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February 26, 2014

Copying VC’s

Filed under: Uncategorized — Steve Krupa @ 12:17 pm
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Here’s an interesting article by Joel Dreyfuss at titled “How to Invest Like a VC in the Hottest Technology”.  I got a little play here for our healthcare investment strategy, and I think it caught Joel’s attention because it definitely is the case that some of the more disruptive technology ideas like SaaS computing and mobile are earning a way into the healthcare industry, where business model and immediate ROI tend to dominate technology purchases.  More to come on this throughout the year as healthcare technology starts to gain mindshare in the press and public market investment community.  


May 25, 2010

Defending the Carried Interest (Capital Gains) Tax Incentive

Filed under: Finance,Venture Capital — Steve Krupa @ 8:41 pm
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Today I intended to write an editorial, of sorts, in opposition to the US government’s proposal to raise the tax rate on Carried Interest earned by investment partnerships.  This tax increase targets partners of VC and Private Equity funds and is imbedded in a current bill proposed by the House of Representatives called The American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213).

Under the category of closing individual loopholes, the House provides the following summary of the provision:

Taxation of carried interest.  The bill would prevent investment fund managers from paying taxes at capital gains rates on investment management services income received as carried interest in an investment fund… the bill would require investment fund managers to treat seventy-five percent (75%) of the remaining carried interest as ordinary income (50% for taxable years beginning before January 1, 2013). This proposal is estimated to raise $18.685 billion over 10 years.”

In the course of my beginning to research this topic, I remembered that my partners and I had already addressed this issue in a letter we wrote back in March of 2009.  Below is an edited version of that letter, altered slightly to bring it up to date.  It reads much like an editorial, but I believe it succeeds in making its point.


Venture Capital and Carried Interest 

The Congress proposes to increase the capital gains tax rate on Carried Interest earned by principals of venture capital firms from the current standard capital gains rate to a hybrid rate weighted more toward the marginal tax rate on ordinary income.  As with all tax rate increases, we believe that this one will serve as a long-term disincentive, in this case to the formation of capital around innovative start-ups, one of the key historical drivers of job creation in the US economy (according to National Venture Capital Association, in 2005 companies that received venture capital from 1970-2005 accounted for 10 million jobs – approximately 9% of the private workforce – and $2.1 trillion in revenues – approximately 17% of GDP).

Unlike other forms of investing, venture capital investment does not involve intricate financial engineering and it does not rely on financial leverage and market arbitrage to generate gains.  Venture capital is about investing equity in young companies for long-term results.  Most venture capital investments are made in companies with less than $50 million in revenues and are held for periods between 5 and 7 years (although some are held much longer), distinguishing them as intrinsically unique, long-term, growth oriented equity investments.

It is expected that for the foreseeable future venture capital will be deployed in clean and alternative energy technologies, a host of computer science-oriented businesses, bio-medical technology and healthcare services and information technology.  These are the precise areas of innovation necessary to solve some of the key issues in our economy and these are the very businesses that seek employees with advanced skills in biology, mathematics, engineering and computer sciences, a major thrust of our government’s education initiative.

In a well-run investment model the venture capitalist operates in partnership with the entrepreneur, focusing on long-term company building, as opposed to the buying and selling of portfolio securities.  The venture capitalist puts its own capital at risk and raises additional funds by advocating investment in the sector to large institutional investors, many of which, like endowments and pension funds, are tax-exempt.  Once the funds are raised, the venture capitalist screens an enormous pool of new ideas to tease out those with the best investment prospects (less than 1% of venture ideas ultimately get funded by venture capitalists).  After the initial investment is made, the venture capitalist supports each new company and its entrepreneur by providing follow-on financings and working with the company as a board member and advisor on matters of strategy, human resources development, sales, marketing, finance and business development.  It is not until the long-term success of the company is achieved that the venture capitalist earns a financial reward for its efforts in the form of a capital gain, known primarily as Carried Interest.  Along the way there are plenty of chances for failure.  Despite the best efforts of all involved, most venture-backed companies ultimately fail, but those that do succeed pay-off well in excess of the failures, rewarding entrepreneurs and venture capitalists for working through substantial financial and operating risk.  Venture capital investment represents absolute value creation, not “zero-sum” value transfer.  The resultant output to the nation is permanent innovation and job creation. 

So why would the House propose to penalize venture capitalists with a tax increase to Carried Interest?  It seems counter productive and will not lead to stimulating innovation (further in and of itself it doesn’t raise much money – $18 billion over 10 years is less than 0.04% of the federal budget over that same period time).  During the campaign President Obama committed to eliminating the capital gains tax for investment in small businesses, clearly supporting the notion that tax incentives stimulate investment activity.  Yet, a carried interest tax increase on venture capitalists would operate in complete opposition to this goal.  The truth is, the venture capitalist and the entrepreneur are long-term partners and should be treated the same.

