Hi!

While I love my winter (nothing like watching the snow fall from my warm office before a big ski day!), I am excited about the arrival of spring. The slackline is up in the back yard; new growth pops out of the garden every day. And I get to sun myself like a baby alligator, drinking my afternoon coffee outside.

Plus, summer will be here before we know it. Boulder only has three more weeks of school. This summer, Eleanor and I are heading to Yosemite. Amazingly I never went there during my six years in San Francisco. How did I miss that? Now I’m excited to see the Mecca of rock climbing in person.

Hope you’re well and have some fun plans for the summer, too.

Best regards,

David

Need to get debt or equity capital?

See two (sanitized) models that raised $45M and $7M last year.
Does your model have what it takes to convince investors?

Curious? Contact me for a demo.

Raising $45M With A Great Business Model

Last year I was involved in multiple wins with companies raising substantial equity rounds. One of those success stories was Aledade. Aledade raised $45M in a Series B1 round from such name brand investors as GV (aka Google Ventures), The University of Texas Investment Management Company (UTIMCO), the Maryland Venture Fund, McKesson Ventures, and Biomatics Capital (a fund with ties to Bill Gates).

Aledade is a great company, and the senior leadership team is quite impressive. Certainly you don’t raise $45M unless that is true. But they also succeeded because they had a great business model, and I spent substantial time with the company helping them to forecast their future operating results and boiling down the answer into summaries for investor communications.

One key to a great business model is leverage. It’s great if you can make a product relatively cheaply and sell it for a lot of money (hi, Apple!), but many modern businesses find a way to establish themselves at the center of an ecosystem where, for relatively low and relatively fixed costs they can tap into a large revenue stream. Think of Facebook: after attracting us as users, it costs Facebook relatively little to run the servers and maintain the site. Since they know so much about us they are irresistible to the massive advertising market which pays for access to us.

Last summer, the New York Times reported on Aledade and described the basic business model. Aledade participates in the massive $588B Medicare market. Their software and systems give participating doctors timely data so they can better manage health care for patients, producing better outcomes at a lower cost. Since Medicare already has cost projections for these patients, they are willing to share some of the savings with Aledade and the doctors. Thus, like Facebook, Aledade can spend a relatively small and fixed amount on technology and then tap into a revenue stream. They may save only a fraction of the total cost and receive only a fraction of that savings, but when the first number is $588B, even a small fraction of that looks attractive.

Aledade avoids the problems I sometimes see in startups attacking large markets. First, there’s the classic “if we capture just 1% of the $300 billion U.S. electricity market we’ll be a $3 billion dollar company, so these projections are conservative.” I love this one because the assertion that it’s conservative because we chose 1%, and, of course, there’s no number smaller than one. Of course there is: zero, and that’s exactly the revenue most of those companies will achieve. But Aledade is different. They have shown they can partner with groups of doctors and patients, putting themselves in the game.

Once in the game, the business model combines the best aspects of being an insurance company and using other people’s money. With insurance companies, they collect premiums and then try to spend as little as possible on your healthcare. Aledade is different. Since Medicare is funded by the federal government, Aledade just needs to beat expectations. Where an insurance company can lose money if expenses are too high, Aledade’s losses are capped at their “fixed cost” spending on technology and programs, but they are not exposed to health care costs. This creates a ratchet where Aledade has no significant downside but a fantastically huge upside.

And that’s an attractive business model. You have relatively well known operating costs to attract and spend on customers. Then revenue is more variable. if you don’t crack the code (reduce medical costs), you lose the money spent on operating costs. If you do crack the code, well, then you can expand rapidly, have a great social bottom line of reducing costs for all Americans, and you make a ton of money by bending the cost curve.

My fingers are crossed; I hope they succeed.