A "Natural Cure" for the Author's Debts

Here's a sickening reminder of how easy it is to scam a public that doesn't understand science. Amazingly, this snake oil brochure is Number 1 on the NY Times Best-Seller list of How-To books. How is it that anyone can trust the prescriptions of a convicted fraudster with no scientific or clinical background?

Notice the con man's effective use of conspiracy theory to leverage public mistrust of large corporations. Trudeau loves to point to the "profits of multinational pharmaceutical companies" as motivation for this broad-based conspiracy to squelch natural cures (amazingly, not one of the 100,000 people he implicates has ever decided to tell all). But what about the profits from his self-published book and infomercials which have, so far, procured for him "dozens of homes and condominiums"? I mean Good God, the man has a motive.

I can't help but suspect that US consumers would think more critically about medicine if our healthcare system weren't a "black box" over which they have no control. Perhaps Consumer Driven Healthcare (CDH) will motivate consumers to critically assess their medical options (empowered by data from Healthia!).

More likely, this nonsense won't end until we stop teaching our children to trust their lives to storytellers and "spiritual leaders", and instead to make practical decisions based on empiricial evidence, as observed directly or repeatedly reported by credible witnesses.

Otherwise expect more scams like this one until natural selection kicks in to favor the consumers of scientifically valid medicine.

Healthia

Introducing a new Bessemer-funded consumer venture...

My previous post celebrated Consumer Driven Healthcare (CDH), the new development in American healthcare reform. CDH promises to stabilize premiums for employers, cut out-of-pocket expenses for employees, and improve the quality of healthcare through freer competition.

But consumers are unaccustomed to shopping for medical services, and there are no available data on the price, quality and service of competing providers. A McKinsey study concluded that "this is the huge challenge of the CDHC movement. If consumers are to welcome new incentives to manage their health care and spending, they must have better information to support their decisions." (via this report on CDH).

So we have incubated a company in concert with founders from Healtheon and Valicert to build a portal for delivering the information and online shopping resources that healthcare consumers have come to expect when buying other goods and services. According to Healthia's About US page: "Our goal is to provide America's first comparison shopping and research portal for consumer driven healthcare, enabling businesses and their employees to choose health plans and ancillary health benefits objectively and transparently."

Please visit our California-only beta site and give us feedback. We're starting with just the first steps toward consumer driven healthcare--setting up an HSA and HSA-eligible plan.

Consumer Driven Healthcare

This post is only for people who consume healthcare services.

It is well understood that our nation's healthcare delivery system is in crisis, but you may not realize the degree to which it is about to impact families. Health insurance costs per employee are rising between 10% and 20% every year, and healthcare spending per capita is 16.3 times 1970 levels, bringing us to more than twice the average for western world countries. As the costs per employee rise above a certain threshold, employers pass on the deficit to employees, and so the inflation rate of out-of-pocket health costs is even higher. The US Census Bureau forecasts a stunning picture: out-of-pocket expenditures per US family has risen from 13.1% of median income in 1999 to 21.1% in 2003, and heading north of 30% by 2006. According UCLA's Center for Health Policy Research, in just two years between 2001 and 2003, the average California worker's contribution for family coverage plans rose 79% -- from $114 to $204 per month.

We all recognize, from first-hand experience, the root of the problem. Insurance companies control which doctors we can see, when we can see them, what treatments and medicines they can prescribe, which hospitals we can use, how long we can stay, what tests they can run, how much we pay, etc. As a result, the whole system is, well, completely fucked up.

The ability for consumers to make rational decisions in a free market normally governs the rate of inflation to a reasonable level. Even expensive, complex purchases, such as real estate, taxation, estate planning, investments, home renovation, etc. can be made so long as the consumer has access to professional counsel from practitioners who compete on price, service, and a reputation for dispensing quality advice. But consumers do not have access to an open, freely competitive market for medical services. Our employers choose our plan, our PPO or HMO chooses our doctors, and to keep the PPO patients flowing, doctors comply with the PPO guidelines rather than dispense unencumbered advice. You rarely even have the choice of paying for preventive medicine today to avoid expensive, dangerous treatments later (at which point, figures your insurance company, you are highly likely to be Someone Else's Problem).

But whatchya gonna do? No one wants to start picking up the tab for medical services. Is the whole mess just a necessary evil of the third-party payor system? No!

