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Milestone Matters - Fall 2003 Newsletter"If you look up, you only see scarred pines, devastation and you miss the point. If you look down, there's a profusion of damned near everything growing out of the ground." - Allen Morgan, General Partner, Mayfield, The Wall Street Journal, August 28, 2003Editor's Corner
Dear Friends, Investors and Associates: Having just returned from a brief sojourn in Sicily with my wife and friends, I am still recovering. It is not jet lag that troubles but the culture lag, for want of a better term. To leave the urban intensity of NYC and the venture business, cope with the security forces at JFK and then to find oneself, a scant 15 hours later, in the bucolic surroundings of a remote villa in the Sicilian hills, is extraordinary. At first, I am there but not really. I experience acute media withdrawal, as I must survive on perhaps one International Herald Tribune per week and no radio or TV. After a few days, one makes the adjustment and begins to enjoy the quiet rhythm of days of sunning oneself by the pool, hiking, visiting Greek and Roman ruins, reading the books that have stacked up in one's good intentions pile and eating the elixir of fresh pasta in infinite varieties. At the point when one ponders a change to this lifestyle full time, it is time to brave the security apparatus in Catania airport and take flight again via Milan for JFK. One advantage of travel is the detachment it offers and the perspective it lends to the exigencies of the moment. I returned to find much unchanged and read my summer letter to you with the sad realization that the big troublesome issues are still upon us -- Iraq and the Israeli-Palestinian conflict. It is hard to discern any encouraging changes, and I suspect, an absence of a year or more would be required to bring changes in such complex and stubborn political conflicts into relief. On the margins however, there are some encouraging signs as the Libyans have chosen to re-enter the world community by agreeing to a huge fine in order to have economic sanctions lifted and the Iranians, in the wake of much resistance, agreed to allow nuclear site inspections and to suspend the manufacture of enriched uranium. And Kim Jong-il, now appears prepared to accept "assurances" of non-aggression from the US as a prerequisite to further discussions. So, we are grateful for these modest gains and very happy about the marked improvement on the home economic front and within the venture business that have accelerated over the past few months. It now appears that GDP growth reached a surprising 7.2% over the summer months. Job creation has just recommenced, albeit, at a slow pace, which is frustrating, particularly for the unemployed. Ironically, this reflects, in part, the US economy's success achieved by the application of technology which has greatly boosted worker productivity. During the third quarter, the growth in labor productivity, which is the margin by which the growth in GDP exceeds the growth in the number of hours worked, may well surpass last spring's robust 7%. In addition, the order backlogs for computers and related products have continued to strengthen in the course of a rebound which began in the first calendar quarter. Information technology financings, still way down from the aberrant peak of 2000, have also rebounded to "normal activity levels", approaching the 1997 pace. According to a recent E&Y survey, there will be about 1,100 such financings during 2003 versus 1,261 in 1997. Also, in the third quarter of this year, venture financing increased about 13% over the prior quarter -- the first quarter-to-quarter advance since the 4th quarter of 1999. We are also pleased to note the quickening pulse of the heretofore somnolent IPO market. For the first nine months of 2003, thirty-three venture-backed companies issued shares to the public of which eleven were within the IT space. Of all these issues, the price of one remains unchanged at this writing, four fell from their respective issue price levels and twenty-eight have risen in the buoyant stock market. All this bodes well as does the fact that an additional thirty-five venture-backed companies have registered with the SEC to launch IPOs. In combination with the increase in M&A activity, this trend in IPO filings provides a nurturing environment for some of our more mature growing companies. On the new deal front, we continue to review a number of interesting opportunities that fall within Milestone's ambit and continue to operate within a tightfisted private equity market which favors the aggressive liquid investor. Accordingly, we remain optimistic about the balance of 2003 and look forward to accelerating improvements in the economic environment and within the venture market in the course of 2004. As always, we are very appreciative of your support and look forward to your comments and questions.Yours truly, General Partner
MVP II Portfolio News Milestone invested in Navtrak, Inc. of Salisbury, MD on September 29, 2003. Navtrak utilizes the Internet, the Global Positioning System (GPS), and wireless networks to provide automatic vehicle tracking and location-based information services to operators of commercial fleets. Milestone invested $500,000 as part of a $2.9 million expansion financing with Ovation Capital, Himalaya Capital and Silicon Alley Venture Partners. Todd Pietri will serve on the Board of Directors. Health Care and Information TechnologyThe U.S. spends more than $1.4 trillion dollars each year on health care or 14.1% of GDP, an astounding number! Of this amount, more than $450 billion or 25% of total spending is for administration, in many ways an even more astounding number. This is more than enough to provide coverage for the more than 40 million U.S. uninsured and, as a percentage, almost double what Canada spends for administration for its single payer (government) health care system. Yet, as anyone who has dealt with the U.S. system knows, this immense amount of administrative spending mainly produces immense amounts of frustration and