Milestone Matters Newsletter
Spring 2006

“A number of factors have contributed to the rebound . . . startup costs and overhead have plummeted, hardware prices have fallen, and packaged open-source software has taken the place of programming departments . . . new types of targeted advertising from companies like Yahoo and Google have allowed small companies to sell ads online without sales staffs but perhaps the biggest change in the Alley has been the shift from profligacy to one of financial discipline.”  Warren St. John, Alive And Well In Silicon Alley, The New York Times, March 12, 2006

Dear Friends, Investors and Associates:

I am still basking in the warm glow of a holiday retreat spent on a small, remote Caribbean island where my family and I return annually for a reunion. It is an-other-worldly place with little to do but delve into the mounting pile of books in one’s “to read” pile and decide which beach to lounge upon. For the high-energy types, there is tennis, scuba diving and sailing but on a low key small-scale level.
I find that it requires about four days for the adrenaline to drain from my system and, at first, I spend a good deal of time sleeping—in bed, on the beach and slumped over books after five pages or so. Then energy, born of rest rather than coffee and business buzz, returns and one can enjoy the quiet, the absence of the telephone, TV, and any pending engagements.

I spent some of my time mogul-spotting and noted that the cell phone has penetrated to even this remote idyll. Some of my vacation acquaintances appeared on the beach with cell phone firmly at ear while talking and gesticulating in the course of a conversation with a customer or perhaps a recalcitrant associate. But this intrusion was the notable exception to the relaxing ambience where grandchildren take center stage and set the playful tone of the languid days. My cell phone did not function on the island but I was tempted to feign a conversation so as to establish my bona fides as the indispensable executive. Cooler heads prevailed and I abandoned this ruse. The terrible truth is that it has taken me many years in the venture business with organizations of varying sizes to face the cruel fact that I am dispensable and that one’s partners and colleagues carry on quite well in one’s absence.

The Internet is very much a part of island life, albeit in manageable doses. In such circumstances the beauty of the Web is that it allows one to remain selectively engaged. Unlike the telephone, in 30 minutes each day, or less, one can monitor events back home and respond to questions and weigh in as one may feel compelled to do. But one need not become emotionally engaged by the point and counterpoint of business conversations.

So now I am back at what appears to be a propitious time for Milestone. This week MVP II will make its thirteenth investment in a promising marketing and media services company. This will complete the MVP II investment cycle and we will turn our attention to the nurturing of our portfolio positions and the orchestration of the most lucrative exits.
Also during April, we conducted the initial closing of MVP III - our new fund - in the amount of $28.5 million and we have plans to expand that capital base in the course of 2006.

As discussed in the Winter Newsletter, the national economic environment is robust and we remain encouraged by the flow of opportunities that we encounter.

We generally think of technologies developing in response to opportunities and known markets, but I continue to marvel at how evolving applications, enabled by the Internet, create new markets. For example, thousands of individuals can now play at the same time in massively multi-player online games and other virtual worlds. In one such world, Second Life, players create virtual houses, stores and entertainment centers that are used to sell merchandise, host parties and put on seminars.

Second Life has exploded in popularity, growing from 20,000 users a year ago to 170,000 today. Approximately 2,500 servers support a world of 32,000 virtual acres (bigger than Boston). The world started with only 64 acres and 300 paying customers in 2003. More than $5 million of goods and services are traded between Second Life users each month as individuals direct their virtual characters (avatars) to design and sell clothes, provide lessons on professional services, and conduct a number of other activities that occur in the real world. According to online gaming services firm IGE Ltd, players spent hundreds of millions of dollars in real money on virtual goods and services last year. Thinking of the ramifications – virtual property rights, rental properties, stock exchanges – quickly frazzles my mind and returns me to the real beach in front of me.

We are also witnessing the potential resuscitation of tired old markets through technology-enabled extensions. Just as the pundits reached the consensus that network television is a spent force, TV executives are in discussions to hugely expand their reach by delivering their fare via wireless networks to cell phones. Will consumers watch TV on their PDAs? (They do in Asia). Will advertisers pay for access to them? I think so.

Milestone, with ample liquidity, finds itself in the middle of these challenging times and exciting opportunities. We’ll keep you apprised as we see them unfold from our New York perspective.

With best wishes for a pleasant summer,

Edwin A. Goodman
General Partner
 

Gene-IT, Inc. (Westborough, MA recently released a major upgrade to its biological sequence search solution for bio-pharmaceutical researchers and intellectual property professionals. GenomeQuest™ 3.0 now accepts text or sequence queries to search continuously-updated sequence databases. The new release includes over 25 million sequences found in more than 148,000 patent documents, consistently annotated and organized. An additional 278,000 patent documents are referenced and organized into 85,000 patent families. The new release also adds search methods to find SNPs, Motifs, RNAi Probes, Diagnostic Primers, and Micro Array targets. Recent customer wins include Monsanto, CIPO (Canadian patent office) and Regeneron.

