Issue #44. Monday, November 11
For this edition of the Zoic deal newsletter, we’ll be covering a range of diagnostics, devices and an important policy discussion taking place.
Recently, I’ve been thinking about the debacle surrounding WeWork and Softbank’s Vision Fund. These past few weeks have been rough for Matsuyoshi Son and his $100 billion fund. Three of its portfolio companies have encountered major setbacks (see here and here), and investors are beginning to publicly question the validity of the investing model.
In our eyes, the Vision Fund model is simple: invest in high growth rates combined with the potential to dominate their industries. We have two objections to this approach:
First, Softbank has paid insufficient attention to portfolio company valuations as a result of its growth-above-all focus. Perhaps the most striking feature of the WeWork debacle is that there was no fundamental change in the company’s business plan or outlook between January (when Softbank invested at a $47 billion valuation) and the recent round valuing the company at $8 billion. Rather, what happened is that other investors examined WeWork pursuant to its hoped-for IPO and did not like what they saw. In its rush to deploy capital, Softbank paid almost six times what other fully informed investors would have been willing to pay.
Second, Softbank failed to adequately consider whether Uber and other portfolio companies had a true competitive advantage in their space, instead relying excessively on first-mover or size advantages to provide a margin of safety against the competition. When we look at industry-dominating tech firms such as Google or Amazon, we see in each case a superior technology which served as the springboard for outsized growth. Amazon isn’t a great company because of its virtual monopoly on a large subsection of online retail; it is a monopoly because it is a great company. Companies are far more likely to fall victim to rivals if their underlying product isn’t inherently better. Growing fast and burning money isn’t enough.
At Zoic, our investment size is far more modest, of course. But we always ask ourselves these two questions before we invest:
1) Do the offered terms make the risk/reward ratio attractive?2) Why is this company going to outlast the competition?
If we have satisfactory answers, we invest our capital and our time to help the company achieve our vision for the future. Otherwise, we pass. We invest in under 1% of the opportunities we examine, but we believe that our conservative approach is the winning one in the long run.
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For our first article, we’ll be actually discussing healthcare policy. This may not be direct technology, but is absolutely critical for adoption, especially for diagnostics. The most common barrier to adoption that we see is lack of reimbursement for a test, particularly for early diagnosis. However, Medicare is now considering paying for early cancer diagnostics, at least for breast and ovarian cancer. The patients do need to meet a set of criteria, but at least this shows that Medicare is starting to catch up to the promise of these tests. If this can start to occur for more tests, this will be a critical milestone for the wide variety of cancer (and other chronic disease) tests that we have discussed.
We see continued growth in the microbiome diagnostic space, especially personalized and consumer tests. There are more and more tests that sequence the gut microbiome that now appeal directly to consumers, such as with this latest partnering. Sequencing can provide detailed information on the bacteria present in one’s gut, but many of these tests don’t offer much beyond that. A diagnostic that can actually determine what diseases will occur and, more importantly, what treatments to take will be most valuable.
In yet another example of a microbiome test, another diagnostic for inflammatory bowel disease is seen here. IBD is a common first target for the microbiome diagnostics as there is the most evident link between the two. From there, the hope is a platform test can spread to other medical indications such as subtypes of IBD and then to colon cancer.
Moving on to devices, an area that we don’t see many innovations in but is ripe for disruption is dialysis. Dialysis is quite common, with 660,000 patients on the treatment in the US alone. However, the devices are still not that different from decades ago, the main innovation being home dialysis through peritoneal or home hemodialysis. Complications can still arise, even at home such as fluid overload, with major implications for heart health. Even clotting can be a major issue, so a device that can prevent that, either at home or in the clinic can somewhat improve patient health on this modality.
Finally, we see yet another example of magnetic therapy, again for treating depression. Transcranial therapy projects a magnetic field non-invasively to try and treat depression, especially those that are not responsive to pharmaceuticals. Current magnetic devices do offer some efficacy, but it can sometimes be as low as 30%. Some improvements can increase this rate, such as with directed magnetic fields, which would be desirable as this method has few side effects.
We recently caught up with Chris Willenken, strategist with Zoic Capital to discuss three criteria points he considers when focusing on firm strategy and deal structure.
Chris has over two decades of proprietary investing experience, including time on the American Stock Exchange floor, on a leading high frequency trading desk, and as a personal investor in startups and limited partnerships.
Furthermore, Chris is one of the world’s leading contract bridge players. A Grand Life Master, Chris has many high finishes in major international events. Highlights include five North American Championships and a silver medal at the 2018 World Championship.
Congratulations to our portfolio company, Optina Diagnostics, in their recent announcement for partnership with the Wagner Macula Retina Center to conduct clinical studies.Optina Diagnostics, a world leading company in retinal imaging and artificial intelligence with a vision to change mindsets when it comes to brain health, and Wagner Macula Retina Center, a center of excellence for ophthalmology, are entering into a collaboration agreement to conduct a clinical study for the advancement of Optina’s Retinal Deep Phenotyping platform. This collaboration will lay the groundwork for Optina’s future pivotal clinical trial.”As we enter into Alzheimer’s month, we are particularly excited at the opportunity to collaborate with Dr. Wagner, Dr. Kapoor, and the professional team at the Wagner Macula Retina Center. It brings together a whole new paradigm for the way we think about, how we diagnose and how we understand brain health and Alzheimer’s. This is the first market readiness collaboration where Optina will deploy its exclusive eye clinic program & Retinal Deep Phenotyping platform in a community setting. It will prepare the ground for additional prime eye clinics locations across the United States to develop a brain health expertise” said David Lapointe, CEO at Optina Diagnostics. optinadx.com
David Lapointe, CEO Optina Diagnostics
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|The Biweekly Dealflow Update, curated by the team at Zoic Capital.