June 2, 2025 · 6:44 am

European Venture Capital Scene: Spotlight on Italy…

Last week while traveling in Italy the rightwing government codified into law severe restrictions limiting the eligibility requirements for Americans looking to secure Italian passports. How rich is it that given Italy struggles with the most acute population decline in Europe? About 25% of the 59 million Italians are over 65 years old. It is estimated that there are between 16 – 20 million Americans of Italian heritage, many now outraged as they sought possible escape routes back to Italy.

According to Italy’s Foreign Minister, the number of Italians living abroad increased 40% to 6.4 million over the past decade, which is now potentially going to reverse as many look for refuge. More than 191k Italians left just in 2024. The juxtaposition of an American Pope holding his first mass last week in Rome, extolling the virtues of immigration, was prophetic.

Obviously, the global chaos brought on by the new U.S. administration is very evident in Europe. While the distance from Rome to Kyiv is just over 1,000 miles, the war felt much closer. In addition to the movement of people, capital is in flight. The U.S. stock market has consistently and comfortably out-performed European indices, nearly doubling in returns over the past dozen plus years, but that has not been the case for the past several months.

Comparison of European and U.S. Stock Indices

Source: Morningstar (May 2025)

In addition to a dramatic weakening of the U.S. dollar, which has declined nearly 8% since the start of 2025, U.S. benchmark equity indices have declined. In 1Q25, the Morningstar Europe Index increased 6% while the Morningstar U.S. Market Index dropped 8.5% (in euros). Year-to-date through May the European Index has increased 11% while the U.S. Index has dropped nearly 9%, signaling a profound rotation of capital away from the U.S. The Hang Seng Index in Hong Kong is up a remarkable 19+% year-to-date, while the Japanese Nikkei 225 Index has shed more than 5% of its value.

Global Stock Indices Performance (YTD)

Source: VettaFi Advisor Perspectives

While there are undoubtedly numerous contributing factors to account for the bubble chart below, the inability to consistently access sufficient capital on reasonable terms must play a role. The juxtaposition of the U.S. and Europe when comparing scaled companies is stark and profound. There is not one scaled European start-up in the past 50 years to eclipse $100 billion in market value, while there are six companies worth more than $1 trillion each in the U.S. over that same period. There are thirteen scaled start-ups in Europe worth more than $10 billion with an aggregate value of ~$400 billion. All the scaled U.S. start-ups valued at over $10 billion total more than $30 trillion in value or 70x those in Europe.  

Number of Start-Ups to Scale to $10+ Billion of Market Capitalization

Source: Andrew McAfee, Wall Street Journal

The situation is just as acute when looking only at private technology companies. There are only 107 such companies in Europe and they are valued at $333 billion, according to an analysis by the Wall Street Journal, as compared to 690 companies worth $2.5+ trillion in the U.S. Globally, only four of the top 50 technology companies are based in Europe. The lack of scaled technology start-ups reflects, in part, the patch work nature of regulations and standards across Europe.

Number of Private Technology Companies Valued at $1.0+ Billion

Source: CB Insights, Wall Street Journal

According to the International Monetary Fund, 1985 is the average year of the founding of the top 10 public U.S. companies, while in Europe it is 1911, further underscoring the sclerotic nature of Corporate Europe. Furthermore, over the past 25 years the hourly industrial output of the European worker declined from 95% of that of the U.S. employee to 80%.

Notwithstanding this landscape, the private equity and venture capital sectors have seen a recent modest renaissance in Europe. While still a small fraction of the investment activity in the U.S. ($209 billion was invested in 2024 alone), total European venture capital investment activity tends to run about only 20% annually of that in the U.S. Recent tariff headwinds, regional differences by country, and the absence of a mature and well-heeled venture capital industry has not served Europe well. The United Kingdom continues to play a leadership role while Italy ranks tenth of the 44 countries with capital cities on the European continent.  

Venture Capital Investment by Country (2023-2024)

Source: Dealroom.co

According to an analysis by Gianni & Origoni, an international law firm, €8.6 billion has been invested over the past decade in Italian start-ups, with €1.1 billion invested in 628 companies just in 2024. Much of this momentum has been attributed to a concerted and coordinated effort to develop a more robust entrepreneurial ecosystem.  Notably, Italy passed the Competition Law of December 2024 several months ago which instituted a tax exemption on capital gains from venture capital investments for pension funds with 5% of their overall portfolio being in venture capital, stepping up to 10% in 2026.

Graduation Rate to Next Round of Venture Capital

Source: Dealroom.co

Perhaps not surprisingly, Italian venture capitalists have tended to focus on “hard” advanced technologies grounded in substantive academic research and are less focused on consumer-centric sectors such as advertising, ecommerce, and media.

Italian Venture Capital Investment by Sector (2024)

Source: Dealroom.co

The size of financing rounds also reflects the developing nature of the European venture capital sector and stand in stark contrast to the U.S. The median round size for all rounds before Venture Growth rounds is single digit million euros, according to Pitchbook. For context, the 2024 average round size for Early-Stage U.S. venture capital financings was $10.1 million as compared to the median European Early-Stage financing of €1.8 million (~$2.0 million). Notably, round sizes in 1Q25 across all stages have increased over 2024 levels.

Median Round Size by Stage

Source: Pitchbook

Other than for the Venture Growth stage, valuations across the board have largely stayed flat in 1Q25 when compared to 2024, perhaps reflecting some investor risk aversion. The median pre-money valuation for European Early-Stage rounds in 1Q25 was €6.2 billion, suggesting investors acquired ~23% of the companies in those financings (amount of founder dilution is closely monitored). The median pre-money valuation for U.S. Early-Stage companies in 2024 was $47.6 million, which is more in line with the €44.5 million for European Venture Growth stage companies – two subsequent rounds later.

Median Pre-Money Valuations by Stage

Source: Pitchbook

There was one other notable demographic announcement by the Italian government last week. Italy’s constitutional court reaffirmed the ban on single women from having in vitro fertilization (IVF) given that they are not a “traditional” family. This flies in the face of Prime Minister Meloni’s stated concerns about an aging and shrinking population, herself raised by a single mother. Importantly, and in a separate but related ruling, that same court codified that women in a same-sex relationship can both be recognized as the parents in an IVF procedure. Go figure.

And please join us for our next quarterly Expert Roundtable Series webinar on June 10, 2025, at noon ET. And subscribe here to follow other news and insights from Flare Capital Partners.

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May 14, 2025 · 10:07 am

Cohere Health’s Series C: Case Study…

McKinsey estimates that there is nearly $1 trillion of healthcare administrative expenses each year, of which $200 billion is just on financial transactions. There are a staggering nine billion medical claims processed each year. A hornet’s nest of policies and procedures have evolved to manage these expenses from complex formularies, deductibles, co-pays, and prior authorizations (PA). Just in 2023, there were over 50 million PAs, 99% of which were for procedures for Medicare Advantage members.

It was this market opportunity that Cohere Health was created to address. The vision of the company has always been to drive deeper payer/provider collaboration and in so doing create a “touchless authorization” business model. The company has successfully commercialized a suite of next-generation PA products that significantly rearchitect the way care pathways are delivered. Recent advances in AI have further catalyzed a drive to meaningfully improve clinical and administrative efficiencies for payers. In order to continue its rapid scaling and development of additional products, Cohere Health today announced a $90 million Series C financing, led by Temasek, a close partner of Flare Capital.

The high level of new investor interest was due to a few factors. The leadership team is complete and well-balanced with deep clinical expertise and impressive technical credentials. A truism: great people will attract capital. Clearly, a large and obvious market opportunity as AI rearchitects burdensome, expensive administrative workflows was critical. Being a recognized innovative category leader with a relevant and sophisticated investor syndicate going up against legacy vendors ensured that potential clients felt that they had to engage with the company to see the “art of the possible,” which generated a significant sales pipeline with well-heeled impressive clients.  

Given the macro headwinds, capital is more expensive and harder to access, leading to an “emerging winners” phase of this funding cycle as many early-stage companies will simply run out of gas. It appears that 2025 is on track to see approximately $12 billion invested in private healthcare technology companies, which is significantly less than nearly $30 billion in 2021 but more in line with the $10+ billion in 2023 and 2024.

Traditional approaches to PA are recognized by most providers as one of the greatest points of friction that disrupts workflows, negatively impacts patient outcomes, fosters distrust between payers and providers, and generates billions of dollars in excess administrative costs each year. As a result, physicians/staff are estimated to spend up to 15 hours per week on PAs and nearly 85% of them report the burden of PAs as either high or extremely high. In addition to the administrative burden of the PA process, 30% – 40% of patients receive treatment that is not in accordance with evidence-based guidelines.

