HST.921 / HST.922 Information Technology in the Health Care System of the Future, Spring 2009.

Harvard-MIT Division of Health Sciences and Technology

Course Directors: Dr. Steven Locke, Dr. Bryan Bergeron, Dr. Daniel Sands, and Ms. Mirena Bagur

How Venture Capitalists Assess

Healthcare Information Technology
Business Plans
Eugene D. Hill, III
SV Life Sciences Advisers, LLC

Harvard-MIT School of Health,

Sciences, and Technology
Course HST.921
April 2, 2009
1
The Substance

„ Key Issues
ÔThe Market
ÔThe Management
ÔThe Method
ÔThe Money
ÔThe Metrics

2
 Venture Capital Deal Flow

Business Plans Received

Projects
Evaluated

3 Projects Funded
Key Triage Factors

„ Management Pedigree

„ Deal Source

„ Process Management

„ Customer Validation

„ Adherence to Plan

4
Key Focus Areas

„ Major Risk Factors

„ Obvious Show Stoppers

„ Better, Faster, Cheaper, or Brave New World

5
Major Risk Factors

„ Technological

„ Market

„ Regulatory

„ Operational

6
Market

„ Macro „ Micro
ÔSize ÔEconomics (Pricing, Operating Margins)
ÔGrowth Rate ÔCustomers
ÔConcentration ÔSegmentation
ÔBarriers to Enter

7
Methodology

„ Business Model

„ Value Proposition

„ Distribution Strategy

„ Competitive Differentiation

„ Growth Strategy

„ Technology

8
Management

„ Vision

„ Experience (Quality, Quantity, Relevancy)

„ Education

„ Track Record

„ Capability

9
 Money

„ Financial Strategy

„ Capital Requirements

„ Structure

„ Valuation

„ Liquidity Path

„ Use of Proceeds

10
 Numbers
„ Income Statement
ÔRevenue Projections ($, Units, Average Sale Price)
ÔExpense Projections (Head Count, Salary Level, Corporate Overhead)
ÔMargins (Gross, Operating)
„ Balance Sheet
ÔCash
ÔAccounts Receivable
ÔInventory
ÔGoodwill/Intangibles
ÔDebt
ÔLiabilities

11
 „ Cash Flow
ÔOperating
ÔFinancing
„ Budget

„ Capitalization Table
ÔInvestors
ÔManagement
ÔOption Pool

12
 The Process
„ Business Plan Review

„ Management Presentation

„ Site Visit(s)

„ References

„ Competitive Analysis

„ Financial Analysis

„ Corporate Review

„ The Deal

13
 Business Plan Review
„ Form
„ Substance
„ Vision
„ Business Model
„ Marketing Plan
„ Technology Plan
„ Financial Plan

14
 Venture Capital Glossary
What We/They say…
Acquisition Strategy
Adverse Customer Selection
Basically on plan
Dotcom business model
Considerably ahead of plan
Currently revisiting the budget
Cyclical industry
Entrepreneurial CEO
Funding Interruption
Ingredients are there
Investing heavily in R&D
Limited downside
15
and What We/They Really Mean…
the current products have no market
existing customers can’t stand the product; no
positive customer references
revenue shortfall of 25 percent
potentially bigger fools have been identified
hit plan in one of the last three months
financial plan is in total chaos
posted a huge loss last year
totally uncontrollable, bordering on maniacal
existing investors tapped out and unwilling to
provide additional funding
given two years we might find a workable strategy
trying desperately to catch the competition
it can’t get much worse
 Venture Capital Glossary...
What We/They say…
Long selling cycle
On a manufacturing learning curve
Possibility of a slight shortfall
Repositioning the business
Somewhat below the plan
Too early to tell
Turnaround opportunity
Unique
Upgrading the management team
Window of opportunity
Work closely with the management
16
and What We/They Really Mean…
yet to find a customer who likes the product
can’t make the product with positive margins
a revenue shortfall of 50 percent
multimillion-dollar investment recently written off
revenue shortfall of 75 percent
results to date have been grim
lost cause
no more than six competitors
the organization is in complete disarray
without more money, the company is dead
talk to them on the phone once a month
 Pipeline Qualification

