Coachability, strange concept...

Excellent presentation from David Rose on pitching a VC... all the issues that matter in a 15 minutes lecture, I think it is worth watching.

The ten things a VC will be looking at when deciding whether to invest in you or not:

Integrity + Passion + Experience + Knowledge + Skill + Leadership + Commitment + Vision + Realism + Coachability = selling youself

In my experience, the most difficult thing to understand for entrepreneurs is the last one, coachability, meaning a VC wants to invest in people that excels in "listening", in using somebody else's experience...

Watch it here.

Why us???

Real life, one week ago, the last question at a venture capital presentation... the entrepreneurs wrapping up, everything went well, but then one partner asks "yes... but why us?"... Fire at will.

This is one of the most important questions to prepare if you are looking forward to receiving venture capital money. Investors want to add value, "smart money"...

If you are willing to raise money, you should know about other companies invested by the VC... are they aligned with your goals as well? Can you find hidden synergies to explore?

You should always have a clear picture of what else this particular investor could add to the initiative besides money.

Cost structure

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Most healthcare professionals are not aware of the nature of the different types of costs involved in launching a healthcare start-up. This is something of great importance, let's see why. This is the first of a couple of posts that I'm willing to write about this important matter. Let's start by understanding the different types of costs, using a "hospital" as an example to make it more understandable...


Let's imagine a hospital that has many departments (neurosurgery, cardiology, radiology, legal, human resources...), and each department provides many services (coronary bypass, pacemaker implant, heart transplant). Let´s have a look at the structure of costs in one of these departments (see two by two matrix):


(1) Variable Direct costs: All costs that can be specifically traced to the service given, and change in strict proportionality with the volume. An example could be materials used in a neurosurgical procedure (sutures, gowns, antibiotics...).


(2) Variable Indirect costs: Costs that cannot be traced to a single activity but are variable in nature, that is, they do vary with volume. For example, electricity: I know that if I give more services I will spend more, but I cannot measure it (if I were able to measure it, it would be a variable direct cost). Another example: the need of maintaining a health records department for the whole hospital is obvious, and every department uses it. The medical records personnel salary would also be a variable indirect cost.


(3) Fixed Direct Costs: All costs that can be specifically traced to the service given, but do not vary at all with volume. An example could be the neurosurgical navigator (a computer) in the operating room.


(4) Fixed Indirect costs: Costs that cannot be traced directly to a single activity, and do not vary with volume, such as the salary of medical director of the hospital.

More on this in my next post.

Refining healthcare business models

Nice discussion yesterday with an entrepreneur trying to help him to improve the "contribution" of every client to his healthcare start-up. I am not at liberty of discussing the details of the business, but let's say it is a retail healthcare initiative where we try to sell a product for 100€ and then we charge a 25€ monthly fee to every user. To produce the product has a cost for us of 25€.

The question here (and in every healthcare initiative) is "where is the money"?

• In the sale of the product?
• In the recurrent revenues month after month?
  
• In services that we may sell in the future to this customers?

Business model #1: Sell at 100€ and charge 25€ monthly fee. Well, it certainly would work, but the price 100€ would obvioulsy detract some customers into buying, so we would have let's say a demand of 1000 customers. According to this, total value the first year would be:

(100-25)€*1.000 customers + 25€*12months*1.000 customers = 375.000€

Business model #2: What if we gave away products for free, focusing on generating revenues from monthly fees? We would sell at 0€ (with a loss of 25€) and then we would charge again 25€ per month. Giving away something for free usually generates more demand, let's say for the sake of the argument that with this new "free" strategy we sell 5.000 products instead of 1.000. Total value the first year would be:

(-25€)*5.000 customers + 25€*12months*5.000 cusotmers = 1.375.000€

So, yes, giving away the product for free is more interesting than charging 100€ for it. The question here is are we sure that we will get a demand of 5.000 if we give the product for free? If the answer is yes, then the decission is a no-brainer... give it for free!

Besides that, achieving a larger customer base is usually strategically more interesting because you may sell in the future more services to a larger community of customers, increasing therefore even more the revenues.

The point of this post is that business models depend at the end of the day on a bottomline, on a number... The more value we can get from any customer while having him/her happy, the better, so you need to fine-tune very carefully your business model in order to accomplish that.