Furthermore, according to a recent American Medical Association survey, 90% of respondents felt that PAs led to greater utilization of healthcare resources due to increased office and emergency room visits, ineffective treatments due to inappropriate denials, and increased hospitalization.

A principle point of consternation and member frustration is the level of denials, which according to the Kaiser Family Foundation was 6.4% of all PA requests in 2023. Of the 3.2 million denials for Medicare Advantage, only 11.7% were appealed, of which 80% were eventually approved. There was significant denial rate variability by payer from 3.5% to 13.6%. CMS denied a much higher 28.8% of requests for traditional Medicare. This level of variance highlights the need for an intelligent automated platform that can drive more consistent clinical decisions.

There were 425 million medical claims in 2023 for plans that operated on the ACA marketplace, of which 92% were in network with a denial rate of 19%. More than 37% of out-of-network claims were denied, leading to an overall 20% denial rate for ACA claims.

Payers with Highest Levels of Denial Rates for ACA In-Network Claims

Source: Kaiser Family Foundation

Today, Cohere Health has four billion patient claims, 20 million unique patient profiles, over 4,000 codified policies and medical guidelines, more than 250 clinical models, 600,000 provider profiles, and takes in more than 35 million clinical documents annually to power its AI platform.  The company now processes 37,000 clinical decisions each day, which further trains its clinical models. Of particular note, the agentic capabilities find and complete missing gaps in the clinical data right up front in the patient’s journey, further improving the relevance of the chosen care pathway and lowering costs.

Clearly, this is an environment where ROI for vendor selection matters profoundly. Over the nearly 5,000 reimbursement codes, it is estimated that PAs have a cost of $40 – $50 per submission for payers and $20 – $30 for providers given the significant need for expert labor to adjudicate. There are generally two sources of savings: administrative cost reduction and lower medical expenses. The administrative cost savings generate a 3 – 4x ROI when utilizing the Cohere Health platform and as much as 7 – 10x ROI when delegating all PAs to the company.

There are significant industry tailwinds given the recently introduced regulations which are pushing important new utilization management (UM) initiatives by January 2026 and January 2027. As providers further automate their workflows and increase the volume of clinical documentation, payers must keep up by implementing sophisticated AI tools.  Some payers will choose to make incremental investments to remain compliant in the short-term versus fundamentally overhauling their technology platforms today.

There is evidence that regional payers are struggling to manage their Medicare Advantage members so they will look to emerging vendors like Cohere Health for a comprehensive PA platform. Another significant market tailwind has been the advent of new and expensive therapies (e.g., GLP-1) to treat complex diseases, pushing payers to deploy more aggressive administrative UM solutions. Additionally, Cohere Health’s products have been leveraged to serve several new value-based clients as payers push risk to entities closest to patients to better control costs.

Cohere Health is building to an “ambient UM” vision whereby auto-alerts will be triggered right in the electronic medical record. The critical differentiation for the company’s products is the level of accurate, appropriate clinical insights generated by the AI engine. Narrower solutions may “automate without insights,” failing to fully understand nuanced issues of compliance and auditability, which are issues payers care deeply about. The complexity of the clinical environment is exacerbated by varying benefit plans and coverage guidelines across payers’ products.

Typically, administrative costs are reduced by 20% to 50%, to say nothing of improved quality and outcomes for patients. And the medical expense savings are dramatic with managed populations realizing upwards of 15% savings, per company estimates. With this financing, the management team expects to build additional capabilities around care management, payment accuracy, clinical validation, and appeals.

AI Product Roadmap

Additionally, the company is seeing upwards of 70% faster access to patient care, a greater than 60% reduction in denials, and a 18% to 43% decline in adverse events, principally due to appropriate clinical “nudges.” Collapsing the time to process claims also significantly improves working capital dynamics for the provider. Of particular interest to the new Administration is the ability to quickly detect fraud, waste, and abuse via deeper understanding of practice patterns (i.e., history of over-ordering, etc.).

Such a significant financing should “authorize” Cohere Health to be the emerging winner in this important category.

And please join us for our next quarterly Expert Roundtable Series webinar on June 10, 2025, at noon ET. And subscribe here to follow other news and insights from Flare Capital Partners.

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May 5, 2025 · 6:08 am

Disabling Safety Nets for the Disabled…

The World Health Organization estimates that there are 1.3 billion people who are disabled globally or nearly one in six of us. People living with disabilities tend to have shorter life spans, higher mortality rates, and confront health inequities in virtually every facet of their lives. More than 80% live in low- and middle-income countries, further exacerbating their conditions.

In 2023 the Pew Research Center estimated that there were 42.5 million Americans living with disabilities, while in mid-2024 the Centers for Disease Control and Prevention (CDC) released its updated Disability and Health Data System report which tallied 70 million Americans experienced some level of disability in 2022, likely made worse by Covid. Nearly 44% of Americans older than 65 years of age reported being disabled.

The Social Security Administration (SSA) has 14 broad categories of disability with detailed medical criteria for each impairment, including musculoskeletal, neurological and mental, cardiovascular, hematological, congenital, and oncological disorders. The Committee on the Rights of Persons with Disabilities considers those with disabilities to “have long-term physical, mental, intellectual or sensory impairment which in interaction with various barriers may hinder their full and effective participation in society on an equal basis with others.” Many definitions of disability often turn on whether the individual is able to be employed.

Over the past half century or so numerous and foundational government support systems and safety nets have been created to assist those with disabilities. The SSA has two broad programs: the Social Security disability insurance program (8.7 million beneficiaries, $152 billion in payments in 2023) and the Supplemental Security Income program (7.4 million beneficiaries, $61 billion in payments).

In 1964 the American with Disabilities Act was passed to prevent discrimination across most aspects of public life (access to education, healthcare, employment, transportation, etc). Notwithstanding those assurances, many of these efforts may well find themselves in the crosshairs of the new Administration’s federal budget which could either be eliminated or severely underfunded.

No doubt there is a looming federal funding crisis that will squeeze funds from important social benefits in order to service the extraordinary debt balances. Most recent estimates are that the U.S. national debt is $36.2 trillion or $106k per person. Interestingly, the percent of U.S. debt to GDP has skyrocketed to be nearly 120% (left hand axis) while overall S&P 500 corporate debt levels have glided down to be a more manageable 10% of net debt to market capitalization.

Debt Levels

Source: Federal Reserve Bank, FactSet

While there is much consternation over the new Administration’s approach and budget priorities, the White House announcement late last week that the $557 billion of “nondefense discretionary spending” would be reduced by $163 billion in the 2026 budget (a 22.6% reduction from 2025 budget levels) sent tremors through the community advocating on behalf of the disabled. This category of spending includes funding for education, transportation, and public health. Federal funds are to be redeployed for enhanced boarder security and defense. Obviously, all initiatives that address issues of equity and inclusion, which often times directly benefit the disable, are being eliminated.

This reallocation of federal resources is historic, certainly when considering federal spending as a percentage of GDP. What makes this so jarring, in addition to the chaos and haste, is that this spending is for the direct benefit of American citizens, often those most in need without proper and vocal advocacy.  These proposals strike many as punitive and, at times, somewhat arbitrary.

Nondefense Discretionary Spending as Percent of GDP

Source: Center for American Progress

Recently, the Labor Department released its Persons with a Disability labor report which showed that in 2024 the employment to total population percent was 22.7% for those with disabilities versus 65.5% for those without a disability. The disabled unemployment rate was 7.5% last year as compared to 3.8% for those without a disability. Disabled workers were twice as likely to be part-time and 9.2% identified as self-employed versus 6.0% for those without disabilities. Arguably, employment status for the disabled appears to be more precarious. Surprisingly, the April 2025 employment report registered a resilient 177k new jobs created and an unchanged overall unemployment rate of 4.2%, but is expected to weaken considerably over the next several months.

One of the more controversial elements of the Fair Labor Standards Act (1938) was the creation of Section 14 (c) certificates which allowed employers to compensate qualified disabled employees substantially below minimum wage. Proponents argued that such accommodations were efforts to more effectively “mainstream” disabled employees while not compelling employers to compensate disabled employees who were thought to be less productive. In mid-2024 these employees were earning on average $3.46/hour as compared to the federal minimum wage of $7.25. Labor Department data for 2023 and 2024 revealed that 10% of 14 (c) employees earned less than $1.00/hour. Even though the Biden Administration sought to eliminate this program, there were still nearly 40k such employees at the end of 2024.

Number of Disabled Employees Earning Less Than Minimum Wage

Source: Department of Labor

The National Disability Institute estimated in 2020 that the incremental cost per household with someone who is disabled was 28% greater (~$17.7k) than that of a household without a disabled resident. The CDC’s most recent although dated analysis from 2015 calculated that 36% of overall U.S. healthcare expenditures was “disability-associated,” which was a staggering $686 billion. The expense burden showed significant variance by state and was most expensive in the Northeast. Overall, the average expenditure per disabled person was $11.6k. Depending on the level of disability, the Federal Reserve estimates that the “earnings penalty” per household to be from 15% – 70%.

