Monday, July 31, 2017

Alfidi Capital at 4th Annual Rosenman Symposium

I attended the 4th Annual Rosenman Symposium in my ceaseless quest to understand the health care sector. I arrived at the UCSF Mission Bay conference center too late to score the hot lunchtime snacks they laid out. If I had known there would be free food, I would have arrived much earlier for check-in. I had lunch before I got there, so it's not like I was starving, but I do kick myself whenever I miss a free meal. Here comes my bonanza of health care sector investing wisdom.

Alfidi Capital at the Rosenman Symposium 2017.

There are some universally acknowledged good things for health care startups to have. The good stuff includes royalty agreements with Big Pharma and grant support from big name institutes. The National Institute of Biomedical Imaging and Bioengineering (NIBIB) and UCSF Clinical and Translational Science Institute (CTSI) are undoubtedly among those big names.

Highway1 and Breakout Labs help incubate startups in biotech. I must inform the startup community that not all incubators are created equal. The ones run by serial entrepreneurs and advised by VCs who have realized returns are very selective but worth the effort to apply.

One conference speaker helpfully identified a 2x2 matrix that health care corporate development executives use to decide whether to develop a project internally or pursue an external acquisition. It reminded me of a similar matrix I saw years ago for corporate development in the telecom sector. Those corporate development types sure do get around. The corporate development approach to strategic M+A varies but does have some big common factors: synergy with existing product lines; de-risking regulatory approval; ways the target can add value or accelerate growth. Difficulty in getting reimbursements from big health care buyers like Medicare leaves incentives for corporate development to pursue startups that reduce costs. IMHO that reimbursement inefficiency is exactly why US health care is so expensive, before we even consider the costs of malpractice insurance and litigation.

The STEM pipeline for the highly skilled people needed to work in health care startups runs through multiple organizations. The ARCS Foundation pays top students to make new tech and the ARCS Foundation Northern California Chapter is their local presence. Research grants can turn a bright idea into something ready for further pre-market funding. Entrepreneurs should max out such non-dilutive investment wherever possible. Startups execs can also get non-financial inspiration from MedtechWomen, and the world certainly needs more women driving change in health care.

Medtech startups should segment their CustDev by patient type, i.e. old/young, male/female, etc. because drugs and devices will affect different sub-populations in different ways. Noting cost of delivery and value recovered by patient type will aid in establishing metrics that matter to large buyers' reimbursement plans, especially as the health care sector completes its transition away from fee-for-service and towards value-based health care. Corporate development people also want patient data that de-risks a potential startup investment even if it has not yet undergone clinical trials, so early CustDev validation really matters.

I don't have a perfect explanation for why medtech investing is trending down. I do not know if the ACA's rules or its tax on medical devices are affecting this trend. Whether federal government spending on health care will decline depends very much on whether the current Administration gets its wish for an ACA overhaul.

Consolidation among big medtech corporations may be one reason why medtech early stage funding for innovation is slowing down. On the other hand, health care is heavily regulated with big entry barriers, thus it's hard to innovate even if there's no consolidation trend. I could not discern a consensus answer on this topic from any of the conference's panelists.

The EU's medical device regulations (MDR) sets a higher bar for medical devices entering the EU market, forcing companies to revise their marketing strategies. Product development will be more costly, especially for startups. Market strategies for product launch are now likely to focus on the US market first thank to the MDR. Hey, I always knew America was number one.

I got to hear pitches from the 2017 Rosenman Innovators, a crop of promising medical device startups. The whole event reminded me to spend more time meeting people at the QB3 life science incubator in San Francisco. I have been there before and they serve decent coffee. I shall return to the Rosenman Institute's future symposiums as well, so don't forget that I was here in the first place.

Alfidi Capital at 8th Annual Mineta National Transportation Finance Summit

I showed up at the Commonwealth Club in June 2017 for the Mineta Transportation Institute's annual National Transportation Finance Summit. It's the eighth annual event but I lost count a couple of years back. Mr. Norman Mineta himself was absent this year so there must have been something more important on his calendar that day. Transportation addicts can get their fix of public policy downloads on the MTI website. You folks did not come to the Alfidi Capital Blog for any verbatim recaps of speaker comments. No way, you came here for my original free-form genius. Brace yourselves.

