:
While potentially controversial today, I have come to believe that great entrepreneurs and great VC’s are two sides of the same coin. Both embody these characteristics. They are maniacally focused on changing the way we live with innovations others thought were not possible. They are passionate about building a great company and put the company before themselves. No great VC takes solace in having a portfolio when an individual company struggles – like entrepreneurs, this is deeply personal and about so much more than just money. Their roles are complementary, like looking down opposite ends a telescope, but those different perspectives to a problem can be extraordinarily synergistic. Great future entrepreneurs can look like great young VC’s, and vice versa – three of my recent investments are stellar companies started by these “crossover” folks.
All venture firms are simultaneously never, and always, looking for team additions. I believe this is a direct result of how elusive it is to identify those who will be not only smart, passionate, personable and high integrity, but also successful in this ever-changing, ambiguous entrepreneurial world where what worked last time is no recipe for future wins – and more likely charts a path to mediocrity. In fact, my own difficulties in finding conviction around potential team additions for our firm is what spurred putting these thoughts on paper.
On April 14th I am moderating a panel at the Digital Healthcare Innovation Summit in New York City titled “The Hospital as Production Center: Holy Grail or Impossible Dream?” [For anyone who wants a discounted registration rate, see the end of this post.] In an effort not to suck, I’ve put some thought into what makes a great panel. Like many conference junkies in the tech and finance worlds, I’ve sat through hundreds of panels, been on a bunch, and moderated a few handfuls over the years. Here’s a list of a dozen suggestions that I plan to implement:
If you are interested in attending the www.digitalhealthcaresummit.com enter the special key code VNRPR to receive the discounted rate of $695.00. You can also contact Cathy Fenn of IBF at (516) 765-9005 x 210 to enroll.
By the time you read this post, Super Bowl XLV will be over and everyone will be talking about the … commercials. Why? Because most of them are entertaining, some are memorable, and the $2.5 million price tags (for air time alone) pique our curiosity. Why are brands willing to pay so much? Because it is one of the only ways to reach 100 million consumers simultaneously, and because a great 30 second video ad packs an emotional payload in support of your brand unlike virtually any other form of advertising.
Over the past few years I’ve noticed more and more web companies producing great videos to market their companies, often presenting them front and center on their homepage as the introduction to their company. A great video overview can really help explain what you do for customers, how you do it, and present your brand in a flattering light. The best videos go viral and bring you exponential attention and new visitors. And web videos have never been cheaper to produce (at 1/2000th the cost of a super bowl commercial even a start-up can afford them.) So, here are five thoughts on what makes a great marketing video for web companies, and a bunch of examples:
Answer WIIFM: A great marketing video should clearly and convincingly articulate a few simple benefits that customers care about. Mint.com does a terrific job of this, as does Dropbox, both front and center on their homepage. The Dropbox video is particularly noteworthy because it takes an esoteric concept and uses analogy to demonstrate user benefits everyone can relate to.
Show how it works: A great overview video shows just enough of the product and how it works to lend credibility to the benefit statement. Word Lens does a terrific job of this for a product that truly needs to be seen to be believed. A full blown demo would have been less effective than just these short glimpses of the product in action.
Be yourself: Video is such a rich and engaging medium it is perfect for showing the personality of your brand. It is a great way to set tone and speak to your customers and prospects in an authentic voice. Flavors.me does a terrific job of this through music and images alone, letting actions speak louder than words in convincing you that they can make your personal homepage look amazing because they do such a killer job of presenting themselves through this video. Style personified.
Be fun, get remembered: Great marketing videos are fun to watch and somewhat memorable. You don’t have to be knee slappin’ funny or so hip it hurts, just smile-inside funny will go a long way. SalesCrunch and SolveMedia both take pretty dry categories (CRM SaaS and AdTech respectively) and rivet their viewers through entertaining use of cartoons and wit.
Be Brief: Even a great marketing video starts to feel long after two minutes. Shoot for less. This video from Smartling gets the job done in 38 seconds. [Disclosure: Smartling is a Venrock investment.]