Disability-Associated Healthcare Expenditures per Capita

Source: Centers for Disease Control and Prevention  

Additionally, the incremental disease burden on the disabled is significant.  The direct and indirect costs are often quite evident, measurable, and addressable. More insidious are the hidden costs such as unspoken discrimination or unpaid work or job opportunities never afforded the disabled. The Federal Reserve estimates that these hidden costs may account for as much as 40% of the overall difference in earnings for households with and without a disabled resident.

Americans with Disabilities

Source: Centers for Disease Control and Prevention (Behavioral Risk Factor Surveillance)

Accessing healthcare for the disabled is challenging across all dimensions, clearly. As further evidence of that the Department of Justice just last week alleged that several national health insurers paid hundreds of millions of dollars in kick-backs to brokers to drive enrollment and to steer (presumably less profitable) disabled applicants away from their plans.

The promise of AI to meaningfully improve communication, access, and navigation of the world around disabled people is particularly compelling. A recent McKinsey Market Research report estimated that the 2023 market value of the DisabilityTech sector was $25 billion, increasing to $37 billion by 2029. The Howe Innovation Center at the Perkins School for the Blind has identified more than 1,500 companies that are developing products specifically for those with disabilities.

Remarkable.org, a leading incubator of companies in the DisabilityTech sector, worked with over 130 start-ups since its founding in 2016 and is currently supporting 57 start-ups. Industry estimates are that $4 billion has been invested in companies in the DisabilityTech sector, although that is likely over-stated. More broadly, Tracxn estimates that $9.6 billion has been invested privately in 1,120 companies globally in the Assistive Tech sector.

According to Access2Funding, an organization to assist disabled founders, an analysis of U.K. founders determined that disabled founders are 400 times less likely to successfully raise capital. To address that market need, there are now several venture capital firms dedicated to opportunities in the DisabilityTech sector such as Enable Ventures, Difference Partners, and K Ventures.

Since the dawn of civilization there have been 108 billion people. It is estimated that the amount of food required over the next 40 years will be equivalent to what was consumed over the past 8,000 years. The pace of technological advancements is accelerating at rates never seen before, much less contemplated, to support this growth. Coincident with these advances there is a dramatic growth in population. One can only hope that technology will enable the disable to function at comparable levels to others and enjoy all that life has to offer.

And if you squint below, BofA anticipates “Immortality” will be achieved the middle of this century…

Technology Advances over Time

Source: BofA Global Economics Research

And please join us for our next quarterly Expert Roundtable Series webinar on June 10, 2025, at noon ET. And subscribe here to follow other news and insights from Flare Capital Partners.

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April 14, 2025 · 6:11 am

Can Healthcare Power Through…

You better read this soon as things could quickly change…

Long ago (i.e., two weeks ago) the 1Q25 stock market performance data were announced with the NASDAQ declining 10.4%, which was more than twice as bad as the 4.6% drop in the S&P 500 index. In stark contrast the Morgan Stanley World index (excluding the US markets) increased 5.5% – and this was before Liberation Day. Unfortunately, even White Lotus could not help the Thailand stock market which dropped 17.5%, by far the worst country stock market performance in 1Q25.

According to FactSet, March 2025 was the worst performing month since December 2022, evaporating more than $3 trillion of S&P 500 market capitalization…and that was before the implementation of the “beautiful” tariffs. Even the VIX Index, which is a measure of volatility, was volatile, hitting a near-record 60 last week only to drop by nearly 40% in one day to settle at 33.

S&P 500 Index Volatility

Source: FactSet, Axios Visuals

This isn’t just a “top 1%” issue. Consumer sentiment appears to be collapsing in real time across all income levels, with spiking anxiety about job losses and deteriorating economic conditions. Such rapid movements have historically indicated the onset of a recession. Ominously, total U.S. household debt reached $18 trillion at the end of 2024 according to the Federal Reserve Bank of New York, with more than 100 million having bad or no credit according to an analysis by Experian.

Consumer Sentiment

Source: University of Michigan

The same University of Michigan survey tallied a dramatic spike in consumer inflation expectations – shockingly, far worse than at the onset of the pandemic. Driving many of these concerns is the ever-rising cost of healthcare. According to a recent Gallup and West Health survey, 11% of respondents could not afford required medications in the past three months and more than one-third said that they could not pay for medical care were they to need it, citing costs.

Consumer Inflation Expectations

Source: University of Michigan

In addition to turmoil in the bond market with investors selling U.S. treasuries, which are considered the ultimate safe haven asset, flashing red lights are evident in the oil markets. When economic conditions are poised to deteriorate, one would expect the price of oil to drop. Since the inauguration three months ago, the price of West Texas Intermediate crude has declined 27% and is now below the price where existing oil wells can drill profitably, according to the Federal Bank of Dallas.

Price of Highest Quality Crude Oil Futures

Source: Bloomberg

Just as precipitous has been the decline in shipping costs from Shanghai, perhaps not surprising given the targeted nature of the tariffs which now sit at ~125% on goods coming from China. The spot price on containers bound for the US has declined nearly 40% since the November elections. Fitch Ratings observed that 43% of goods from China are deemed “intermediate” which means that final assembly is conducted in the US, which will further undermine domestic manufacturing.

Container Shipping Costs from China

Source: Drewry World Container Index

When might we see this deterioration show up in the quarterly venture capital investment activity? Pitchbook recently released the 1Q25 “First Look” data and it is decidedly mixed (and complicated by the $40 billion round at OpenAI). For the quarter, $91.5 billion was invested in 3,003 companies (or really $51.5 billion in 3,002 companies ex-OpenAI) as compared to $77.2 billion and 3,369 in 4Q24 and $42.4 billion in 3,995 companies in 1Q24, respectively. Clearly, the volume of activity is decelerating – and across all stages. Inclusive of the OpenAI financing, AI accounted for 71% of total capital invested, yet only 33% of the companies that raised capital. Globally, AI companies captured 58% of the venture capital invested in 1Q25.

Venture Capital Investment Activity

Source: Pitchbook

Interestingly, pre-money valuations have remained strong, so while there were fewer financings, those that raised capital seem to be holding their own. Median pre-money valuations for pre-seed, seed, early-stage, and late-stage rounds in 1Q25 were $8.3 million, $14.0 million, $56.0 million, and $73.4 million, respectively. For all of 2024 those amounts were $7.0 million, $13.8 million, $45.0 million, and $63.4 million, respectively. This should be closely monitored as many companies may now struggle to raise subsequent rounds, getting “no bids” which should lead to an increase in disappointing private-to-private M&A transactions.

Exit activity was surprisingly encouraging, arguably counter to the popular narrative. In 1Q25 there were 286 exit transactions valued at $56.2 billion, which compared favorably to the $41.3 billion across 312 transactions in 4Q24 and $40.5 billion and 287 transactions in 1Q24. Notwithstanding this activity, the overall activity is somewhat underwhelming considering the recent high-water mark of $258.6 billion and 498 transactions in 2Q21, just four years ago. Investors are banking on the hope that the past dozen quarters cannot be the new normal. They may need to wait a little longer: KPMG’s First Quarter M&A Snapshot showed that overall activity declined 7% from 4Q24 to $376 billion across all sectors, which was the lowest since 3Q23 (although healthcare increased a robust 60% in 1Q25).

Exit activity directly informs fundraising activity. In 1Q25 only 87 new funds were raised, totaling $10.0 billion as compared to $11.0 billion and 128 new funds in 4Q24. It was just in 2022 that $184.2 billion was raised by 1,582 new funds, contributing to an estimated $677 billion of “dry powder” globally in venture capital funds, according to Pitchbook. Interestingly, just over half of that capacity is held by funds that were raised between three and five years ago, which suggests that there will be significant pressure building to deploy that capital as venture capital funds typically only have a five-year new investment window. For context, it is estimated that the venture capital industry has $1.3 trillion assets under management.

Global “Dry Powder” Venture Capital by Vintage Year

Source: Pitchbook

 Venture capital is a game of grand slams with, sadly, many strike-outs. To underscore that phenomenon, a detailed analysis by Morgan Stanley looking at 31k companies globally over a 25-year window up to 2018 highlighted the dispersion of returns as a multiple of invested capital. Approximately 62% of those investments failed to return capital (i.e., <1.0x), while more than half of the investments returned less than 0.5x the capital invested. Probably safe to assume many of those were zeros.   

