Monthly Archives: September 2010

Communicating good news and bad

In this brief MarketWatch interview S.P. Kothari, deputy dean of MIT’s Sloan School of Management, offers advice on how boards can “tease out” better information from their management teams.  Although Mr. Kothari is speaking about publicly traded companies, we do see some similarities that apply to private company boards as well.

Management teams often feel implicit pressure to sugarcoat negative events or downplay bad news.  As a result, Mr. Kothari argues, board members should direct their questioning to areas which management covers more quickly or in a more perfunctory manner.  Look for omissions and do not assume things discussed briefly (or not at all) are fine.

In our experience, the relationship between entrepreneur and venture partner in private companies is more cooperative, longer-term, and (mercifully) not subject to the quarterly reporting pressures of public companies.  Moreover, venture investors have real “skin in the game” and have the same incentive as the entrepreneur to understand the nuances of the business and focus on long term value creation.  As a result, the communication of good news and bad tends to be more forthright and in real-time, enabling partners (assuming they are good partners!) to understand intuitively the right kind of counsel and support to offer during both the good times and during the inevitable challenges of building a business.

Still, even in private companies with strong, motivated board members, there is sometimes a reluctance on the part of entrepreneurs to lay all the cards on the table.  Board members should strive both to do their homework and understand the right questions to ask and make sure they have built the kind of relationship with their entrepreneur partners that will facilitate open and honest communication.

Watermark Medical featured in the NYT

Our recently-added portfolio company  – WaterMark Medical – was featured in a New York Times piece on emerging trends in health care.  

We’ve enjoyed a long term relationship with Sean and Charlie, and backed their previous company – PDS Heart – which successfully capitalized on the same trends in health care.  


High-Tech Alternatives to High-Cost Care


MENTION health care reform and the image that instantly comes to mind is a big government program. But there is another broad transformation in health care under way, a powerful force for decentralized innovation. It is fueled in good part by technology — low-cost computing devices, digital sensors and the Web.

The trend promises to shift a lot of the diagnosis, monitoring and treatment of disease from hospitals and specialized clinics, where treatment is expensive, to primary care physicians and patients themselves — at far less cost.

The new models emphasize early detection of health problems, prevention and management of chronic disease. The approaches have adopted a range of labels including “wellness,” “consumer-directed health care” and the “medical home.”

The potential transformation faces formidable obstacles, to be sure. Some of those hurdles include getting patients to embrace healthier lifestyles and persuading the government and insurers to reimburse at-home testing and monitoring devices.

Yet the promise, according to Dr. David M. Lawrence, the former chief executive of Kaiser Permanente, the nation’s largest private health care provider, is “an array of technology-enabled, consumer-based services that constitute a new form of primary health care.”

To glimpse the business opportunity — and the challenge — at the forefront of this emerging, decentralized health care market, let’s look at a start-up in the field of sleep medicine.

The start-up, Watermark Medical, offers an at-home device and a Web-based service for diagnosing sleep apnea. Characterized by snoring and pauses in breathing, sleep apnea is a serious health problem that often goes undiagnosed.


Tax break proposed for federally backed startups

The Austin Business Journal reports (subscription required) on proposed federal legislation to  provide small tax credits for equity investments made in companies which have already qualified for  federal grants.

In July we blogged about Rhys Williams’ testimony before the U.S. Senate Committee – Subcommittee on Competitiveness, Innovation, and Export Promotion, during which he made several excellent recommendations.  The proposed tax credit sounds like a close cousin to two of Rhys’ ideas:  tax credits for angel investors and matching local grants to qualified SBIR/STTR grant recipients.

The ABJ also reports that the Austin Chamber of Commerce supports…

“loosening rules that prohibit businesses owned 50 percent or more by a VC firm from applying for SBIR grants because such changes would improve the quality of applications.”

These measures would represent a modest start, but we are pleased to see the growing awareness and encourage everyone involved in the early stage entrepreneurial culture throughout the Southeast and Texas to echo these points to our state and national legislators and regulators as often as possible as we debate how to ignite renewed economic growth in America.

Company Valuations: What is my company worth and how is that determined?

On October 13 Matt Rice will represent the venture industry in a panel discussion on company valuations.  The panel, hosted by the Florida Venture Forum and the Gulf Coast Venture Forum, will be held from 5:30-8:30 at the Hyatt Regency in Sarasota.  Details can be found here.

Other panelists include Rob Campbell, CEO of Voalte, Nelson Castellano, Attorney with Trenam Kemker, and Brian Zophin, CPA, Senior Manager with Cherry, Bekaert & Holland, LLP.

Startups or Behemoths?

Vivek Wadhwa reports that a new study from The Kauffman Foundation demonstrates that not only are new businesses the engine of job growth (while existing firms shed jobs), but the cumulative job creation is remarkably sustainable despite the high failure rate of new firms.  Those that do succeed dwarf, in job creation, the many that fail. 

When a given cohort of startups reaches age five, its employment level is 80 percent of what it was when it began. In 2000, for example, startups created 3,099,639 jobs. By 2005, the surviving firms had a total employment of 2,412,410, or about 78 percent of the number of jobs that existed when these firms were born. 

America’s hodge-podge of scientists, institutions, and funding

Fred Schwarz, in The Uncertainty Principle, argues that an economy’s ability to generate innovative companies results not only from the availability of seed capital, but the structure of the early-stage investing ecosystem:

While scientific research in other industrialized nations is centralized, hierarchical, and bureaucratic, in America it is competitive and entrepreneurial.  This is not to say that politics plays no role in deciding how American science is funded; far from it. But in America, governmental sources of funding are much more diffuse (half a dozen federal agencies and departments spend at least $1 billion a year on basic research), and private sources are much more numerous, than in most European or East Asian nations. It all adds up to strength through pluralism.

Schwarz cites a few specific American strengths:

  • The profusion of funding sources makes it easier for researchers with good ideas to shop around and find a willing partner.
  • Independent state universities compete for the best and brightest research.  “Americans can consider themselves fortunate that except for the service academies, there is no system of national universities.
  • All our competitive factors – within and between institutions, funding sources, states, federal agencies, and military branches – benefit from “…the absence of any federal Department of Science and Technology –  despite the assumption in many quarters that if something is important, it must have its own cabinet secretary.”

Schwarz adds a counterpoint: Europe and China may have an advantage for funding big-ticket items like the Superconducting Super Collider, because they’re “good at spending lots of money with little squawking from the citizens.”  However he then favorably quotes Professor William Happer of Princeton who called the SSC’s demise “a tragedy for science” but also cautioned: “I would rather accept mistakes made by the people or their elected representatives than live with mistakes made by scientific bureaucrats.”

Schwarz’s conclusion sums it up nicely:

America’s hodge-podge of scientists, institutions, and funding agencies – imperfect though it may be –  is the closest thing the world has to a free market in science, and the results can be seen in Nobel Prizes, citations, and the steady influx of researchers from abroad who know that the United States is the land of scientific opportunity.

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