These are the five characteristics which I think make for a great marketing video for your web company. If you think there are points I missed, or have other great examples, please comment and add to the list. If you are the production agency responsible for making any of these videos please take a bow by claiming your work. I’m sure others will want to contact you. If you are looking for more of a live action marketing video, TurnHere can help produce custom video for ridiculously low rates [disclosure: TurnHere is a Venrock investment.]
Today I faced a choice. Should I go out and enjoy the beautiful weather and waves and go for a surf or should I blog about my favorite financial reporting tool? Seems like a pathetic question for a surfer to ask, or maybe this financial reporting tool is really that great. I’ll settle for an answer of “both”.
The tool in question is the Waterfall Chart. It’s a way to compare actual results across time periods (months or quarters usually) against your original Plan of Record, as well as forecasts you made along the way as more information became available. It packs a ton of information into a concise format, and provides management and Board members quick answers to the following important questions:
1. How are we doing against plan? Against what we thought last time we reforecast?
2. Where are we most likely to end up at the end of the fiscal year?
3. Are we getting better at predicting our business?
The tool works like this:
Across the top row is your original Plan of Record. This could be for a financial goal like Revenue or Cash, or an operating goal like headcount or units sold. Each column is representative of a time period. I like monthly for most metrics, with sub-totals for quarters and the full fiscal year. Each row below the plan of record is a reforecast to provide a current working view of where management thinks they will wind up based on all the information available at that time period. Click the example below which was as of August 15, 2010 to see a sample, or click the link below to download the Excel spreadsheet.
Periodic reforecasting does not mean changes to the official Plan of Record against which management measures itself. Reforecasts should not require days of offsite meetings to reach agreement. It should be something the CEO, CFO, and functional leaders like the VP Sales or Head of Operations can hammer out in a few hours. Usually these reforecasts are made monthly, about the time the actual results for the prior month are finalized. When you have an actual result, say for the month of August, $2,111 in the example above, this goes where the August column and August row intersect. On that same row to the right of the August actual you will put the new forecasts you are making for the rest of the year (September through December.) In this fashion, the bottom cells form a downward stair step shape (a shallow waterfall perhaps?) with the actual results cascading from upper left to lower right. You can get fancy and put the actuals that beat plan in green, and those that missed in red. You can also add some columns to the right of your last time period to show cumulative totals and year to dates (YTD). With or without these embellishments you’ve got some really powerful information in an easy to visualize chart.
Two questions an entrepreneur might ask about this tool:
By repeatedly comparing actual to plans and reforecasts, won’t my Board beat me up each month if I miss plan or even worse, miss forecasts I just made? If you are a relatively young company, most Board’s (I hope) understand that planning is a best-efforts exercise not an exact science. Most Boards will react rationally and cooperatively if you miss your plan, as long as you avoid big surprises. By giving the Board updated forecasts you decrease the odds of big surprises because the latest and best information is re-factored in to the equation as the year progresses. They probably won’t let you stop measuring yourself against the Plan of Record, but at least you’ve warned them as to how results are trending month to month and course corrections can be made throughout the year.
Won’t this take a lot of time? Hopefully not a ton, but it does take effort. However, it should be effort well worth it beyond just making the Board happy, because as a management team you obviously care about metrics like cash on hand, and this should be something you are constantly recalibrating anyway. The waterfall is the perfect tool to organize and share this information.
Most of my companies using this tool track five to ten key metrics this way. Typical metrics include:
Whether or not you agree this is the single greatest financial reporting tool ever, I hope you give it a try and find it useful. Now I’m going surfing….
There is much conventional wisdom in venture capital. One such belief is that hospitals are a really horrible market for tech startups to pursue. Back in 2002 when we invested in Vocera, an innovative communications system for hospitals (think Star Trek), many other firms had looked at the deal and passed. Although this was the company’s third round of financing, the company was still pre-revenue and pre-launch, and this was the first round raised subsequent to their strategic shift from a horizontal solution to one vertically focused on hospitals. Most VCs ran from it. Following are some of the reasons potential investors gave for hating the hospital market then, most of which persist as concerns, often valid, today:
1. Hospitals are highly budget constrained
2. Most hospitals don’t have profits motives and are not subject to the same competitive forces as for-profit businesses
3. Hospitals are complex political environments with many forces that influence decision making and purchase behavior that seem counter to rational business judgment. Those who decide, those who approve, those who pay, use, benefit from, can all be different roles in the organization.