In Q1 2006, ExpertPlan, Inc., hired Julian Onorato as chief operating officer and executive vice president. Mr. Onorato has 25 years of experience within the financial services industry, including more than a decade in retirement planning services. He joins ExpertPlan from Automatic Data Processing, where, as Senior Vice President of Operations and Technical Services, he oversaw the delivery of products and services across five nationwide service centers. ExpertPlan provides Internet-based retirement plan administration and recordkeeping services to small businesses on behalf of broker dealers, banks, insurance companies, mutual fund complexes and third party administrators.

Opportunities in Healthcare Information Technology

Milestone is spending more time on the healthcare information technology (HCIT) sector.  A third of MVP II’s portfolio companies are HCIT companies, including three serving the pharmaceutical and biotechnology industries (Medidata Solutions, Octagon Research, and Gene-IT) and one that capitalized on the consumer directed healthcare trend (CareGain, which Fiserv acquired)

In MVP III, Milestone believes it will see a growing number of attractive HCIT investment opportunities outside of its preferred pharmaceutical and biotechnology IT niche. The convergence of spiraling healthcare costs, the growing government and industry mandates to apply technology, and the increasing potential of Internet-based applications should spur demand and encourage new company formations. 

Merger and acquisition activity, especially in the healthcare consulting, electronic health records (EHRs) and practice management (PM) sub-sectors, indicates the major technology players are trying to position themselves favorably for the growing HCIT opportunity.  For example, Siemens acquired Shared Medical Systems (2000), GE acquired Medicalogic (2003) and IDX (2005), Accenture acquired Cap Gemini’s North American healthcare practice (2005), IBM acquired Healthlink (2005), Agfa acquired GWI (2005), and Allscripts acquired A4 (2006).

Other industry activity indicates positive momentum.  For example, Intuit recently announced that it will jointly develop and distribute with Ingenix, the profitable information services subsidiary of UnitedHealth, consumer healthcare management software.   And while healthcare IT stocks haven’t beaten the software-as-a-service category, they have substantially outperformed the S&P 500 since January 2005.

It is sobering to keep in mind that the healthcare industry has not sought to automate administrative and operational inefficiencies to the same extent as other industries.  For example, Gartner reports that the healthcare industry as a whole spends considerably less on information technology as a percent of revenue than other industries (2% for healthcare versus 5% in other industries).  In addition, the HCIT sector has performed, at best, inconsistently for investors, particularly venture capitalists, over the past few decades.  While GMIS, Shared Medical, Meditech, HBOC, Cerner, Emdeon (formerly WebMD), Eclipsys, and emerging players such as Visicu and Emageon, have become substantial companies, few enterprises relative to the size of the sector have succeeded.  HCIT’s historical challenges include the following:
 

• Despite the industry’s enormous size, hospitals and doctors are extremely fragmented.  It is therefore difficult for vendors to acquire customers cost effectively.

• Doctors and hospitals are, in effect, low margin service providers.  Compounding this problem, many hospitals are not-for-profit and capital intensive.

• Given the structural challenges to automation, the industry has never attracted the best and brightest IT professionals.  In addition, most participants, including payors, have arcane, cobbled together systems that are difficult to remove and to replace. 

• Many of the early attempts to automate the clinic required doctors and nurses to change their behavior.  Until vendors figure out how to more effectively adapt their technology to clinical practices, adoption will proceed slowly. 

• Frequently, healthcare automation projects promise system-wide benefits among all of the stakeholders (hospitals, doctors, payors, patients, government), but the investment burden often falls disproportionately on one group.  This dynamic slows adoption.

• Also, the lack of government mandated standards for EHRs has slowed adoption of interoperable technologies.  In instances where the government has mandated data standards, for example the FDA’s CDISC (Clinical Data Interchange Standards Consortium) standard, automation has followed rapidly.

For these and many other reasons, Milestone intends to be mindful of the challenges inherent in traditional HCIT, while continuing to pursue opportunities in healthcare consumerism, information technology for the pharmaceutical and biotechnology industries, wireless patient monitoring, and compliance automation.
-------Todd T. Pietri

                           Source: Chronicle of Higher Education

• Over the past 20 years, U.S. net job creation exceeded the total number of employed today in France

• Last year the U.S. graduated more sports exercise majors than electrical engineers

About Milestone Venture Partners

Milestone is an early stage venture capital fund with $42 million under management. We focus on technology-enhanced service businesses in the New York metropolitan area. Companies that we find attractive possess the nucleus of an exceptional management team, an attractive business model, and a compelling market opportunity.



Milestone Venture Partners
551 Madison Avenue, 7th Floor
New York, NY 10022 
V: [212] 223 7400
F: [212] 223 0315
www.milestonevp.com

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