„ Suspect: A potential Prospect

„ Prospect: A Suspect with whom contact has

been made

„ Qualified Prospect: A potential Customer with budget

actively seeking a solution

„ Customer: A contractually committed

financially viable client

17
 Technology Review

„ Technology
ÔArchitecture (web-enabled or web-centric) thick
versus thin client
ÔOperating System
ÔRelational Database
ÔApplication Code
ÔDevelopment Environment

18
 Technology Review (continued)

„ Resources
ÔBudget
» Cap Ex
» Development
» Operating
» Maintenance
ÔStaff
» External
» Internal

19
 Technology Review (continued)

„ Track Record
ÔFinance
ÔDevelopment
ÔExperience

20
 Technology Review (continued)

„ Function
ÔPublish
ÔInteract
ÔTransact
ÔTransform

21
 Technology Review (continued)
„ Development Semantics
ÔPre-alpha
» A concept in someone’s mind
ÔAlpha
» Works only in development laboratory
ÔBeta
» Installed in production environment, partial
feature/function complete
ÔFirst Customer Release
» Debugged, defined feature/function shipping to
paying customers

22
 Management Presentation

„ Articulation

„ Cogent Strategy

23
 Site Visit

„ Headquarters

„ Outlets

„ First Impression

„ Organizational Culture

24
 References

„ Management: Former employer(s), bosses,

peers, direct reports, board
members, advisors, competitors,
analysts

„ Customers: Current, former, prospective

„ Company: Auditor, legal, bank, investors

25
 Competitive Analysis
„ Market Share
„ Mind Share
„ Momentum
„ Differentiation
„ Buyer Motivation - Painkiller or Vitamin?
„ Sales Cycle
„ Pricing

26
 Pricing

„ Traditional
ÔSoftware License Fee
ÔAnnual Maintenance

„ Emerging
ÔSubscription
ÔTransaction Based

27
 Valley of Death

Gross Margin

< $1.5K > $250K

Average Sale Price

28
 ASP Pricing Model

Organization Size/
Financial Resources

Financial Barrier
To Adoption

Market

29
 Financial Analysis

„ Actual vs. Plan

„ Sales Pipeline

„ Leverage (Operating, Financial)

„ Competition (Margin, R&D, Distribution, ASP,

Corporate)

„ Valuation

„ Return ($, IRR)

30
 Corporate Review
„ Audit and Management Letter
„ Legal (Lawsuits, Licensing, Agreements, Distribution
Agreements, Employee Agreements, Employee Benefits,
Shareholder Agreements, Stock Options, Financing
Agreements, Stock Ledger, Customer Contracts, etc.)
„ Regulatory (Licenses, FDA, Environmental)
„ Intellectual Property (Patents, Copyrights,
Trademarks)
„ Insurance (Liability, Key Man, D&O, E&O)
„ Leases (Real Estate, Capital Equipment)

31
 The Deal

„ Term Sheet

„ Legal Representation

„ Document Preparation

„ Closing

„ Post-Closing Review

32
 Tips
„ Dos:
ÔConduct site visits of corporate and regional offices’
arrive early
ÔTour with junior (non-management) staff
ÔMeet with worker bees
ÔSee production environment
ÔAsk lots of questions

33
 Tips
„ Don’ts:
ÔMistake development for production
ÔVisit only corporate site and staff
ÔDiscuss anything in elevators or bathrooms
ÔLeave your files unattended
ÔSign the visitor log
ÔLead the witness
ÔVolunteer competitive information
ÔBreach moral/written obligation of confidentiality

34
 Human Capital Assessment
Venture Techniques

„ Art Critic

„ Sponge

„ Prosecutor

„ Airline Captain

35
 Management Orientation

„ Missionary

„ Mercenary

36
 Management Attributes

STAGE FOCUS KEY ATTRIBUTES

„ Start-up „ Development „ Passion, Vision

„ Early „ Entry/Pilot „ Persistence, Tenacity

„ Expansion „ Adoption „ Process, Systems

„ Late „ Penetration „ Profits

37
 Health Care Drivers
„ Aging Demographics

„ Scientific Innovation

„ Consumerism

„ Cost Escalation

38
 Health Care I/T

„ Market
ÔSize: Healthcare $1.7T (13.8% GDP) 7% CAGR
Healthcare IT $25B; 12% CAGR

ÔEntitles: Health Plans (500)

Hospitals (5,000)
Nursing Homes (20,000)
MDs (650,000)
RNs (2,200,000) est.