In fact, there is a promising movement afoot to fix the system that is quickly gaining ground. It is known as Consumer Directed Healthcare (aka Consumer Driven Healthcare, CDH). The goal of CDH is to put the consumer in the driver's seat, so that (s)he is motivated and able to make free, rational choices, while still relying on one's employer to cover the expense using pre-tax dollars. The idea is for employers to purchase very high-deductible (and inexpensive) plans for employees, and to set aside the savings for the consumers to spend themselves on any expenses below the deductible. In the event of grave illness, the old third-party payor system kicks in, but for most families, the healthcare decisions reside in the hands of the consumer. Critically important, whetever you don't spend this year remains available for future years, even if you change employers, so you're motivated to factor in costs as well as quality and service.

Fortunately, in an extremely rare show of wisdom, the Republican US Congress passed a Medicare Modernization Act that legalized CDH funding plans known as Health Savings Accounts (HSA). Employers can buy high-deductible plans, and contribute as much as the deductible itself into the employee's HSA tax-free (federal, soon state). Since the act became effective on Jan 1, 2004, HSA adoption has exploded. By March of this year the number of HSA-covered lives exceeded a million with a 250% annual growth rate.

This comprehensive study on CDH reveals some promising results among early adopters. Employers are saving 20% on healthcare costs, and premiums for high-deductible HSA-elgibile plans rose only 4-6% or, by some estimates, even dropped 15% this year. Over half of the consumers have money left over after 12 months, accumulating wealth for future years. A McKinsey study found that HSA account holders are 20% more likely to comply with treatment regimens for chronic conditions. HSA account holders are 50% more likely to inquire about cost, 100% more likely to inquire about drug costs, and 30% more likely to get physical exams. And most importantly, health outcomes are equivalent or better.

Contrary to concerns that HSA's would appeal only to the young, rich and healthy, a study by the consortium America's Health Insurance Plans found that most of the million HSA account holders among its members' insured lives were over 40, 73% of them had children, and 29% had family incomes below $50,000.

So what's the catch? Some people worry that consumers NEED insurance companies telling them and their doctors what to do. Ridiculous. It's certainly hard to make the best decisions about healthcare, but a decision reached by a consumer advised by a licensed doctor of choice has to be at least as good as the same decision constrained by the one-size-fits-all, cost-cutting guidelines of an insurance company.

Having said that, consumers are unaccustomed to shopping for medical services, and there are no available data on the price, quality and service of competing providers. McKinsey's study concluded that "this is the huge challenge of the CDHC movement. If consumers are to welcome new incentives to manage their health care and spending, they must have better information to support their decisions." (source)

This sounds like a job for "the Internets". Shopping portals have simplified all kinds of complex purchases. And healthcare expenditures are certainly high enough and important enough to drive consumers to whatever comparable data are available.

Meanwhile, get your company, or your family, an HSA and an HSA-eligible plan. I did, and now my family is saving anywhere from $2,000 to $4,000 per year on healthcare, depending upon whether we hit the deductible. And until we hit the deductible, we decide for ourselves which doctors, tests, treatments, drugs and hospital to use.

My next post will point you where to go for an HSA plan, and also tell you how Bessemer hopes to play a critical role in the CDH movement.

Consumer Investing (2)

Following up on my previous post, I'd like to say a bit more about what kinds of consumer technology ventures I'm looking for.

Obviously, many consumer markets promise significant growth--wireless services, mobile devices, mobile content, home automation, digital music services, console games, casual games, RSS readers, blogging sites, location-based services, social networking applications, search engine optimizers, consumer payment systems, VOIP, vertical search, local search, desktop search, comparison shopping engines, online marketing, video on demand, etc.

Without revealing exactly which areas we're scouring (we're open to all of them), I can share one important lesson on assessing consumer investments, one that we have learned the hard way--from either bad investments or regret from passing on good deals. The lesson is that venture capitalists don't have a clue how consumers will behave.

As conceded in our anti-portfolio, I passed on the Series A round of eBay because I couldn't imagine a big business based on selling stamps, old comic books, and used junk. But I did invest in EXP, an internet exchange selling all kinds of advice (legal, technical, household, business...). Both mistakes exemplify the egotistical VC tendency (at least mine anyway).

Of course, we're not the only ones. According to a great essay in MIT Sloan Management Review, "It may soon no longer be possible for even gifted visionaries to imagine the next killer app."

Fortunately for us, user adoption is only one of the key milestones reached by a successful consumer venture. Others include a validated revenue model, a validated distribution strategy, and an IPO-quality management team. Those other milestones are ones that we can more reliably predict and control. And so, as Bessemer assesses consumer ventures, we are least interested in funding User Behavior risk, but much more comfortable with risks associated with the revenue model, distribution model, and team.