4. Sales cycles are very long, often measured in years.
5. Hospitals are technology laggards when it comes to adopting information technology.
6. Hospitals are dominated by large technology vendors such as GE, Cerner and IBM.
There is some truth to each of these, but here’s the counter argument that led us to make a second investment in the hospital market, namely Awarepoint, an indoor GPS system for tracking people and assets in the hospital.
1. There are lots of hospitals. Over 5500 in the US alone, and there are little blue signs pointing you to each of them. Given the annual budgets of your typical hospital, this translates into a very big market. Vocera now serves over 650 hospitals and more than 450,000 daily users, and is still growing very rapidly, believing they have tapped less than 10% of their core market opportunity.
2. Hospitals are sticky. Once your product is adopted, and assuming it works well, they are reluctant to switch you out because solutions get so enmeshed in different processes and systems, and so many employees get used to them. You can’t screw up, or raise prices dramatically, but you may not have to sing for your supper every time a competitor issues a press release.
3. Hospitals are willing and able to spend on IT if it is a priority and they see an opportunity for a large return on investment. This is one of the things helping Awarepoint penetrate the market, and they are not alone. Companies like Allocade , which creates dynamic patient itineraries to improve throughput, are also having success based on the ROI they can deliver.
4. Because hospitals are underpenetrated by information systems, there is lots of low hanging fruit and relatively basic problems to be solved. Electronic Medical Records vendors are having a field day, both because of stimulus incentives but because many hospitals, especially the 72% of all community hospitals with under 200 beds, still don’t have this basic form of digitizing their information. The trend towards Accountable Care Organizations, and the related financial incentives, will require greater clinical integration of care across health care settings (inpatient, ambulatory), greater financial efficiency, and increased transparency and flow of information about the process, costs, and outcomes of health care, all of which will require better healthcare information technology.
5. Hospitals are similar to each other and willing to serve as references to each other. Yes, they do compete in some ways, and each has its unique attributes, but you find a higher degree of collegiality and similarity than most industries where competitors hate each other and each may have very different ways of doing their core activities.
There are a few reasons why the hospital market is ripening for startups and the VCs who love them:
1. Hospitals are feeling financial pressures to run efficiently. With healthcare reform there will be more patients coming in their door requiring services, while price caps will get tougher. And there will be financial penalties for things like readmission rates that often correlate to operating inefficiently, and which technology can help prevent.
2. With the EMR mandates and installations, the Chief Information Officer is now in an elevated position in the organization and even considered a revenue generator. Many EMR installation projects are leading to ancillary projects and opportunities to automate and digitize other aspects of hospital operations.
3. New IT paradigms like cloud based services, open data initiatives (thank you Todd Park @ HSS), APIs, and Open Source means that it is less expensive to build and deliver better products into the hospital.
4. Wireless technologies, and relatively cheap and robust devices like iPhones and iPads, make it easier to reach caregivers on the go, whether nurses at the bedside or Doctors on the golf course. Companies like AirStrip are getting real-time info to the caregiver wherever they are, and caregivers love it. Also, WiFi and Zigbee in the hospitals means your equipment and monitors, and even staff, can transmit their info from wherever they are without wires and expensive, disruptive installations.
5. This current generation of Doctors and are used to technology in their personal lives. They use email, carry iPhones and Blackberries, shop online, etc. And the residents entering hospitals today are Digital Natives. There will be an increasing expectation that hospitals adopt these technologies that most other verticals have embraced.
While we fear the unexpected visit to the hospital as much as anyone, Venrock is looking forward to more investments in companies that serve them with compelling HCIT solutions.
Having participated in healthcare IT for the last 10+ years, we decided to collect and share some lessons learned. The list is by no means exhaustive, so let us know your thoughts – where you disagree, what you would add, etc.