Distribution of Venture Capital Returns

Source: Morgan Stanley

From a returns perspective, venture capital appears to be holding its own, certainly among the broader private asset class. Preliminary 4Q24 Pitchbook data (below) registered a 1.79% quarterly return, slightly down from 1.96% in 3Q24, but ahead of overall private asset performance of 0.77% in 4Q24. Cambridge Associates, a leading institutional investment advisory firm, recently released its own 4Q24 U.S. venture capital returns registering 3.12%, 5.83%, and 2.21% for early stage, late and expansion stage, and multi-stage classes, respectively.

Benchmark Horizon IRRs

Source: Pitchbook

No industry sector has been insulated from the recent self-induced economic volatility. Across the board analysts are lowering earnings estimates. Importantly, though, the healthcare sector continues to show relatively robust growth in earnings, notwithstanding the significant operating and regulatory headwinds. Coupled with fundamental innovation and the profound impacts of AI deployments, expectations are that the sector will remain resilient. Notably, on Fortune’s 2025 America’s Most Innovative Companies list healthcare had the most companies with 63 entries.

Annual Sector Earnings per Share Growth Estimates

Source: FactSet

The phenomenon of technology replacing certain administrative and clinical labor in healthcare workflows captures most of the “Technorati” chatter. While early in the deployment cycle, there may be some early positive signs that AI is having given modestly improving operating margins. The most recent Kaufman Hall National Hospital Flash Report of 1,300 hospitals determined that labor expenses year-over-year only grew 5% while other non-labor items (supplies, drugs, purchased services) grew between 8 – 10% each.

And not soon enough – the new Administration’s anti-immigrant push has dramatically reduced the supply of inexpensive labor. Border crossings since the inauguration puts this year on pace to be the lowest since 1967, according to the U.S. Border Patrol. The National Bureau of Economic Research recently concluded that while AI may not necessarily reduce the overall labor needs of an organization, tasks particularly exposed to automation will experience significant substitution, likely most acute with lower salaried staff.

These advances have also driven considerable venture capital investment activity in the digital health sector. Rock Health reported that $3.0 billion was invested in 122 digital health companies this past quarter, in line with the $2.7 billion and 133 companies in 1Q24. Arguably, the period of 2021 – 2022 saw the creation of too many companies bringing undifferentiated narrow point solutions to the market. The post-Covid pace now appears to be settling in at an annual investment pace of $10 – $12 billion in 400 – 500 companies. Given the enormity of the market opportunity, this sector should productively absorb this level of investment.

Digital Health Investment Activity

Source: Rock Health

Healthcare and AI intersect elsewhere. Caltech and University of California Riverside recently published an analysis based on the Environmental Protection Agency’s models that determined that between 2019 – 2023 more than $5.4 billion of public healthcare costs have been incurred directly due to the impact of building AI infrastructure. Much of this infrastructure is located in lower income communities which will be disproportionately harmed by these pollutants. The Department of Energy estimated that 4% of 2023 U.S. energy consumption was to power data centers, which should rise to 7 – 12% by 2028.

Given that, we should expect this map to change…

Healthcare Expenditures per Capita by County (2019)

Source: Institute for Health Metrics and Evaluation

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March 17, 2025 · 6:31 am

Bottoms Up: Role of Alcohol…

“Happy Saint Patrick’s Day,” he whispered out of respect for pounding headaches all around from a hard day of drinking…

And Americans drink a lot. The National Institute on Alcohol Abuse and Alcoholism (NIAAA) estimates that nearly 8 billion gallons of alcohol are consumed each year, which is approximately 12,700 Olympic swimming pools.

Alcohol has been front page news this past week. The extraordinary 200% tariffs being threatened late last week on European Union alcoholic beverages is in response to their 50% tariff placed on U.S. alcohol, or perhaps it was some reductive misguided response to India placing 100% tariffs on those same beverages earlier in the week. This is all so dizzying, and not because I have been drinking.

The shimmering on/off status of tariffs has inadvertently placed a light yet again on the scourge of excessive drinking. The NIAAA estimates that more than 6% of American adults chronically struggle with Alcohol Use Disorder (AUD). One in 12 men and one in 25 women are thought to have AUD. According to the 2023 National Survey on Drug Use and Health, 28.9 million Americans had AUD within the prior twelve months, which works out to 16.8 men and 12.1 million women. White Americans suffer the most with an incidence of 11.0% as compared to African American and Asian at 9.6% and 5.7%, respectively.

It does appear that there may be a geographic dimension to AUD. A recent University of Wisconsin study identified a greater prevalence of “excessive drinking” in colder northern states (defined as either five or more drinks in one instance or eight or more over a week, per the Centers for Disease Control and Prevention). Nearly a quarter of those residents struggle with “excessive drinking.”

Percent Excessive Drinking by County

Source: University of Wisconsin

The  National Center for Drug Abuse last year tallied 68,000 deaths directly due to alcohol, with another 47,500 attributed to comorbidity issues associated with long-term alcohol abuse. Over 2,200 people died from acute alcohol poisoning. This does not even account for the 10,500 drunk driving deaths, which work out to ~30 per day.

Perhaps tariffs (i.e., taxes) might be a good thing if they limit excessive alcohol consumption. An interesting and quite relevant analogue involves taxes on cigarettes. Numerous studies, notably by the Surgeon General and World Health Organization, concluded that a 10% increase in the price of cigarettes will cause, on average, a 4% decline in consumption. The price elasticity of cigarettes is greatly influenced by demographics and economic conditions of those being studied, but it certainly appears that there was a reasonably strong correlation with increased taxes and lower consumption, coincident with more rigorous anti-smoking campaigns initiated 40-50 years ago. In 1964 the Surgeon General first linked tobacco use with elevated cancer risks, triggering lawsuits, advertising bans, and introduction of more significant taxes.

Cigarette Consumption vs. Excise Taxes

Source: Cato Institute

The need for a collective detox and the paucity of universally effective solutions is not lost on the venture capital community. According to Rock Health, the “Mental Health” category has been the top funded clinical category for each of the past five years with $12.1 billion invested in total (AUD, substance use disorder (SUD) are a subset of conditions in this broader category). Pitchbook listed 658 companies in the SUD category, spanning a grab bag of solutions from therapeutics, tech-enabled services, and AI companies. Over the last decade, $19.1 billion was invested in these companies, only one-third of which are mapped below.

Market Map of Substance Use Disorder Sector

Source: Pitchbook

Perhaps the tide is starting to turn. According to NielsenIQ, alcohol sales declined 0.8% in the U.S. last year to $112 billion. Domestic wine sales suffered the most with a 5.3% decline in sales in 2024. Interestingly, vodka sales remained flat last year although tequila/mezcal sales increased 7.9%, according to the Distilled Spirits Council. Beer/hard cider sales dropped 2.9% last year.

A 2024 Gallup survey showed that 45% of respondents felt two drinks a day was unhealthy, which was an increase of 6% over 2023 and the highest in mark since the survey’s inception in 2001. Cannabis use, sadly, is offering an alterative and adding to the clouds of uncertainty surrounding the shares of public alcohol companies.

Globally, there are 62 public alcoholic beverage companies with an aggregate market capitalization of $943 billion. Over a time frame when the S&P index increased nearly 100%, leading public alcohol companies have traded down between 10% – 50%. Clearly, at the outset of the pandemic, these stocks surged as many were left with nothing else to do but drink.

Select Publicly Traded Alcohol Companies

Source: Rene Sellmann Analysis

Notwithstanding the luck of the Irish, it is the Romanians who outdrink all other countries with nearly 17 liters (~4.5 gallons) of alcohol per capita per year consumed. For all its bluster, Ireland comes in only at #12.

Alcohol Consumption by Country

(Liter per capita)

Source: Statista

It appears that the first evidence of alcohol production was during the Stone Age some 12,00 years ago, although archeologists debate the veracity of the discovery of a brewery in Israel 13,000 years ago. Wine jars in China from 9,000 years ago is another historical marker in the evolution of alcohol. Given that history, unfortunately the current turmoil roiling the alcohol market probably won’t even merit a footnote in history yet untold number of people will continue to be upended by the misuse of this social lubricant. Here’s to the hundreds of entrepreneurs working to find innovative solutions to address this crisis.

And please join us for our next quarterly Expert Roundtable Series webinar on June 10, 2025, at noon ET. And subscribe here to follow other news and insights from Flare Capital Partners.

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March 10, 2025 · 5:52 am

South Africa: Will it Usher in the “African Century?”

To be in South Africa this past week, when the new U.S. administration declared that it would not attend the meeting of G20 foreign ministers in Cape Town this month, further highlighted fraught global tensions now being unleashed. There were a few reasons cited for our withdrawal: South Africa’s insistence to pursue its genocide case at the International Court of Justice against Israel for its war against Hamas, as well as the U.S.’s displeasure with the 2024 Expropriation Act which facilitates the government purchase of land from the white Afrikaner minority for the public’s benefit.

