Five hundred million dollars is a lot of money. You may recall that $500m was the settlement in August between Google and the Department of Justice (you can read my article at The Health Care Blog) that allows Google to avoid prosecution for allowing illegal ads by Canadian pharmacies that sold prescription drugs to U.S. customers.
Crime committed, punishment exacted, money collected, now back to our regularly scheduled programming, right? It does make me wonder: Is that a lump sum payment or installments? To which general ledger account does the Congressional Budget Office post that settlement? How much were the legal costs to arrive at that settlement? Shouldn’t those dollars be applied directly to healthcare instead of just being added to government coffers?
I know $500m is a small amount in Big Government terms, but the full measure of justice isn’t really complete until we account for the use of those funds. Legal is a sunk cost, so that comes straight off the top, let’s say $5m for the legal team. There needs to be a victim’s fund. I’m sure there are plaintiff attorneys lining up on behalf of innocent victims. Some (most) claims will be completely without merit, but not all. I don’t know of any pending cases, per se, but let’s say we set aside $100m for personal damages. That leaves a $395m balance.
Here’s what I propose: let’s take 2% of the $395, rounded up to $8m, and fund a different kind of healthcare reform. The kind I’m thinking of isn’t based on legislation, but innovation.
For many outside the startup ecosystem, there is a tendency to think that “chutzpah, vision and foresight” are all that’s needed for mega-sized success. Breaking news: it takes risking capital, and the odds of transforming a startup to a success are modest, at best. Lots of really big swings and misses from both innovators and investors.
For every Facebook or Groupon there are probably 100 startups that either wash out completely or survive to liquidity (either positive or negative). It’s also very easy to say in hindsight that Facebook was destined to become a $100 billion company. Few remember that just seven short years ago, a relatively small investor gave a kid out of Harvard a check for $500k. Fewer still know of the really big misses by venture capitalists that are in the business of finding and funding early stage startups.
For some insight into those misses, I’ve always liked the Bessemer Ventures anti-portfolio page. Neill Brownstein, partner at BVP, was given a chance to invest in pre-IPO Apple at a $60m. He declined with a reply that it was “outrageously expensive.” Swing and BIG miss. Point being that venture capitalists don’t always fund success even when it is served up to them.
Facebook and Groupon are the exception, not the rule, and the early stages of a startup are pure sweat equity. Chris Dixon, whose insights I’ve admired for years, captured this really well in his post, There are Two Kinds of People In the World.
Those of us working in the earliest stages of innovation around healthcare are keenly aware of the lack of funding and resources available. Early-stage risk capital and resources are in short supply, generally. While that’s actually a good thing, it’s wildly disproportionate to the size of the healthcare market. Healthcare represents 18% of GDP, but only 3% of early-stage funding (see the sixth chart). To add some perspective, four other categories – gaming, social, advertising and storage – account for 55% of all early-stage funding. It’s also unfortunate that education is another 3-percenter, but I’ll save that for a separate post.
We also know that three new “incubators” have arrived this year specifically focused on healthcare. Not surprisingly, they are located in three great cities for startups – San Francisco (Rock Health), Chicago (Healthbox) and New York (Blueprint Health). Modeled after very successful non-healthcare programs like Y-Combinator and Tech Stars, these incubators use an application process to select the best ideas and teams to “incubate” to the next level.
The incubation process typically lasts anywhere from two to four months and the companies selected are each given modest seed money ($18k to $50k) to start. Most of the incubators, including those outside healthcare, take an equity stake (5% or 6%) in exchange for the small funding. The lone exception is Rock Health, with zero dilution, and they should be applauded for their innovation to the model itself. Healthbox upped the ante to $50k; so while we may have just arrived to the incubator scene, healthcare is already demonstrating *great* capacity to innovate.
For early stage ideas and teams, the incubation process is much sought after. Not, however, for the token cash. Team size is typically two to four people, so even $50k over three months for three people is a life with lots of Ramen. The real opportunity is access to an inside network of mentors, advisors, legal and other resources that are all part of the national and global startup ecosystem. That network effect is designed to help position an early stage venture for the next round of funding through introductions to venture capitalists.
That first round of funding is referred to as Series Seed and typically brings $300k to $1m. The intent here is to fully launch the venture to an even bigger audience, further success and, ultimately, a big liquidity event.
I have no insight into the applications for either Healthbox or Blueprint, but Rock Health had over 350 applications for their first cohort of 11 companies. The sheer number of applications to Rock Health indicates the strength of their program (location, strong network, zero dilution). It also highlights the sheer volume – 350 teams – committed to making a difference in healthcare. We need to foster, encourage and promote all those people and that activity in every possible way.
Simple math says that 20 companies (two cohorts per year) at $20k each, plus rent, payroll, legal and all the other expenses should be less than $2m per incubator, per year. Our $8m “innovation” fund from the $395m balance could easily support four incubators. Seven incubators running 20 companies equals 140 companies innovating in healthcare, per year.
Now for all the skeptics, I’ll be the first to admit that not all of these “companies” will even survive. Most will fail and the incubation process itself is no guarantee of success, but it is a very tangible commitment to innovation, which is a far better path to success than waiting and hoping for the proverbial White Knight.
Dan Munro is founder and CEO of iPatient, a cloud-based solution designed to transform the patient-provider dialog. Munro is the former CEO of 4Blox and former VP of Business Development at Aerocast, a next generation Content Delivery Network that was funded by Motorola, Liberty Media and George Soros in 2000.
He has successfully raised both angel and Venture Capital and accelerated the profitable exit of a number of startups, including a healthcare-payer solution that was acquired by WebMD ($65M) in 2004. Another early stage venture, Sequoia Software, was acquired in 2001 by Citrix ($185M). Sequoia’s XPS portal technology pioneered the use of XML in healthcare. Among the first to use XPS was Baylor Health System and the resulting solution was featured by Bill Gates at the annual Microsoft Healthcare conference.
Munro graduated from the International School of Brussels before completing his undergraduate degree in Communications at the University of Redlands.
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