Today venture capital is a highly competitive global business.  Innovation will develop where there is unity between the talent available to build new innovative businesses and the incentives for capital investment.  We see other countries narrowing the global education gap and providing very compelling capital incentives (e.g. – China is investing heavily in education and does not tax capital gains at all).  Currently, the United States has the most advanced and effective venture capital infrastructure in the world and we believe that this is one of this country’s great competitive advantages, portending future success beyond our current financial difficulties.  As such, we would urge Congress to look for ways to maintain and enhance venture capital as the National Asset that it is and not to penalize suddenly those venture capitalists whose past and ongoing work is in complete harmony with America’s long-term economic objectives.

May 15, 2010

Psilos’ Annual Outlook on Healthcare Venture Capital Investing

Last week my firm Psilos Group released its collective annual outlook on the state of healthcare venture investing.  The Outlook serves as our public statement outlining areas of opportunity in IT-Enabled Healthcare Services, Healthcare Information Technology and Medical Devices, Diagnostics and Instrumentation.


Psilos Group Calls Health Reform Legislation
“An Opportunity for an Industrial Revolution in Healthcare”

Quality and Cost Innovations Critical to Addressing Healthcare Inflation;
Premier Healthcare VC Firm Outlines Six Opportunities to Drive Meaningful Change

NEW YORK, May 12, 2010 – It is time for an “industrial revolution” to change the underlying costs and structural inefficiencies in the healthcare industry, according to a new report issued today by healthcare venture capital firm Psilos Group (, and the recently enacted Patient Protection and Affordable Care Act (PPACA) affords healthcare entrepreneurs and investors an unusual opportunity to respond with innovation.

The report addresses the challenge of adding 32 million newly insured Americans to the “bad economics” of U.S. healthcare, but suggests that reform can “catalyze healthcare innovation that improves quality and reduces cost, if only investors, policy-makers and companies rise to the challenge before us.” The report calls for accelerated development and adoption of innovative solutions and technologies that will deliver real value for each healthcare dollar spent by the federal and state governments, U.S. corporations and individual healthcare consumers.

“We cannot simply go on investing in incremental changes to approaches that have failed repeatedly,” said Dr. Albert Waxman, Psilos’ senior managing member and CEO. “If done well, new medical technologies and disruptive models of delivering healthcare services can be the foundation for new businesses based on 21st century information technology.

“A real healthcare industrial revolution would go a long way towards eliminating the 30 percent waste and error in our current system, improving national competitiveness and creating new products for global exportation.  The return for the U.S. will be a vibrant healthcare economy that enhances the public good and private enterprise at the same time.”

As part of its second “Annual Outlook” on healthcare economics and innovation, Psilos notes that failure to establish a culture of innovation in healthcare delivery will lead an existing $2.5 trillion industry to continue to inflate to over $4.5 trillion by 2019, as projected by the Center for Medicaid and Medicare Services (CMS). Psilos highlighted six specific areas where innovation can bring about near-term, high-impact and high-return changes to improve the U.S. healthcare system. These include:

  1. An efficient system to prevent and manage chronic illness, which accounts for 78 percent of all our healthcare expenses. Technology can help improve care management to prevent costly procedures and to incentivize consumers to live healthier life styles.
  2. Error reduction in inpatient, ambulatory, and post-acute care. These errors are most often the result of poor information flow and imperfect human behavior. Innovative solutions to help care administrators avoid costly and tragic mistakes have begun to emerge and have demonstrated positive clinical outcomes.
  3. New technology and benefit plans to deal with the diabetes epidemic, which costs an estimated $170 billion annually in the U.S. Improved diagnostic solutions and healthcare management programs will go a long way in controlling the spiraling costs.
  4. New medical technology to enable earlier, better diagnosis and thus earlier intervention with high-cost, high-morbidity diseases. Continued innovation around technologies that help identify diseases earlier will have a vital financial and clinical impact.
  5. Medical devices to foster less invasive and more effective surgical interventions. New minimally invasive surgical technologies will enable care givers and hospitals to provide treatment options that reduce inpatient use and result in fewer negative side effects and better clinical outcome.
  6. Expanded adoption and investment activity in healthcare information technology. This includes venture investments to recognize and sponsor entrepreneurs committed to developing modern solutions that bring about the much-needed innovations to put the U.S. healthcare economy on track for a successful future.

For more details, please review the Psilos Annual Outlook at:

April 15, 2010

I Want My Mobile Healthcare (Part 1 of many)

I have long avoided investment in mobile healthcare applications, but I am afraid the time has come to reconsider.   

from the Economist, "Wireless Health Care"

For a long time my pessimism has been propped up by the debacle of e-prescribing (now referred to as mobile Rx or mRx).  In the venture business sometimes you show your chops by what you avoid.  From 1999-2003 we looked at almost every opportunity in the mRx space, but ultimately never pulled the trigger on an investment.   

In that period of time huge amounts of capital went into at least 15 mRx start-ups, with the 5 best-known companies raising over $170 million in venture capital (recall names like: Parkstone, ePhysician, iScribe, and Pocketscript), with only ePocrates (VC-backed) and Allscripts (public company) emerging as survivors, but hardly successes with a pervasive mRx product.   