MTI 8th Annual finance summit 2017 in San Francisco.

The federal gasoline tax has not been raised since the Clinton Administration, so it has not kept up with inflation. The tax's funding for repair of federally-owned roadways has thus not kept pace with road repair needs. The coming onslaught of zero-emission vehicles (like that new model Tesla is rolling out so it can actually make a profit) will further strain roads with their heavier drive trains while their owners avoid paying the gas tax, so California is preparing to assess its own annual fee on these vehicles.

I agree with one of the summit's speakers that municipal bond issues should fund initial road construction (capex) and not regular repair (opex). The Federal Highway Administration has a helpful life-cycle cost analysis (LCCA) guide for road repair. States that spend public money wisely will do the math before asking voters to approve now bond issues. California's DOT has its own LCCA because we are the best state ever.

I wonder what the California state transportation sector thinks of Sacramento's cap-and-trade carbon control regime. It matters because the California EPA Air Resources Board has a slew of programs covering emissions from transportation activities. The transportation sector needs to check out the state's low carbon fuel standards.

One speaker mentioned some Harvard study supporting his idea that spending on transportation connectivity provides access to jobs. I'll guess that he meant this 2015 Harvard study "The Impacts of Neighborhoods on Intergenerational Mobility" because I couldn't find anything else in public sources that fit the description. The larger point is that public spending to promote employment also requires spending to enable people to get to their jobs.

The Federal Transit Administration has committed capital investment grants to help mass transit projects. It's a boon for Bay Area programs like BART that want to extend line service. We still don't know the full details of this Administration's infrastructure plan. If it remains focused on tax incentives for developers, it may change the scope of the federal government's grant programs or bypass them altogether. It will also force local funding programs like the Metropolitan Transportation Commission's (MTC) One Bay Area Grant (OBAG) to align with local developers' interests. Aligning public and private interests can be a good thing if transit spending is linked to development planning and job creation.

I went to this summit for the free snacks and stayed for the talks. You all know that I never let free food get in the way of acquiring financial knowledge. The free brochures go into my archives and the free thinking goes into my brain. The bottom line for the financial services sector is that demand for infrastructure, including public transportation linked to private development, is slated for multi-year growth. Bonds and other instruments funding infrastructure are coming down the road.

Alfidi Capital at Google Demo Day 2017

I had to check out Google Demo Day 2017. I'm getting quite accustomed to seeing brand new stuff at Google Developers Launchpad in San Francisco and the Demo Day was right up my alley. I don't need to repeat what the competing startups said in their pitches, because that's not why my readers are here. They're here for my original insights. Yes, I'm talking to you.

Google Launchpad gave out booklets on Demo Day 2017.

I took away some pretty clear lessons for startup founders based on the give and take between the judges and the pitching startups. Target your first vertical aggressively. Know your biggest competitors (how to position yourself, and how they'll counter you). Clearly explain your user experience (UX). Briefly walk through a successful use case from a paying customer. Know your capital requirements and how scaling up will affect both capex and opex. Explain how your solution shortens a customer's procurement decision cycle, which will be longer in some hardware-intensive verticals.

The implied tasking for entrepreneurs who need to forecast capex and opex is to either thoroughly know financial analysis prior to launch or bring on a CFO immediately after raising Series A. I have mentored a few startup founders through the basics of business finance. It is not child's play.

The VC judges picked a winner among the pitching candidates, and I was pleasantly surprised that it was the one I picked as a winner before they voted. See folks, I do think like a VC. The winner was a financial market application, so I admit my natural bias in seeking something in my sector, but a few other startup candidates had some decent ideas. One idea that I thought would go nowhere was too easy for established competitors to duplicate.

Hey Google developers, you're going to see me at the Launchpad a lot more now that I know its location. I really like the shiny, snazzy name badges they sometimes make for attendees. I should get a permanent one since I plan to be there so often.