The U.S. State Department went on to halt the $440 million in foreign aid (principally to fight the continued AIDS epidemic) and cited the country’s DEI policies (how rich given its apartheid heritage). Of the $41 billion in U.S. foreign aid in 2024, $12.7 billion was directed to sub-Saharan Africa. There is now deep concern for the implementation of onerous trade tariffs, although only 2.5% of GDP is based directly on U.S. exports.

None of this should mask the very significant challenges faced by many South Africans every day. The official unemployment rate is 32.9%. Over 14% of the more than 63 million residents live without electricity, over 80% of which comes from the national power company Eskom, which is now owed $5.2 billion from various municipalities. That is nearly one-third of its annual revenues, and without those payments, Eskom may not be able to continue to operate. Last month the World Bank and African Development Bank pledged $35 billion to bring electricity to half of the 600 million people in Africa who currently do not have it.

A running story line involving the local mining industry underscores this desperation. It is estimated that there are more than 6,000 abandoned gold mines operated by crime syndicates in the country that smuggle as much as 25 tons of gold out of the country. Often these mines collapse, capturing the country’s attention as rescue workers struggle to recover trapped miners. One such prominent mine (Buffelsfontein) collapsed recently with nearly 350 miners 4,200 feet below ground. Notwithstanding those conditions, gold exports account for 6.2% of GDP.

And yet in spite of the myriad political, social, and economic issues across the continent, the International Monetary Fund has referred to this century as the “African Century” given some of the broader macro trends. With the dramatic decline in global fertility rates, the Lancet estimates that 54% of all babies born in 2100 will be in sub-Saharan Africa. By that year there will be 5x as many people living in Africa as there will be in North America, and by 2050 more than 85% of those speaking French will live in Africa.

But some words of caution. For instance, in the 1990s, Africa was wealthier than China. In 1960, Congo had a GDP per capita twice that of South Korea. The Economist now forecasts that 80% of the world’s poor will live in Africa by 2030.

Coupled with devastating climate change and structurally weak governments, these profound demographic changes have led to new and significant migration patterns, as many on the continent move north to Europe, Asia, and the U.S. The history of autocratic and kleptocratic governments has further destabilized the region. The Peace Research Institute in Oslo estimates that 10% of the land mass in sub-Saharan Africa is currently at war, further exacerbating forced migration.  There are 28 state-based conflicts in 16 of the 54 African countries. At the end of 2023, more than 32.5 million people were displaced, which has tripled over the past 15 years.

Number of State-based Conflicts by Region

Source: Peace Research Institute (Oslo)

Given these headwinds GDP growth for 2024 in South Africa was 0.6%, driven mostly by stronger than expected household expenditures although offset by weak government spending and investment. Challenges with electricity production were cited as well as the fervent debate about raising the VAT from 15% to 17% in order to make critical public sector investments. This uncertainty has caused the government to postpone the formal approval of the operating budget for this year. This has generated anxiety among economists as the country debt to GDP levels have spiked to 75%, meaningfully above historic levels. Inflation in January 2025 registered 3.2%.

Debt to GDP in Emerging Markets

Source: International Monetary Fund, JP Morgan

The total market capitalization of the Johannesburg Stock Exchange is $1.1 trillion with over 2,600 listed companies and has increased 5.3% since the beginning of the year. Interestingly, the U.S. public equity markets, which total $54.9 trillion, have lost approximately $3 trillion in value since the inauguration of the new administration (and is now staring at a possible government shutdown in mid-March). 

Several equity analysts view the South African stock market as relatively undervalued. HSBC, while acknowledging global headwinds, cite the fact that the valuations are ~20% below the trailing 10-year average with a forward P/E multiple of only 9.4x.

There appears to be an emerging venture capital ecosystem across the continent. In 2024, a total of $2.2 billion was invested in 457 deals by 583 different investors, according to Partech Africa. South Africa was the second most active country, behind Nigeria ($520 million in 103 deals), with $459 million in 16 deals. As a point of comparison, the U.S. venture capital activity in 2024 was $209 billion in 13,776 deals. As in the U.S., there is a long tail to the geographic distribution coupled with a density of activity in a limited number of countries.

Venture Capital Investment by African Country

($M)

Source: Partech Africa

Like many other regions in the world, overall venture capital activity in Africa saw a significant “Covid bounce” in 2021-2022, which the sector is still navigating. While the overall African investment activity was essentially flat from 2023, it does suggest that the market has stabilized after significant decline from 2022. In fact, nearly $975 million was invested just in 4Q24, accounting for almost 45% of the full year’s activity. Crunchbase tallies 371 venture capital firms in Africa, while the African Private Capital Association counts 722 venture investors, 89 of which are in South Africa.

Overall Venture Capital Activity in Africa

($M)

Source Partech Africa

Just over 20% of the capital invested in 2024 was in technology companies. Average round sizes by stages were $1.6 million, $5.8 million, $13.8 million, and $39.8 million for Seed, Series A, Series B, and Growth stages, respectively. In 2024 there were only four “mega deals” (greater than $100 million) which accounted for $1.1 billion or half of all venture investments. There are some venture-backed “emerging winners” stepping forward – late 2024 saw the announcement of $250 million Series D investment in Tyme Group, a leading South African digital bank. Healthcare represented 7% of the deals and only 3% of the capital invested in 2024 in Africa.

Unfortunately, there appears to be headwinds in the venture capital market now. Average round sizes for Series A and B stages declined by nearly 18% and 27%, respectively, in 2024. The total capital invested in Series B companies dropped by 36% last year. The percentage of Seed companies that go on to raise a Series A also declined meaningfully.

Conversion Rate from Seed to Series A Stages

Source: Partech Africa

One can only hope that with a more robust public and private capital markets ecosystem, an entrepreneurial culture might be developed further. Despite the initial, although limited, successes, the amount of venture capital invested in African companies is inconsequential overall; less than $1.63 per capita as compared to $633 per American. An enduring innovation ecosystem will improve the standing for all.

One of the most acute scourges of life in Africa is modern slavery (forced labor and/or forced marriage) which can take hold in such impoverished conditions. Walk Free’s 2023 Global Slavery Index highlights these issues, stating that 158k people are living in modern slavery in South Africa (2.7 per 1,000), which places the country #133 globally and #43 within Africa. Globally, Walk Free estimates 49.6 million people live in modern slavery. North Korea ranked #1 with a prevalence of 104.6 per 1,000 people “living” in modern slavery.

South Africa earned a 53/100 on the “Vulnerability to Modern Slavery” index, which scores the government’s response to combat modern slavery. Sadly, these thoughts swirl about given the era of apartheid and that the 7% of the South African population that is white owns most of the farmland, which in turn is a majority of the land in the country.

Prevalence of Modern Slavery in Africa

Source: Walk Free

Setting all these issues and concerns aside, South Africa is an extraordinary country – cannot recommend it highly enough. The advancements since earning its democracy in 1994 are admirable, the natural beauty breathtaking. Surrounded by countries suffering from autocracy and kleptocracy serves as a dire warning for all countries confronting similar forces.

And please join us for our next quarterly Expert Roundtable Series webinar on June 10, 2025, at noon ET. And subscribe here to follow other news and insights from Flare Capital Partners.

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February 16, 2025 · 11:04 pm

Healthcare Technology: Never More #@$^* Important…

On top of everything else, the recently published State of the Nation Report was jarring to read. Of the 39 countries analyzed, the United States ranked 33rd in murder rate, suicide rate, and childhood mortality. For life expectancy, the U.S. came in at #29 and #32 for depression prevalence, and yet #10 overall for something called “life satisfaction.” Americans must be easy to please.

As historic healthcare safety nets are now under siege and the U.S. looks to withdraw from international healthcare organizations such as the World Health Organization and Gavi (the Vaccine Alliance), it is hard to reconcile the public’s desire to see that government should continue to prioritize healthcare access and affordability with what the government is actually doing. When allowed only three choices, survey respondents placed access and affordability was the top choice 52% of the time.

Public Rankings for Government Health Priorities

Source: Rollins-Gallup Public Health Priorities Survey

Obviously, the cost of care is exceedingly high and many struggle with medical debt, now estimated to be over $220 billion in the U.S. The poor overall health condition of the country is quite apparent. In fact, a recent Department of Defense study concluded that 75% of Americans between 17-24 years of age are not qualified to serve due to being overweight, struggles with either physical or mental issues, could not pass an aptitude test, or had a criminal record. This phenomenon accounted for why the military missed recruitment targets by almost 25% in 2022 and 2023.

The Institute for Health Metrics and Evaluation reached even more sober conclusions when assessing America’s ranking for healthy life expectancy which deteriorated from approximately #50 twenty years ago to a forecasted #108 by 2050. Shockingly this is against a backdrop of nearly $5 trillion spent on healthcare according to recently released government data, of which $1.6 trillion was funded by the federal government, $1.3 trillion directly by consumers, $900 billion by private businesses, and the balance by state and local governments. As more of this financial burden is pushed onto individuals and states should we expect improved outcomes? Doubtful.