exasperation. Practitioners (doctors and hospitals) are the most dissatisfied (well over 90%), followed by insurance companies, then by companies (who pay the bills), and, finally, by consumers (about 57% are dissatisfied according to surveys) who are the least dissatisfied. That consumers are the least dissatisfied is not too surprising, in that health care is an unique sector of our economy where the consumer is not directly paying the bill, or at least doesn't think he is. If the above numbers don't make it clear that the health care system has to change, then the rapidly escalating cost of health insurance (estimated to rise 12-14% this year) most certainly does. The last great idea for controlling costs, the Health Maintenance Organization (HMO) and its offspring, the Preferred Provider Organization (PPO), have failed. Their apparent success was mainly due to cost shifting and draconian controls on medical treatment. The former was rendered inoperative when everyone joined one of these plans (not necessarily voluntarily), and the latter collapsed under consumer backlash and subsequent government regulation, otherwise known as the "Consumers' Bill of Rights." So, we have ended up in the worst possible of all places, immense bureaucracy (even if private) and no control over costs or consumption. Needless to say, most of the discussion in Washington about drug benefits for the elderly and foreign drug imports doesn't begin to address the real issues confronting the health care system. But, there is action underneath the media radar screen on what is known as consumer directed health care (CDHC). The fundamental idea is simple in the extreme; give the consumer an economic stake in the game and he will in fact become mindful of what health care services he consumes and their costs. This is especially effective when used in conjunction with existing health plan provider networks. Under a CDHC plan, Joe Employee is granted x dollars per year to cover his health care costs. This year, the IRS ruled that any money not spent by an employee in a CDHC plan in one year may be carried over to the next for the employee's health costs without tax consequences to him. Legislation has been introduced, as part of the drug benefits bill, to also make this benefit portable between companies without any tax and to let any money not spent be invested (a health care IRA). Any gains would not be taxable but the money would have to be spent on medical treatment. Together, these changes go a long way toward the possibility of restoring some sanity to a system badly in need of it. Objections made to this obviously simple (critics say simple-minded) approach are many. The most frequently cited is adverse selection, i.e. that young, healthy consumers will benefit at the expense of the chronically ill. This might be true if everyone were forced to join a poorly designed CDHC plan. In most companies where such plans have been implemented, joining is voluntary. In any case, motivating young, healthy consumers not to use their benefits just because they are there is a very good way to reduce costs. Also, money for preventive medicine usually must be consumed, not rolled over. Well-designed CDHC plans have generally produced an 8-10% reduction in costs. The vast majority of members in the plans one year re-up for the next, and total membership in any given CDHC plan rises over time. It appears to be a win-win for consumers and companies. Perhaps the most credible objection to CDHC is that consumers are not and cannot be knowledgeable enough about healthcare to make the relevant judgments. Thanks to the Internet, this is no longer true! Indeed, one expert in the field posits that when one in six consumers is knowledgeable, then the market place is knowledgeable and that health care is very near this tipping point. I would bet that we all know someone who has used the Internet to research a disease or a surgical procedure and has become an "annoying" expert, especially to some doctors. But for a CDHC plan to be effective, the insurance company needs to provide the required consumer information in an understandable and accessible form. Good progress has been made, especially for generic drugs, but the battle here will be long and hard. Have you ever seen a doctor post a price list or any medical society provide quality information? The Internet is also likely to be the key to attacking that $425 billion spent on administrative costs. One egregious example: Price Waterhouse Coopers, in a recent study, estimated that for every hour spent on patient treatment in home health care services, another 48 minutes is spent on paperwork (and it is mostly paper)! Yet, most home health care providers are small organizations which cannot afford the requisite IT investment to automate this process. This makes them an ideal market for Application Service Providers (ASPs), since most medical forms (and therefore the information required) are standardized and the widely dispersed providers can be easily provided IT services via the Internet. Nor is it only
small concerns that need to upgrade their IT services and skills.
The health care industry is generally considered to be at
least 5-7 years behind more advanced industries in their use of IT.
Yet, as in the example above, the standardization of
information required, the duplication of administrative processes,
the benefits of automated error checking and the sheer volume of the
paperwork make the increased use of information technology in
healthcare a compelling place for investment. As a result, Milestone
is actively pursuing opportunities in health care IT.
Milestone Venture Partners Investing in early Stage Enterprise Information Technology Companies in the New York Metropolitan Area
551 Madison Avenue, 7th Floor, New York, NY 10022 V: [212] 223 7400 F: [212] 223 0315
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About | Approach | Management Team | Advisory Board | Portfolio | Firm News | Contact551 Madison Avenue, 7th Floor, New York, NY 10022 V: [212] 223 7400 F: [212] 223 0315 |
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