39
 Stimulus Bill

„ Funding: $20B

„ Recipients: Hospitals/MD’s

„ Purpose: EHR Adoption

„ Mechanism: Add on to fee service payments

40
 Health Care I/T

Clinical
F
O
C
Administrative
U
S

Financial

Data Transaction Data Decision

Capture Processing Base Support

FUNCTION

41
 Health Care I/T
„ High Potential Opportunities
ÔPharmaceutical Services
» E-detailing
» Clinical trial management (Phase Forward)
ÔClinical Systems
» Electronic medical record
» Image management (EMed Technologies)
» Medication management
» Remote physiological monitoring
ÔEmployee Benefits
» Consumer driven
ÔSupply Chain Management
» Exchanges

42
 Health Care I/T
„ Barriers to Adoption
ÔStructural
» Fragmentation
» Decision process
ÔEconomic
» Cost benefit ROI -- Increased revenue
Reduced time
Reduced cost
» Macro – reimbursement
» Micro – margins

43
 Health Care I/T
„ Barriers to Adoption (continued)
ÔOperational
» Work flow integration
ÔTechnological
» Legacy system integration
» Standards: Articulation
Compliance
ÔRegulatory
» HIPPA
ÔAdoption rate
» Crossing the Chasm

44
 Innovation Adoption – Life Cycle

100%
A dopters
Late
Market Penetration

n
tio
op
Ad
rly
Ea

Early Chasm
Adoption
0%

Time

45
 Adoption

„ Drivers „ Enablers
ÔEconomic ÔFinancial
ÔRegulatory ÔRegulatory
ÔPsychological ÔTechnological
ÔDemand ÔStandards

46
 Disruptive Technology

„ Technology Paradigm Shift:

ÔMoore’s Law (Speed/Cost Inverse Relationship)

ÔMetcalfe’s Law (Network Effective)

47
 Technology Evolution - Network
1960s 1970s 1980s 1990s 2000s
Proprietary
tecture
Archi-

(SNA)
Non-proprietary-packet Academic Commercial
(TCPIP)
Government
Content Switches Connect- Speed

KB MB GB

Wired Wireless-Analog Digital

ivity

Copper Fiber

Analog Digital Optical

Voice Graphic-Static Dynamic

Data
48
 Technology Evolution - Hardware

1960s 1970s 1980s 1990s 2000s

Platform

Mainframe Mini PC Laptop PDA

Workstation Server

Media Disc Floppy, 5 ¼ 3½ CD

Storage

Mag Tape RAID SAN

Capacity KB MB GB TB
I/O SCSI Fiber Channel USB
Processor

Architecture 4 bit 8 bit 16 bit 32 bit

Speed MHz GHz
Type IC Micro RAM CMOS

49
 Technology Evolution - Software
1960s 1970s 1980s 1990s 2000s
Ownership Proprietary Open Source
Language

Code Machine Assembler Compiled Object-Oriented

st nd
(Binary) 1 2 3rd (C, VB)
(Basic)

Platform Machine Specific Intra-operative

(Java)
Ownership Non-Relational Relational
Data
Base

Structure Proprietary Non-Proprietary

(ISAM/VSAM) ASCII
tent tecture
Con- Archi-

Mainframe Mini Client Server Web

2 Tier 3 Tier nTier

Text Graphics
Voice

Character Graphic
Input

50 Punch Card Floppy CD

Mag Tape
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HST.921 / HST.922 Information Technology in the Health Care System of the Future
Spring 2009

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