Price wars coming to healthcare?

Any economic crisis forces competitors to fight harder for a reduced demand, and healthcare is no exception. Competition on price is one of the options available to try to attract new customers and retain old ones.

For instance, it seems like 23andme has started a price war in retail genomics. They have just slashed the price on their personal DNA test from $999 to $399 (some would say it is quite a "significant" price drop, don't you think?).

According to 23andMe, this price drop has nothing to do with our present economic situation, and they claim that next-generation DNA analysis chips have made the process of scanning a person's genes significantly cheaper. By cutting the price of its service, the company hopes to increase demand and hasten the day when a full genetic screening becomes routine medical practice... or so they say. Well, you can read between the lines if you look deep enough, I guess.

For those interested in retail genomics, here's my personal list of the companies competing in this space (probably there are some more outside my "radar" ...):

• 23andMe
• Acu-Gen Biolab, Inc
• Consumer Genetics
• Cygene Direct
• DAT Direct
• deCODEme
• Dermagenetics
• DirectLabs
• DNA Direct
• Genelex
• Graceful Earth
• Health Tests Direct
• HealthCheckUSA
• Holistic Heal
• LabSafe
• MedLabUSA
• MyMedLab
• Mygenome.com
• Navigenics
• Personalized Lab Services
• Private MD Labs
• Quixtar
• ResultsDirect
• Salugen
• Sciona
• Suracell

How much is your idea worth?

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Today I am sharing a case that I wrote for an MBA lecture on healthcare venture capital investing. It is a one pager, and it shows four interesting companies while "forcing" the investor to choose one and only one. It tries to bring the elements you need to think about when valuing opportunities in the healthcare sector (team, market size, path to market, product, competitive advantage, intellectual protection...). It belongs to a 20 microcase series (I call them "microcases" because they are all one pagers, easy to read...).

I decided to share this particular one because it usually generates fantastic discussions in class, and now it has become my favourite case for teaching entrepreneurship (!!!). As in real life, there is no right answer to the question about which company would you pick as your preferred investment, your rationale in picking one or the other is what matters.

As you know, an idea is worth nothing... if you execute your idea, it can be worth a lot, but its value therefore depends on its execution.

Hope you like the case, enjoy!

(Note: I uploaded the pdf file to scribd for those of you interested, here's the link)

Technology inflation???

I meet entrepreneurs with new healthcare ideas every day, and I’m happy to say that both the quality and the quantity of the ideas has improved very consistently in the last couple of years.

However, in the last months I can’t help having the impression that maybe we are under some sort of technology “bubble”, with lots of new medical devices that just improve “a little bit” what the previous one was doing… Improvement is fine, but we have the risk of adding more and more “qualities” to a product that the market does not need. Cost benefit analysis is always important in a cost constrained healthcare.

In other words, disruptive innovation is always… well, disruptive… brings new things to the marketplace that are needed, and therefore is always welcome. But incremental innovation may be entering sometimes a spiral of inflation, meaning we develop and invest in more and more things that really don’t add critical value to healthcare (while contributing to skyrocketing costs…).

Just a thought.

Trends, trends, trends...

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We have been anticipating year 2009 as the biggest year in biotech and medical devices investments, both in the US and in Europe. Here's the last data from pwcmoneytree.


Number one investment in last quarter... biotech
Number three investment in last quarter... medical devices.


If we combine both areas (into life sciences), we would literally "fly" outside the slide...

As we said, the trend is here to stay for a while, now is the time for life sciences...

To have skin in the game...

Back to work. How important is it to invest your own money into your start-up?

Well, there are no fixed rules about this issue, but most of the VC firms will ask entrepreneurs to invest some money into their project. Why? To show commitment, to demonstrate they believe in what they are doing...

There is a saying for this: "to have skin in the game". Having skin in the game, that is, having something to lose if things go down the drain is important, because it aligns very clearly the entrepreneur's goals with the investor's goals.

To have skin in the game is not necessarily related to money... if the investor perceives that this start-up is your plan B, for instance, you are dead, you won't have the money.

Or else if they perceive you have a plan B and you may leave the boat before success and you are not risking anything with the project, they won't see either the alignment they need to see in order to invest.

So, it is important to have this in mind... Just a quick reminder for all entrepreneurs!