The Shifting Value of Growth CapitalJohn Ferry, Senior Associate, Oxeon

photo_article2John serves as a Senior Associate at Oxeon and has been largely focused on building leadership teams for high-growth Healthcare IT and Services clients including Landmark Health, Clover Health, GoHealth Urgent Care, Oak Street Health, AVIA Health Innovation, Bright Health, and many others. John has also worked closely with Oxeon's large non-profit clients, including leading Chief Innovation Officer and Chief Marketing Officer searches at Sutter Health and working closely with Intermountain Healthcare on their innovation strategy. John is also actively involved in evaluating and managing the firm's investment portfolio and equity-oriented strategy, sourcing and evaluating multiple direct Oxeon investments. John is based in Chicago, IL.

We talk a lot about different kinds of capital in the venture world: direct investment capital, human capital, relationship capital. The last few years have seen an unprecedented amount of venture capital funding into early stage companies. I was lucky enough to listen to Bobby Franklin, the President and CEO of National Venture Capital Association (NVCA), speak at MedCity Invest, a recent healthcare investment conference in Chicago. One of the key themes of his presentation was the growing rate of venture investments in early stage companies - VC dollars invested increased for the third consecutive year in 2015, hitting its highest annual amount mark since 2000. Without getting into comparisons to 2000, there's a simple truth within this data: companies are flush with cash.

Bill Gurley's excellent recent blog post, "On the Road to Recap," highlights some of the problems this has led to, particularly with the "Unicorns" of Silicon Valley: record high burn-rates (which he estimates might be 5-10x those of the 1999 timeframe), "most companies operating far, far from profitability," and "excessively intense competition driven by access to said capital" for companies chasing the increased valuation headlines. This "capital glut" within many of the Unicorns of Silicon Valley may ultimately lead to actions undesired by any founder, investor, or employee of these companies: down-rounds, loaded term sheets, and unachievable sales goals. According to Gurley, "more money will not solve any of these problems - it will only contribute to them. The healthiest thing that could possibly happen is a dramatic increase in the real cost of capital and a return to an appreciation for sound business execution." For entrepreneurs and investors seeking returns in this environment, I would add to the list of Gurley's remedies: a deep appreciation for the value of human and relationship capital.

Let’s take a second to define "human capital" and "relationship capital" and what it means for scaling venture-backed companies today. Human capital encompasses everything people bring into an organization – their skills, experience, grit, passions, etc. Relationship capital is much more than someone simply joining an organization with a "rolodex" – it’s the sum of an organization’s connectivity to the marketplace: how will this company be received by anchor partners or customers? How will this company navigate the complex relationships within the existing healthcare ecosystem? Both forms of capital are difficult to quantify, and rightly so, as they’re both fundamentally about people.

In healthcare, I would argue that human capital and relationship capital are even more valuable. Established players are not easily disrupted; sales cycles into the provider and payer space do not match those of a traditional enterprise software company; and, unfortunately, the industry can be quite unforgiving to first-time healthcare entrepreneurs. Great human capital can navigate most effectively through the complex term sheets Gurley warns may be incoming. And like top tier venture capital, great human capital attracts other A-players into organizations. Great relationship capital can accelerate healthcare’s notoriously long sales cycles. Great relationship capital can lead to a company partnering with a top tier anchor client.

It’s no secret that venture and private equity firms looking for outsized returns have been forced to put more and more dollars to work into earlier stage companies. At Oxeon, we’ve seen this trend in real-time: multi-billion-dollar private equity funds financing companies when they are no more than a PowerPoint deck put together by a brilliant entrepreneur, strategic and corporate funds increasingly funding early stage companies where they can add immediate strategic value, etc. Venture capital firms are building out more robust, and more strategic, human capital and business development teams for their portfolio companies as they continue to find competitive advantages in this capital-rich fundraising environment. On the portfolio company side, the Chief People Officer role has emerged as one of the most critical early executive hires. With an executive focused exclusively on talent – and when talent is treated as a strategic focus and not simply a function of HR falling alongside other administrative responsibilities – companies best prepare themselves for massive scale and for putting their hard-earned investment capital to its most effective use. A Series A company I worked with recently brought in a Chief People Officer as their first executive hire post-financing in anticipation of more than doubling their employee base over the next year.

Gurley clearly identifies the downsides of some of the investment “capital glut” we’re seeing in the venture space, and the winning companies will be those that maximize the value of other forms of capital – human, network, and experience. At Oxeon, we seek to bring these additional sources of value to our clients and investments through our intense focus on relationships, talent, and organizational design. While the greatest companies are always built by the most exceptional people, I believe we’ll see that proven out more when we make it to the other side of this venture capital cycle. Overinvest in relationships and people – with human capital and relationship capital, there’s no such thing as a glut.