 Global Rankings for Healthy Life Expectancy

Source: Institute for Health Metrics and Evaluation

Interestingly, many of the states most dependent on federal healthcare support have profoundly lower healthy life expectancies. While the overall average healthy life expectancy is 66.1 years, certain particularly unhealthy states register as low as 61.5 years of healthy life expectancy.  As the federal government starts to abdicate its role in healthcare, it is hard to imagine many of these “unhealthy” states rallying resources to adequately address these pending gaps. Expect greater divergence of outcomes by state.

Healthy Life Expectancy by State (2024)

Source: Institute for Health Metrics and Evaluation

Another factor to consider that directly hits the welfare of states: catastrophic weather events which tend to sweep through the same handful of states each storm season. According to the Insurance Information Institute, the average number of extreme weather events leading to more than $1 billion in damages increased from 3.3 annually in the 1980s to more than 20 each of the past five years.

Through the darkness there may be glimmers of resilience. Even though still quite unstable, this past year was reasonably encouraging for the hospital sector, certainly when compared to prior extremely difficult years during the height of the pandemic. According to Kaufman Hall’s national 2024 survey, net operating revenue per bed and operating margin increased 18% and 3% year-over-year, respectively. Overall operating margin for the hospital sector nationally registered 4.9% for 2024. Unfortunately, the levels of bad debt and charity care did increase in 2024, likely due to greater payer denials and continued redetermination of Medicaid members.

Obviously, there are still significant labor headwinds swirling about. Industry analysts often cite that there could be a global shortage of as many as 10 million healthcare workers by 2030; Mercer forecasts at least a 100k worker deficit by 2028 in the U.S. While it is indisputable that technology will in some/many/all cases step forward to address these acute labor issues, the reduction of federal government support will be painful.

Notwithstanding the improved operating environment, a Mercer analysis showed that 40% of healthcare organizations in 2023 had to liquidate assets in investment portfolios to cover operating expenses, a classic mismatch of assets and liabilities. Across all of healthcare, 57 companies with more than $10 million in liabilities filed for bankruptcy in 2024, five of which were hospital systems, according to Gibson Advisors. While significant, this was down from 79 in 2023. A  recent Deloitte Center for Health Solutions report showed that 60% of healthcare executives held a “favorable” outlook for 2025, in large measure due to the impact of digital technologies and AI.   

While past performance is not necessarily an indicator of future activity, it is instructive to look at the performance of various public equity indices. According to Pitchbook, the hospital sector of public stocks increased 26% in 2024, while the payer/payvider sector increased 13% (the S&P 500 index increased 23% last year). Unfortunately, the value-based care sector declined 45% in the same period. Paradoxically, the dramatic investment in healthcare technology is meant to accelerate the healthcare industry towards value-based care models.

Across the entirety of the healthcare and life science industries, Pitchbook estimated that $10.5 billion was invested in 511 AI companies through 3Q24 as compared to $10.1 billion and 668 companies in all of 2023 (2021 saw $22.0 billion and 1,018 companies, respectively). Rock Health, which focuses just on the digital health sector, reported similar trends with $10.1 billion invested in 497 companies in 2024. Rock Health estimates that 37% of the investment activity in 2024 was in companies that are “AI-enabled.” Clearly, the healthcare technology sector has embraced AI while appearing to have reached a “new normal” of about $10 billion invested annually, which is coming off an unsustainably robust year in 2021.

Annual Digital Health Investment Activity

Source: Rock Health

Much of the healthcare technology investment activity today is to support broader near-term provider priorities, such as the pressure for health systems to partner for non-core, ancillary operations or to partner with technology vendors for automation solutions to lessen the administrative and clinical burden. There is also an increased focus on improving the consumer experience of the patient/member. The most important value proposition categories called out by Rock Health in 2024 were (i) treatment of disease ($1.9 billion), (ii) non-clinical workflow ($1.8 billion), and, (iii) monitoring of disease ($1.4 billion).

The impact of widespread automation and AI deployment across the general economy may be starting to show up in employment data. According to U.S. Department of Labor data the unemployment rate for IT workers spiked to 5.1% in January 2025 from 3.9% in just the prior month, which is quite a bit higher than current overall unemployment of 4.0%. Arguably, routine administrative roles are being squeezed by AI. In addition to pressures on the healthcare system to improve utilization and cost trend, the new Administration’s heavy-handed limits of 15% for indirect costs for National Institutes of Health grants (down from the typical 25%-50%) may drive more rapid adoption of AI in the life sciences sector (although many of those indirect costs are necessary, unavoidable, and structural in nature).

The enthusiasm for healthcare technology is not lost on public market investors. A December 2024 survey of buyside clients by J.P. Morgan ranked healthcare technology as the leading sector within healthcare to “perform well” in 2025, although tempered by the fact that 68% are projecting only greater than 5% returns. Notably, none of the investors expected worse than -5% returns for healthcare technology in 2025. 

Investor Expectations by Sector to Perform Well in 2025

Source: J.P. Morgan Investor Survey (December 2024)

Technology’s role in society is intertwined with underlying demographic changes. The focus on replacing labor with automation obfuscates the reality that great healthcare is ultimately a human-to-human interaction. The U.S. labor force has rapidly and profoundly started to change, arguably creating an anxiety and backlash among many as immigration rates spiked over the last several years. Much of the inbound labor is prepared to contribute at dramatically lower costs to be in America (and do not draw on all the social safety nets commensurate with the taxes they pay into the system – i.e., no social security benefits). In addition to the desperate labor needs to rebuild from the fires in Los Angeles or rebuild from the hurricanes in North Carolina and Florida to harvesting our crops, the acute needs for affordable healthcare labor as the U.S. population ages are profound. 

Annual Change in U.S. Population

Source: S&P Global, Axios

Two other macro concerns will start to emerge: population growth rates and wealth concentration. Ominously, declining fertility rates will shrink populations later this century which will put dramatic pressure on economic growth. McKinsey estimates that GDP per capita growth could slow by 0.4% on average from 2023 – 2050, and as much as 0.8% in some regions of the world. To offset this trend, productivity growth rates will need to improve 2-4x from current rates – quite unlikely. For context, the U.S. 4Q24 GDP per capita growth rate was a robust 2.3% according to the U.S. Bureau of Economic Analysis.

The other development hiding in plain sight is extraordinary wealth concentration. Bank of America recently estimated that Baby Boomers just in the U.S. now have a net worth equivalent to 80% of global GDP. Furthermore, those over 65 years old plus Gen Zs (born between 1997 – 2012) will spend $28 trillion in 2030. How those population cohorts choose to engage with the healthcare system will have profound implications. Clearly the more affluent will be able to access better more timely care – this will only get starker.

Notably, flow of capital by state to the federal government underscores the geographic wealth concentration and the dependence of many states on the largess of other states to effectively fund many of the social programs that are under siege now. Cruelly ironic.

Balance of Payments Per Capita

Source: Rockefeller Institute of Government

With accelerated stratification are we becoming more anti-social? On the heel of Valentine’s Day it was shocking to read that between 2022 – 2023 approximately 24% and 13% of men and women between the ages of 22-34, respectively, had not had sex in the past 12 months, according to a now removed survey by the Centers for Disease Control and Prevention. The greatest decline was among monogamous people, largely attributed to a dramatic decline in marriages.

Prevalence of Sexual Activity

Source: National Survey for Family Growth

Across the country 49.1% of adults over 20 years old are unmarried. Interestingly, the higher incidence of being unmarried somewhat correlates to states with lower healthy life expectancy – of course, that is entirely coincidental. Unrelated but shocking nonetheless, it is now estimated that there are 10 deepfakes for every person on the planet. Unfortunately, this type of AI technology will do nothing to address the drop in fertility and marriage rates, and in fact, may be contributing to the problem.

Percent of Unmarried People Over 20 Years of Age

Source: U.S. Census American Community Survey

The Chinese may be staring at an even bigger issue as only 6.1 million couples filed for a marriage registration in 2024 – a nearly 50-year low – which is only 0.9% of the population.

And please join us for our next quarterly Expert Roundtable Series webinar on March 4, 2025, at noon ET. And subscribe here to follow other news and insights from Flare Capital Partners.

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January 13, 2025 · 6:49 am

Can’t Get No Satisfaction (2025 Remastered) …

The near-term anxieties that AI is going to imminently displace millions of workers were set aside – at least for another month – when the employment data were released last week showing a surprising surge of 256k in U.S. payrolls leading the unemployment rate to drop from precisely 4.231% to 4.086%. Notwithstanding the (appropriate) obsession swirling around AI, worker productivity has been essentially flat for nearly 15 years in corporate America when measured on a revenue per employee basis. Is that about to change with the dramatic influx of capital into the AI sector? Recent trendline data suggest we may be at the knee of the curve.