The idea of mRx is simple.  Doctors prescribe medications using a mobile device.  The mobile device runs a series of applications that confirms the appropriateness of the drug and the dosage and checks for any drug-drug interaction problems for the patient.  If all clears, it sends the script to the pharmacy for fulfillment.  The patient shows up, picks up the initial script, and down the road the doctor can be prompted for renewals delivered by mail order.  The benefits are:  (1) less prescribing errors – which saves money on waste and the potential bad outcomes related to improper medicine and (2) time efficiency for the doctor, the patient and the pharmacy.   

In 1998 mRx ran on PDAs (Palm Pilots – remember those) and today it runs on smart phones.  The application is simple at the mobile device, but super-complicated as an interface.  The number of multi-system interactions necessary to accomplish a transaction are fantastic in number.  We stayed away from the opportunity for precisely 2 reasons:  (1) PDAs were just not that pervasive in the medical community, and frankly the wi-fi capability felt clunky and slow and (2) we just could not quantify the cost of building the systems necessary to interface with the pharmacy, PBM (pharmacy benefit management), Health Plan and provider IT systems, almost all of which were not web-services enabled.

But the times are changing…

Mary Meeker (equity research analyst at Morgan Stanley), predicts that mobile Internet usage is growing so fast it is bound to surpass desktop Internet usage by 2013-14 (chart below).    


(For access to all of Ms. Meeker’s presentation, which is very interesting, click here)

Fred Wilson, a leading edge IT VC and Twitter investor, blogged earlier this week about the ascension of social networking platforms like Facebook and Twitter over general email as the leading communication platforms on the Internet (again, see Morgan Stanley chart below).    

Pithiness and convenience drive much of Twitter’s appeal and its seems we are beginning to see a training ground for mHC emerge, where short, precise interactions will serve as the basis for successful applications, particularly in the area of remote patient monitoring, which I see as one of the more interesting areas of mHC from a return on investment standpoint.   

With the mobile market now beginning to make sense, the question turns to whether the HCIT infrastructure is ready for mHC.  Generally the answer is probably no, but recent trends, including the government’s proposed HC reforms, seem to be on track for stimulating changes in this area.

As we all know there are numerous conflicting issues and confusion around the HC business, including the now imminent expansion of the Department of Health and Human Services (HHS) as the next super-big Washington bureaucracy.  With a little help from consultants and attorneys I am in the process of reading and analyzing our new healthcare law (a/k/a  HC Reform which includes, for our purposes here, the Patient Protection and Affordable Care Act -PPACA or HR 3590 – plus the Health Care and Education Reconciliation Act – HCERA or HR 4872 plus the Health Information Technology for Economic and Clinical Health Act – HITECH ), and I promise to begin publishing my cheat sheets soon.  But so far it seems that HC Reform has the potential to revolutionize HC IT as we know it, an attribute that may countervail the financial crisis spawned by its passage.

Many a future post will deal with the details of this idea (revolution, that is), but generally I believe that HHS reimbursement policies, which under HC Reform are expected to revolve around proper care coordination among primary care, specialist and hospital-based providers, will demand smart applications running accross seemless connectivity among HCIT systems.  This means that existing legacy system configurations will not survive the transition to HC reform because they will need to be replaced with Services-oriented architectures (SOA) that enable low-cost web-services and data transfer.  Once this transition gains steam (and it is already happening at the payer level of the value chain), mHC will be set to explode. 

Please note that when I reference mHC I am really not focused on the consumer market for mHC applications (these are cute and I will talk about them soon).  I am interested in applications that link patients, payers and providers in a way that optimizes HC economics and outcomes.   

In upcoming posts on this subject I will begin to explore specific mHC applications, among them remote monitoring of the chronically ill and care coordination among providers, and whether the timing is right for venture investors.

February 4, 2010

Hello world!

Filed under: General — Steve Krupa @ 11:13 pm
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“Hello world!” a default “wordpress” title which I accept as a welcoming to all first timers.  It is 5-Feb-2010 and I am staring directly into infinity, an empty blog. 

This is the new home base of my evolving digital existence, my second realm.  What I have to offer here are ideas and perspectives on subjects near and dear to me.  What I am in search of is comment and intrigue that will give those subjects added meaning to me and to all who choose to come here.  I hope to create a place for learning, teaching and deepening relationships.

My professional time is spent thinking about healthcare, helping entrepreneurs build businesses and managing a portfolio of venture-stage healthcare investments with my business partners (check on us at  New ideas on all three of these subjects are constantly being tested.  I have many, which will eventually make there way onto these pages.  I also come across many new ideas which I intend to share, with full attribution of course.

 The process of building a great business changes constantly.  Ideas on how to finance, govern, market, hire, communicate, motivate, lead and evolve new enterprises interest me greatly, particularly in the context of our nascent digital age.  I also know that for every investor out there, there is an investment model.  As a professional investor I am always on the hunt for new perspectives on choosing and managing investments and building portfolios, and I hope to introduce these perspectives over time.

My life is definitely not all about work, but I do think it is all about digging deeper and pursuing aficionado status in as much as I can handle.  So while I have you here, I hope to explore some of the subjects that inform my free time, hopefully not just as an indulgence, but also as a way of going a little deeper and having a little more fun.

Thanks for joining me, and I look forward to the discussion.

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