Investing in the Unknown and Unknowable

Jun 8, 2018 | Blog


The Biweekly Deal Flow Update

Insights on healthcare innovation, deal flow, and the trends in healthcare technology and diagnostics.
Issue #10

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-Zoic Capital
Investing in the Unknown and Unknowable
Human behavior is often driven by fear, uncertainty and doubt.  That gut-wrenching feeling you get when walking down a dark alley is rooted in millions of years of human evolution. In the 21st Century, we try to mitigate those primal fears by increasing our knowledge and sense of control — efforts that explain why both insurance and lobbying are multi-billion-dollar industries.

Despite our attempts to control or foresee it, the future remains unknowable. Nowhere is that perhaps truer than when investing, where a brilliant idea may not necessarily translate into a lucrative one. Yet, successful investors have learned how to embrace uncertainty.

In an excellent essay entitled “Investing in the Unknown and Unknowable,” Harvard economist Richard Zeckhauser argues that conventional financial wisdom does not apply in what he calls UU (unknown and unknowable) situations.

Three takeaways stuck with us:
Make investments when your upside is larger than your downside:
This may seem obvious but is it really?

Beware of asymmetrical information:
In this situation, you have less Information than others who are key impactors of the investment’s success or failure. In your due diligence, be sure you’ve uncovered everything that is pertinent, that you know what the train looks like so you can see it coming. Avoid the overconfidence bug, and keep looking for the imbalance of data and insight. But if you’re the one holding all the cards — a “UU” investment might be the greatest opportunity for a big return.

Stacking the odds:
You know it’s time to invest when you have the right combination of skill and expected financial payout stacking the odds in your favor. The power of complimentary applied skills should not be undervalued and can quickly compound into greater success. 
When faced with an investment opportunity that may qualify as containing many qualities of the “unknown and unknowable,” clear thinking may vastly improve investment decisions and yield substantial benefits, especially when competition Is limited and prices out of line. In this article, Zeckhauser clearly states that “learning to invest more wisely in an unknown and unknowable world may be the most promising way to significantly bolster your prosperity.”

Six Deals For Friday

•Zoic has been actively seeking molecular (DNA and protein) diagnostic companies, especially those with innovative business models and the teams that can execute on them. An area that we have particular interest in both due to growth potential and potential for disruption is home testing, specifically non-invasive prenatal testing. A number of acquisitions has occurred to validate this market potential, for example, Myriad Genetics to Acquire Counsyl for $375M

•Another area of active interest and growth is using recent advances in noninvasive spectroscopy and other imaging methods, combined with artificial intelligence and machine learning. This has specific advantages for better guiding surgery practices by ensuring each operation is at maximal efficiency, reducing complications and the number of surgeries required. For example, a cardiac mapping technology can potentially provide these benefits.

•The potential diagnostics is not just to better diagnose at the the current timeframe, but at much earlier times. This way, a major condition like cancer or cardiovascular disease can be acted upon earlier and to much greater effect. The vision shared by many is taking samples routinely, either of blood, saliva, sweat or urine, and using this as the main diagnostic point. Liquid biospy still needs a great deal of work, from the biomarker side to the hardware side, but the vision is still getting closer. Exact Sciences CEO Conroy Talks Growth, Foxconn, Startups & More.

•Implants and synthetic veins and valves have existing for some time. However, we see significant innovation potential in this space, mainly due to several groups we are seeing implementing new material technologies and engineering design taken from other industries to make magnitudes improvement on what has been seen before. New cardiovascular valves from synthetic materials can treat diseases and prevent conditions that we are seeing, especially within aging population. A great example of this is Sequoia-backed Chinese heart valve developer Venus Medtech receiving funding from DCP Capital.

•Noninvasive life sign monitoring is another growing field and an active area of interest for us. These devices are in a crowded market, however, and though some have promise, such as startup, LifePlus’ noninvasive CGM wearable that’s currently in testing. However, Zoic is seeking those that can replicate hospital grade technology in a format magnitudes cheaper, quicker and easier to use. Only when the scale of improvement is at or greater than 10x can new medical use scenarios arise, which is our ideal case.

•We also have discussed and are actively seeking either new opportunities or expanding our current portfolio companies’ applications to companion diagnostics. Pharmaceuticals are still a dominant form of treatment and even though we do not invest directly into pharmaceuticals due to the development time, expense and risk, there is certainly market potential in investing in diagnostics that can guide the usage of these drugs. The pharma companies especially are quite active in seeking opportunities to partner and acquire new diagnostics that are coupled with their products, with the goal being patient specific prescriptions and dosing. A great example of this is, Qiagen and Freenome partnering to improve companion diagnostic development.

Articles Of Interest
•Looking For A Better Exit? Get Out Of The Game Early – Crunchbase
•Venture Capitalists Dish on Current Trends – Axios
•Asking Companies to Quit Giving Quarterly Advice – Quartz 

Recent Events 
Zoic Capital attended the Creative Destruction Lab Super Session at the Rotman School of Management, University of Toronto. Companies that successfully completed the CDL program at 5 of Canada’s top universities took part, including a Q&A session with Vinod Khosla. 

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The Biweekly Deal Flow Update, curated by the team at Zoic Capital.

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