That's why my partner Rob Stavis funded Skype when it was only 3 months old with no revenue (and no idea yet of how to generate it). Having observed 2 million people download the alpha client in the first month and 150,000 concurrent users, we didn't have to worry about User Behavior risk. Clearly Skype had developed something of great value to users. The same pattern applied to Gracenote, Bokee and Blue Nile when we funded them--each had millions of registered users who found their way to the site without expensive marketing to acquire them. Had we developed this screen earlier, we would have funded eBay based on the strong, organic growth they were seeing in traffic finding its way to their homegrown site. Today, this kind of thinking reflects very favorably on the new crop of "web 2.0" services, whose viral nature and network effects can attract growing clusters of users.

The focus on "eyeballs" sounds like 1990's bubble investing, but the difference is that bubble investors valued eyeballs no matter how expensively they were acquired (since capital was free). We are looking for organic growth--the kind that's easy even bubble-scarred for VC's to mentally extrapolate into a large capital-efficient business.

That's why we believe that the formula for any successful consumer venture is to be as scrappy as possible until you see that exponential growth curve. Twist, tweak and test until you find the mark. Only then is it time to raise lots of money, hire expensive VP's, and "monetize" your users. (Be sure to read this excellent post from Brad Feld on finding the next killer app.) If Google taught the world anything, it's that you start with the customer experience, and then build the business only after you've got that one nailed.

Consumer Investing (1)

I mentioned in an earlier post that Bessemer's fund is over-allocated to enterprise security, and so several emailers asked for a preview of my next investment road map.

I am venturing out on a broad road map that several of us (led by Jeremy Levine, Rob Stavis and Ron Elwell) have been scoping out since 2002 around emerging consumer services on the internet and on mobile phones. In later posts I can get into some specifics, but generally speaking we see the greatest returns this decade accruing to new consumer service companies (Yes, I know: Duh).

Between 1984 and 1994 we funded many retailers (Staples, Sports Authority, Businessland, Eagle Hardware, Dick's Sporting Goods...) and then during the 90's we funded many consumer facing dot-coms (eToys, BabyCenter, Blue Nile, Mindspring...). But our most successful investments had always focused on enterprise and carrier, so shifting our focus to consumer actually took some real thought. (Normally we try to avoid the VC herd, but in this case they were grazing in our favorite spot.)

The global consumer technology market has encountered three major catalysts of change powerful enough to displace global markets. This is the kind of disruption we like to see underpinning investment road maps:

1. Technology Catalyst: Rapid evolution of mobile computing platforms.

Mobile computing devices have evolved for years along several technical dimensions including processing power, battery life, screen resolution, network bandwidth, I/O capabilities, storage, RAM, miniaturization and cost. Sometime around 2002 the technical capabilities hit a critical threshold that enabled the rapid development of broad new services beyond telephony. But the technical evolution is accelerating, and so we can expect the devices to continue getting smaller, faster, cheaper, more dazzling, and more versatile. Mobile computing is the new application platform, the internet of this decade. (Look, I know this is old news but it was uncommon VC thinking back in early 2002.)

2. Geopolitical Catalyst: emergence of consumer middle classes in the world's most populated countries.

The new Asian consumer markets are obviously exploding. Wireless services are particularly interesting there because for many subscribers, the phone is the only video-based computer they have for entertainment and productivity.

3. Psychographic Catalyst:

When is the last time you heard someone complain about the VCR back home blinking 12:00? Early adopting consumers used to be the exception, but today they are the norm. Look at the uptake of new technologies like Tivo, Google, Firefox and Skype--it is no longer insane to aim for 50 million users within 18 months of launch.


So what have we done about it so far? In the last three years Bessemer led early rounds at Gracenote, Skype, GoTV, Mforma, and Zensys (the Z-Wave home automation company). We have seeded and incubated about a half dozen consumer startups not yet announced. We increased our stake in Celtel, the largest African cellular operator, which was just acquired for $3.3 billion. Our semiconductor team led rounds at companies leading the way in mixed signal, low power processors for consumer devices, such as PA Semi and Avnera.

Perhaps more importantly, Bessemer opened offices in both Shanghai and Bangalore, in order to tap those markets for employees and customers. We have already made investments in both countries (only one of which, Rico, has yet been announced).

More to come on how we assess consumer investments, and specific areas of interest...

The United States of Almighty-God

For my fellow Americans deluded enough to believe that we live in a secular state with a free, objective press, take a sobering look at the cover of this week's Time Magazine, in which the editors--exploiting the religious fervor that continues to grip our nation--pose the question "Does God have a place in science class?"

