Below is the ‘Tip of the Week’ from Ep72: Blockchain Investing, Part 2 (William Mougayar)
When I worked for my previous employer doing M&A, we were chartered w/ building a strategy for targeting companies within specific sectors or verticals. But before we could target specific companies, we had to think about the sub-segments of that market in which we wanted to play and build a portfolio of companies around. And the exercise always began with what we called External Drivers. What are the Market, Legislative and/or Technology drivers that are going to cause major changes to the industry going forward. We’d then assess all of those drivers, try and discern the implications of those drivers and, finally, what opportunities would exist for us to exploit.
In today’s tip, I want to focus on drivers, so let’s explore examples of market, legislative and technology drivers; and we’ll use the healthcare sector to help illustrate how these work. We’ve been working on a deal in healthcare, so it’s pretty fresh in my mind, at the moment.
One major market driver is the average cost of healthcare in a person’s lifetime, which is rising at an extremely fast rate. The reality of new treatment methods and medicine is that they come with a heavy price tag. What compounds this driver is that these innovations in healthcare also allow humans to live longer lives. So, not only is the cost of treatment received in the average lifetime increasing, but the average lifetime itself is increasing. This all results in the total cost of care in a person’s lifetime is many multiples higher now than it was a generation ago. And the final market driver that I’d like to mention, further exacerbating healthcare costs is population. An exploding global population, while increasing the tax base in their respective countries, is also increasing the healthcare cost burden. We can see the effects of these drivers in the immediate future with the aging demographic of baby boomers; that will live longer, have higher cost of care and come in large numbers.
The most commonly cited healthcare driver that came out of legislation is the Affordable Care Act. This single piece of legislation is highly disruptive to existing healthcare organizations, health service models, and also the total population that has access to healthcare. Another example of a legislative driver in healthcare is related to value-based-care. If you are not familiar with this concept it is centered on aligning healthcare organizations incentives with the desired outcomes. So, the current model in healthcare is fee-for-service. The more service a health entity preforms and the longer they keep patients in the hospital, the more money they make. This is counter-intuitive b/c it means that the healthcare organizations do better, if the patients remain sick. The value-based focus attempts to reward health organizations for keeping their patients healthy. So they focus is less on providing more service for financial gain and instead providing financial gain for achieving patient health outcomes. The legislative driver here is that the Department of Health and Human Services has mandated a switch to value-based care with a target of 50% of all health care organizations on this model by 2018. Clearly this is another disruptive driver, destroying value for some and creating great value for others.
There are far too many to cite here, so I will just mention a couple. Clearly the internet and emergence of mobile have allowed online collaboration and communities of medical professionals to interact and consult with one another on specific cases. We mentioned Fred Wilson in the discussion and, of course, Union Square has made a number of investments in digital health, of which Figure 1 is a great example of one that would not have existed, certainly w/o the internet, and also likely not without the advent of mobile and smart devices. Of course, there are also examples where video streaming and advanced robotics have allowed the ability for world-class surgeons in one geography to conduct procedures on patients in completely different locations. Advances in technology can be an extremely powerful driver that enables businesses and possibilities that previously could only be imagined.
This is not related to healthcare and I’m going to reveal my geek-side here a bit, but one of my favorite things to cite is the Star Trek TriCorder. In a way, we all have a version of a Tricorder in our pockets today, in the form of a smart phone. Yet, if I had told my parents, just two decades ago, that the majority of people in the United States would be walking around w/ a Tricorder by 2015, they would’ve been calling the men in the white coats.
Again, not healthcare related, but could you imagine Uber existing without the proliferation of smart devices? Absolutely not. The technological innovations around smart sensors, GPS, point-of-service; now allow one of the most valuable companies in the world, to exist, where previously one couldn’t imagine how that could be possible.
Today’s discussion on the blockchain was a great example of a major technology driver. And there were market drivers discussed and potentially legislative drivers that will also motivate innovators to build applications utilizing the blockchain. The emergence of the blockchain will enable many companies, business models and companion technologies to generate significant value in ways that did not previously exist. Do we know what those are yet, not really. But it all starts w/ the external drivers. As William explained, one must know what it is and how it works before they can begin to imagine its effects. So, whether you’re investing in the blockchain or another sector, what’s changed? What are the drivers? What are the strategic implications of those drivers? And what opportunities exist b/c of those implications? If you’re a thesis investor and want to have focus, start w/ the drivers.