Worker Productivity – S&P 500

(Revenue/Employee)

Source: FactSet

This past quarter saw a dramatic spike in venture capital investment in the Artificial Intelligence, Machine Learning (AI, ML) sector, driven in large measure by a handful of extraordinary financings. Of the total $74.6 billion of venture capital invested in 4Q24, $46.2 billion (62% of the total) was in AI, ML companies. The average round size (perhaps a meaningless metric this quarter given the Databricks ($10 billion), OpenAI ($6.6 billion), xAI ($6 billion) financings) was $81 million in 4Q24 for AI, ML companies. While the number of deals quarter-over-quarter was relatively flat in this sector (it actually went down by nearly 100 deals in 4Q24), the amount of capital increased 2.8x just from 3Q24.

As these companies quickly bring new capabilities to the market, one would expect to see dramatic improvement in worker productivity over the next several quarters. Industry analysts will track closely how customers talk about the ROI of these investments over the next several quarterly earnings seasons. Anything less than robust case studies showing significant impact likely will see the number of companies raising capital decline dramatically as the sector consolidates around a handful of clear emerging winners. Globally, Pitchbook estimated that nearly 36% of all venture capital investments went to AI, ML companies this quarter.

U.S. Venture Capital Investment Activity: AI, Machine Learning

Source: Pitchbook

Overall, there were 2,859 venture financings in 4Q24 with an averageround size of $26.1 million. The number of deals per quarter continued stepping down since the euphoria of early 2022 when there were nearly 5,600 financings in 1Q22 (average round size of $14.3 million; 67% were pre-seed and seed rounds).  The increase in round size is understandable as start-ups launched 3-4 years ago now start to scale, concentrating capital around fewer companies.

U.S. Venture Capital Investment Activity

Source: Pitchbook

The broader equity markets provide some additional context to the 4Q24 venture activity. By almost any measure, public equity investors had a good, if not great, year in 2024 with the caveat that you had to invested in a handful of select companies. It was the second consecutive year that public indices increased by more than 20%. That has only happened four times in the history of the S&P 500 index; three of those four times the markets declined over the following two years, according to research by J.P. Morgan Asset Management. Importantly, as great as 2024 was, all major U.S. stock indices increased less than 2023’s performance.

Public Stock Indices Performance in 2024

Source: Yahoo Finance, Axios

There are other flashing yellow (not quite red) lights. With the public markets flirting with all-time highs, the bond market is seeing rates rise uncomfortably high, signaling anxiety about the new administration’s near-obsession with tariffs and shrinking the labor force (according to the Institute on Taxation and Economic Policy, undocumented workers paid $25.7 billion in Social Security taxes in 2022, for which they received no benefits). In both 2023 and 2024, only ~30% of S&P 500 companies outperformed the benchmark as compared to 60% in 2022, highlighting the concentration of fewer and fewer companies that are driving overall returns. This has echoes of the “dot.com” fiasco nearly 25 years ago.

Percentage of Stocks Outperforming the S&P 500 Index

Source: BofA Global Economic Research

This concentration of performance to fewer stocks arguably had an unintended impact on actively managed funds and not necessarily that AI will replace your stockbroker. According to EPFR, more than $450 billion rotated away from active managers and into ETFs, which saw a $1.7 trillion increase in assets under management (AUM). ETFGI now estimates that ETFs globally manage $15 trillion, $11 trillion just in the U.S. Not surprisingly, one- and five-year performance for active managers lagged passive funds quite meaningfully (20% and 13% versus 23% and 14%, respectively), according to Morningstar. While fees played a role (0.45% versus 0.05%), one’s ability to invest in the “Magnificent Seven” did not necessarily require a broker, which accounted for 57% of 2024’s gains.

Similarly, while not a great method to value a company, the price-to-book ratio also harkens back 25 years and should be taken seriously. Perhaps one might argue that with more asset-light technology companies now in the S&P 500 index, this comparison is less relevant. Not clear.

S&P 500 Index Price-to-Book Ratio

Source: BofA Global Economic Research

Not to be alarmist but two other recent data points: bankruptcies and prevalence of down-rounds. According to S&P Global Market Intelligence, the number of announced bankruptcies hit a 14-year high in 2024 with 694 filings based on companies tracked by the research firm, 110 of which were PE/VC-backed. The high-water mark was 828 in the depths of the Great Financial Crisis.

Second, the incidence of down-round financings was approximately 15% in 2024, consistent with 2023, but quite elevated over the mid-single digit percentages earlier this decade. According to analysis by American Affairs, only 15% of “unicorns” are profitable, notwithstanding that most are over a dozen years old, highlighting the ongoing dependence upon supportive capital markets. That has not necessarily been a problem for several select companies as many of the hottest venture-backed companies have been able to stay private longer. According to Forge Global, the seven largest private U.S. companies are now valued at $695 billion and continue to close eye-watering private financings.

Undoubtedly, that phenomenon has caused the overall average round size at each stage of financing to spike in 2024 over 2023 levels, most notably in the Venture Growth category, which is trending to be $84.4 million as compared to $58.7 million in 2023.

Average Venture Capital Round Size

Source: Pitchbook

Concomitantly, pre-money valuations across all stages surged in 2024, and yet again, most notably in the Venture Growth category which saw valuations converge on $2.1 billion. The Late-Stage category saw the average valuations nearly double from $187.1 million in 2023 to $357.9 million in 2024. New capital invested in 2024 – on average – purchased smaller ownership positions in companies when compared to 2023.

U.S. Venture Capital Pre-Money Valuation by Stage

Source:Pitchbook

The successful venture capital business model is predicated on meaningful distributions back to limited partners. That has not been the case for the past few years, in part given the “private for longer” phenomenon cited above. Exit activity has been quite anemic, actually. In 4Q24, Pitchbook estimated that there were 356 exit transactions valued at $37.0 billion (just over $100 million on average), which while greater than the 313 and $27.8 billion in 3Q24, is a country mile away from the 501 and $255.7 billion in 1Q21. Importantly, the ratio of exit value to invested capital in 4Q24 was 0.37x (not very healthy) as compared to 3.22x in 1Q21 (cartwheels).

U.S. Venture Capital Exit Activity

Source: Pitchbook

Partially in response to this lack of public market liquidity, the secondary market had a banner year. This segment of the market continues to mature, providing yet another alternative for private companies and limited partners to monetize their investments, although often at significant discounts. Globally, Jefferies estimated that 2024 saw $140 billion of secondaries transactions (admittedly, only a small portion of which is venture capital related), which was a high-water mark.

Annual Secondaries Transaction Volume ($BN)

Source: Jefferies Global Secondaries Market Review (* 2H24 estimated)

Taken together, these developments generated significant headwinds for venture capital firms raising new funds. Preliminary estimates from Pitchbook tallied that 508 new funds raised $76.1 billion (average fund size of $150 million), reminiscent of 6-7 years ago. It will be years before 2022 activity levels return, when 1,625 funds raised $188.5 billion (average fund size of $116 million). According to the Financial Times, just nine firms raised nearly 50% of the capital in 2024, and that there are now 6,175 active venture capital firms, a decline of ~2,000 since 2021.

U.S. Venture Capital Fundraising Activity

Source: Pitchbook

Overall, Pitchbook estimates that the U.S. venture capital industry has $1.2 trillion of AUM. The knock-on effect of too much capital too quickly directly hits returns. Through the middle of 2024, investment returns for the venture capital asset class was lagging, reflecting frothy valuations, relatively smaller ownership stakes, and lack of liquidity. Fortunately, during 3Q24 this category saw a nearly 400 basis point improvement in performance

Horizon IRRs by Private Asset Class

Source: Pitchbook

Typically, new funds commit capital over a five-year period but then generate returns over several additional years as their portfolio companies scale. Undoubtedly, many 2021 and 2022 vintage funds aggressively deployed capital in the first few years, undermining overall fund performance. The data strongly suggest that funds which deploy capital in a more measured pace tend to outperform.

Or one could just buy an NBA team. There are now 71 major league franchises with private equity investors valued at $206 billion. Sports teams tend to trade at 5-12x revenues and now bask in $62.4 billion of global media rights payments, according to J.P Morgan. The Wall Street Journal’s “Track the Markets” index had Cocoa as the best performing asset in 2024, generating a 178.2% return. Sadly, Soybeans was last with a negative 22.8% return, perhaps a commentary on our diets while watching sports.