Objection, Your Honor: the question assumes facts not in evidence. The question refers explicitly to God (presumably, the old, bearded white guy trying to poke the monkey), rather than referring to "God" in quotation marks or--more consistent with journalistic principles of detached objectivity--"the creator deity worshipped in monotheistic mythologies."

The bigger problem, though, is that by just asking the question, Time seemingly legitimizes the "school of thought" behind the "science" of intellectual design. This is precisely what churches love to see--Christian fable elevated to the same level of credibility as hard-earned scientifically proven theories.

Let's be clear. Science class is for science , defined as:

Reasoned investigation or study of nature, aimed at finding out the truth. Such an investigation is normally felt to be necessarily methodical, or according to scientific method – a process for evaluating empirical knowledge...scientific theories are objective, empirically testable, and "predictive" — they predict empirical results that can be checked and possibly contradicted. -- Wiki

This means that scientists must embark upon inquiry without any agenda other than finding the truth, whatever it may be. (What a coincidence, then, that intelligent design "research" is completely funded and staffed by Christian fundamentalists.) Further, theories are definitively NOT scientific unless they are conceivably falsifiable through observation. But superstitions that adapt to observation cannot be falsified no matter how false they are (e.g. "we are all brains in a vat" is not a scientific theory). Show me an empirical observation that can disprove intelligent design, and I'll show you a "test of Faith."

This isn't the first time this past year that our nation's esteemed pillars of journalism have stooped to exploiting mass ignorance in order to peddle more magazines and sell more ad pages. Here are some more evangelical cover stories from America's three major "news" magazines:

US News Dec 20, 2004: "The Power of Prayer"

US News, March 8, 2004: "The Real Jesus"

US News August 8, 2005: "God and Country"

Time, April 12, 2004: "Why did Jesus Have to Die?" Objection, Your Honor: assumes facts not in evidence--namely that there was a Jesus, and that he was the son of the creator deity in monotheistic mythologies, rather than a regular person who "has to die."

Time, Mar 21, 2005: "Hail, Mary"

Time, Dec 13, 2004: "Secrets of the Nativity"

Newsweek, Dec 24, 2004: "The Birth of Jesus"

Newsweek, March 28, 2005: "How Jesus Became Christ" (not even a pretense of journalistic integrity)


Apparently, at least one of Time's subscribers is on board with teaching intelligent design in the Kansas public school science classes: on August 2, our Chief Executive proclaimed that "both sides ought to be properly taught." (Aug 2, 2005) The President must not have heard that (according to the New York Times)...

Mr. Bush's science adviser, John H. Marburger 3rd, said in a telephone interview that "evolution is the cornerstone of modern biology" and "intelligent design is not a scientific concept."

It is also quite stunning that Bush refers to Biblical Creationism as "the other side." What about giving equal time to other Creation theories, such as deeply held beliefs you should read about here that all was created by the Flying Spaghetti Monster?

To appreciate the distinction between ID gobbledy-gook and clear thinking science, listen to this week's NPR debate on Evolution vs. Intelligent Design. You will hear George Gilder, ID advocate, throw out terms like "prodigality" and "codons," forecasting that the "theory of information will overthrow biology." You will also hear from my hero Richard Dawkins (author of The Selfish Gene and Devil's Chaplain). When a church-going caller challenges Dawkins to explain how he--such a complex individual--could have come from evolution, Dawkins responds in frustration: "All I can say is, Just go away and read a book... They are fascinating--you will love them." (Dawkins, a true scientist, then answers the question properly.)

I like to think that eventually education will prevail upon most human minds to exercise critical thought. So I was greatly heartened (and proud) to read this week that Harvard University is funding an ongoing study of the precise mechanisms behind evolution, clearly demonstrating the system by which stunning complexity arises from energy, carbon, and a morsel of luck.

Meanwhile, I've been crafting a plan to incubate a startup that sells subscriptions for fairy tales and immortality, but I'm finding the market to be both crowded and saturated.

Road Map Investing

I have received many emails asking about the logic behind my investment decisions--both good and bad. So this is the first in a series of posts addressing investment strategy.

Many VC's talk about Road Map investing, but I think that we at Bessemer try to take this more seriously than most. This stems in part from our unique structure--with only one investor, we do not engage in the tri-annual exercise of raising new funds, which may lock firms into a strategy, and burn time that can otherwise be spent on strategic planning.