Sports Team Valuations vs. S&P 500

Source: J.P. Morgan Sports Coverage Team, Forbes

And please join us for our next quarterly Expert Roundtable Series webinar on March 4, 2025, at noon ET. And subscribe here to follow other news and insights from Flare Capital Partners.

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January 6, 2025 · 7:32 am

Important Flare Capital Promotion…

How gratifying to see one of our early investments paying off so spectacularly…

It is with great pleasure to announce the promotion to Principal our very own Tara Sullivan, who joined the Flare Capital team just over a year ago from Redesign Health. The most important investment we can make is in our team, and Tara has been a terrific contributor across every dimension.

The old adage by Lefty Gomez that one would “rather be lucky than good” does not apply to this ace. Tara is scary good and bonds easily with entrepreneurs and investors. Her instincts on healthcare technology opportunities are prescient. But she has also created her own luck by putting herself in situations where good things happen. Tara catalyzed one of our new 2024 investments in Photon Health, a platform that automates prescription management workflow, by putting herself front and center of the super impressive founder, Otto Sipe. So much of success in this business is just showing up and being present.

As we experienced when we first met Tara, she continues to be chronically upbeat and engaging. She has artfully spliced nearly a decade of relevant healthcare experiences (Putnam Associates, Flatiron Health, Redesign Health) between impressive academic stops at McGill University and The Wharton School at the University of Pennsylvania.

All of us are excited to see what this next important chapter holds for Tara as she firmly establishes herself as an emerging leader in our industry. Her contributions to the firm, the performance of our funds, and to the healthcare technology sector will be significant.

She also showed great fashion forward instincts with her bright orange go-go boots at our Code Blue costume party last year. Tara is never afraid to stand out in the crowd…

Other Firm Updates

Quick update on our Flare Scholars program and Flare Scholar Ventures (FSV), which is our commitment to invest a portion of our new fund in the pre-seed rounds of Flare Scholar sponsored projects. Having just wrapped up recruiting for the great Class of 2025, we now have 444 current and former Flare Scholars, who are young brilliant passionate emerging healthcare technology entrepreneurs and investors. This year’s class hails from 29 graduate school programs and from over 25 of our strategic limited partners. Some other interesting census data on the overall group:

  • 37 Flare Scholars have started companies
  • 38 are investors, with five of them at Flare Capital on the investment team
  • 27 Flare Scholars work at Flare Capital portfolio companies
  • 8 are now C-suite executives
  • Approximately 200 healthcare organizations employ Flare Scholars

The FSV program continues to scale nicely. We now have 27 FSV portfolio companies, meaningfully exceeding our initial goal – and a handful of those companies have already graduated by raising proper seed or Series A rounds. In total, our FSV portfolio companies have raised over $101 million.

The progress of the FSV program is inspirational as we work to identify the next generation of great healthcare technology entrepreneurs. Capital will always follow great talent and in this market, it will be great talent that wins.

And please join us for our next quarterly Expert Roundtable Series webinar on March 4, 2025, at noon ET. And subscribe here to follow other news and insights from Flare Capital Partners.

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December 8, 2024 · 3:14 pm

Clown Show…

It can take as many as 17 muscles to smile. Surprisingly, it may take as many as 43 muscles to frown. The most important muscle is the zygomaticus major, just below the cheekbone, which is often referred to as the “smiling muscle.” Given all that is happening now, Lord knows we could use more to smile about.

The surge of venture capital investment in digital health at the outset of the pandemic has been widely reported (~$30 billion was invested in 2021; this year looks to be tracking to ~$10 billion). Much of the focus has been on the mental health sector with an explosion in the funding of novel virtual behavioral health companies. According to Rock Health, $4.9 billion was invested in mental health companies just in 2021 alone and is now tracking to be $1.4 billion in 2024.

Venture Capital Investment by Clinical Indication

Source: Rock Health

A recent Deloitte report echoed this level of heightened investment activity. Since 2020 through 3Q24, $10.5 billion has been invested in 432 companies, with 2021 being the most active year with $3.8 billion invested in 101 companies. Notwithstanding that the median round size this year was $15.7 million, there are 11 “unicorns” in the mental health and wellness category according to Deloitte. Furthermore, more mental health companies this year were able to raise large rounds (nearly 20% were greater than $100 million), suggesting there will be several more “emerging winners” in this sector. The median pre-money valuation jumped from $51.0 million in 2023 to $190.0 million this year.

One indicator of the importance investors place in this sector is the stock performance of its public companies. According to data from Houlihan Lokey, its Fitness and Wellness Index has comfortably outperformed the broader S&P 500 Index by 8.0%.

Stock Market Performance (LTM)

Source: Houlihan Lokey

Yet, there is still so much more to do. A study by Professor Arthur Brooks at Harvard Business School determined that before Covid 30% of people worldwide were deemed “happy,” while 15% registered as “unhappy,” and the remaining 55% were “fine.” Now, 30% are reported as “unhappy” and only “15” self-report as “happy” – and the situation is likely getting worse.

Many seek refuge in their work when less than happy, but that may not be the sanctuary it once was. Gallup recently published its Index of Life Evaluation for U.S. employees which came in at a record low with 45% listed as “struggling” and 4% as “suffering.” Just over half shared that they experience significant stress in the workday and 40% are chronically worried. The 15-year-old survey hit a highwater mark in 2016 with 61% respondents as “thriving” but has declined each year since. “Thriving” employees miss 53% fewer workdays and are 32% less likely to leave their employer. No wonder Corporate America is so focused on more effective behavioral health solutions.

There also appears to be a wealth effect. Happiness Researcher Matthew Killingsworth at University of Pennsylvania’s Wharton School analyzed 33k American adults and concluded that low-income participants averaged slightly above 4.0 on a 7.0-point Average Life Satisfaction scale, whereas the wealthiest (Forbes 400) survey participants averaged 6.0.

Here are a lot of happy people. According to Altrata, there are 3,233 billionaires globally with a combined net worth of $12.1 trillion, which is only a 4% increase in the number of billionaires from 2023 but 9% increase in aggregate wealth. Of that number, 1,111 of them are in the U.S. Internationally, the number of billionaires in China dropped 15% since 2023 while the number in India spiked from 16 to 151 this year. Overall, 84% of the billionaire class have between $1 – $5 billion in wealth, yet are “only” 42% of the total billionaire pie. The top 18 wealthiest people (0.6% of billionaires) in the world are worth $2.0 trillion and control 16% of that pie.

Sadly (for them), not all billionaires invest like Warren Buffett. Consistently, investment performance by the wealthiest has meaningfully underperformed the S&P 500 index – and not by a little – although U.S. billionaires are significantly better than their foreign peers.

Comparison of Investment Performance

Source: UBS, Axios

And now for one group of absolutely giddy billionaires – the Trump cabinet. In aggregate, the cast of characters so far named to be in the next Administration, if one includes Mr. Musk, who weighs in at $300 billion, has an aggregate net worth of approximately $325 billion. The Americans for Tax Fairness calculates that just those under the Big Top of the incoming cabinet are worth at least $10 billion. As a point of comparison, the Biden cabinet was worth $118 million, still an exceptional amount. President Trump is estimated to be worth $5.4 billion, but $4.2 billion of that is due to his meme stock, Truth Social.

Notably, according to Clowns of America International Inc., there are between 50k – 100k real clowns worldwide, but membership in the U.S. has declined precipitously (and not all of them went into the government). Salary.com estimates that real clowns only earn between $57k – $90k each year, while Zippia.com data suggests clowns earn only $52k.

The election has quite clearly revealed that one’s state of mind often closely correlates to one’s political affiliation. The reversal in consumer expectations and how one perceives the economy was dramatic over the past month, as anticipation of another bull market took hold among Republicans.

Index of Consumer Expectations

Source: University of Michigan

Sadly, the euphoria experienced by half the country has not improved America’s standing on the global Happiness Index. The U.S. registered a 6.73 on the 10-point scale, which placed 23rd overall. Not terrible, not great, certainly when compared to the leader Finland at 7.74, but significantly more cheery than last-place Afghanistan at 1.86. The overall average for the 134 countries surveyed was 5.54 (2022 data). Not surprisingly, there is much unhappiness on the African continent and in the Middle East right now.

Happiness Index by Country

Source: World Population Review

Not included in the World Population Review survey, but setting a global standard, is the small very happy country of Bhutan. In 2008, the government of Bhutan instituted the Gross National Happiness Index to underscore its deep commitment to the wellbeing of its people. Today, only 6.4% of the population was deemed “unhappy.” Perhaps a more concerted focus on this issue – plus the hoped for promise of many innovative digital mental health solutions – will improve the rankings of the U.S.

Ranking of Happiness by Country

Source: World Happiness Report (2024)

As the inimitable Smokey Robinson and the Miracles reminded us in “Tears of a Clown…”

Now if there’s a smile on my face
It’s only there trying to fool the public

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