I think I developed the first formal road map at Bessemer. Back in 1992, fresh out of business school, I joined Bessemer and proceeded to fall in love with every crappy pitch I heard (I recall that one of them manufactured conference expo booths). Fortunately, before I did any damage, my bosses intervened, suggesting that perhaps I should take a few months to Think Before I Fund.

So I developed a comprehensive list of 38 potential investment sectors of high technology, and I spent the next 3 months whittling it down to 5. I crossed off sectors which required deep domain knowledge I don't have (semiconductor capital equipment), sectors that were too early (wireless LANs -- pre-Wifi), sectors that were too crowded (object oriented databases and middleware), and too unproven (multimedia CD-ROM titles). I solicited advice from the smartest experts I could find -- folks like Al Lill at Gartner Group, Rick Sherlund at Goldman Sachs, Brad Feld at Feld Technologies (now at Mobius), Eric Schmidt at Sun (now Google), and Per Suneby who ran Motorola Codex and is now at Flagship Ventures (Per: "Let me give you some advice: never invest in a security company"). I went to conferences, surveying telco equipment buyers and MIS Directors (there weren't too many "CIO's" back then).

The result was a decision to focus on Data Communications (indeed, that was a narrow specialty in 1992), and a Powerpoint presentation targeting five specific "initiatives", each of which led me to proactively find very specific investments that I made in the following 3 years:

1. Network Management (led to NetSys--acq. by Cisco)
2. Network Security (Verisign)
3. Asynchronous Transfer Mode (Cell Access--acq. by Fore, Data Labs--acq. by Yurie)
4. Wavelength Division Multiplexing (Ciena)
5. Enterprise E-mail (Worldtalk, ON Technology, Tumbleweed). Actually, PSI-Net also emerged from the Email initiative, since PSI-Net's commercial IP network was accessed primarily for SMTP (there was no web in 1992).

This road map enabled me to focus my time very specifically on investment opportunities that matched my plan. I think that entrepreneurs outside my road map appreciated the quick No, and entrepreneurs on my road map appreciated the in-depth knowledge I brought to their businesses. (At least no one had to explain to me what IP was--quite a credential for a VC!)

Other Bessemer investors noticed how much more pleasant my life was with a road map, and so they adopted and enhanced the methodology themselves, with great results.

Obviously, my road map in 1992 was way too broad to be effective today, when the volume of startups and investors demand a much higher degree of specialization. Along the way I stopped every few years to refresh the map, redirecting myself toward internet services (Keynote, Flycast, Register), then later to consumer e-commerce (eToys, BabyCenter, Blue Nile, Hotjobs). In 1999 I composed an ill-fated road map around B2B exchanges, and in this decade I have focused primarily on information security.

Each Bessemer investor's road map begins with an analysis of disruptive catalysts that have the potential to cause major displacements in our economy. Those disruptive catalysts might be technical (e.g. network vulnerabilities), demographic (e.g. aging US population), regulatory (e.g. spectrum auctions or SarbOx), psychographic (e.g. consumer concerns about security), or geopolitical (e.g. China's reception to foreign investment). The road map then lays out specific strategies, or "initiatives", to exploit the disruption.

The information security road map included many initiatives over the years. With help from our operating partners--Peter Watkins (ex Pres. McAfee), Chini Krishnan (founder Valicert) and Devesh Garg (GM, Broadcom's security business unit)--my partners (Justin Label, Jeremy Levine, Rob Stavis) and I decided to seek out companies who would address policy compliance, IPS (without false positives), spam, ID theft, spyware. For each of these intiatives we made one investment in the best team we could find attacking the problem--some were follow-on rounds (Postini, Cyota) and some were new teams that we incubated in our offices (Elemental, Determina, Infinitrust).

Perhaps the most difficult step of road map investing is knowing when to burn the map. Some of the best and worst decisions we have made over the years centered around this question of when enough was enough. We successfully exited biotech in 1993, big box retail in 1995, and etailing in 1998 before those sectors busted, but on the flip side we failed to exit telecom in 1999.

Even with a great road map, it's always necessary to maintain an open mind to great opportunistic investments (our anti-portfolio routinely reminds me of this). Nevertheless, I recommend that investors try the road map approach. And if you're an entrepreneur, I recommend that you favor working with investors who have very precisely targeted your space for investment--those investors will take less time to sell, cause less damage (maybe even help), and, if they don't invest in your deal, will likely make a competitive investment.

As for me, I believe that data security remains a robust market, but at this point Bessemer is over-allocated to the sector. So last year I crafted a new road map, but that's another post.