Neologism: Administrative Loss Ratio

In the US Healthcare world, everyone calls the money spent on looking after patients “Medical Loss Ratio”. The new health care law requires (approximately) that the MLR be at least 85% (meaning, more or less, that at least 85% of insurance premiums go to spending on care, as opposed to administration or profit).

All this is very well, but why do they call it Medical Loss Ratio? Why is looking after me (or you) called “Medical Loss”, when the whole point of a health care system is to look after me (or you)?

What they should do is call that money “Healthcare Expenditure” (and some of it might even be “Wellness Investment”)… and instead we should talk about “Administrative Loss Ratio”. When the insurers take our healthcare dollars and overspend on administration (or corporate profit), then that is a loss ratio – not the healthcare itself.

VC:VC Haikus

I love the Haiku form … the constraints force you to find the perfect words and to trade off one word for another.

I felt only a Haiku could capture a mystery that was presented to me, and solved a moment later, during my wonderful ride with friends on Sunday morning.

Bright red mess ahead.
Dead squirrel in biker’s path?
Smells rise: fries, ketchup.

This got me thinking about other topics for Haikus. How about something from the fabulous Haikus for Jews by David Bader.

Monarch butterfly,
I know your name used to be

For the venture capital world, some commentary on a still topical trend from a 2006 Business Week haiku competition; this entry by Andrew Watson.

Web two point zero
Last year’s catch phrase, this year’s thing
Whatever it means

For the world of non-profits, I found this from someone called Rhonda on the 29 Gifts website.

a new day has dawned
another day of giving
i can't wait to start

(“Giving” in the context of the 29 Gifts website is different from charitable giving, but the haiku works for either!)

To round this off, a couple more from me… first a venture capitalist’s lament

Another quarter;
sales, cash targets missed again.
Why did we invest?

and, at last, a celebration

10-bagger! Hooray!
At last, a celebration.
IRR triumph.

(10-bagger: a venture capital investment in which we make 10 or more times our money when we our shares in the company. 
IRR: Internal Rate of Return: a standard measure of Venture Capital fund performance.)

Build a better mousetrap and …

A press release on Monday noted

L-1 Identity Solutions, Inc. (NYSE: ID), a leading provider of identity solutions and services, today announced it acquired substantially all of the tangible and intangible assets of Retica Systems, Inc. including iris-on-the-move and iris-at–a-distance product inventory, algorithms and software, and related intellectual property rights and customer contracts.

Sigma invested in Retica early on and, along with John Mandile, I was a board member for the entire journey. Retica’s tale is a cautionary one, but one which will be repeated many times, whether histories like this are remembered or not.

”Build a better mousetrap and the world will beat a path to your door” has been a siren song for inventors for over 100 years. Such sentiments are the cause of much entrepreneurial angst, and failure. None are totally immune to the lure of building a better mousetrap.

Sigma invested in Retica a few years ago, when its primary technology was retinal scaning equipment for security/ID uses(think Minority Report). The world did not beat a path to our door. Despite retinal scans being superior in many ways, the world’s security experts had already staked their careers on iris scanning as the solution they were going to use. Retica founder and CEO David Muller saw the opportunity to reuse some of the company’s IP in this field and, with Engineering VP Marc Friedman and his technical team, managed successfully to pivot the company to the new direction within a few months.

Entering commercialization, Barry Morse led partnership efforts with all the industry leaders, and sales efforts with government agencies, first as COO and then CEO (on Muller’s departure to a new startup). By the end of 2009 we had the best dual-iris scanner, the best iris algorithms and beta versions of the only system that can identify people walking at normal speeds at distances of up to 30 feet. Surely success was just around the corner.

For those who are well-versed in reading the tea-leaves of such a press-release, this was not a great outcome for Sigma or for the Retica team. Unable to achieve a path to commercial sustainability, the board and investors had decided we needed to sell the company or its assets to recover as much of our investment as we could. When you sell a company in such circumstances, it rarely leads to fabulous outcomes. The team built a better mousetrap, but the world did not beat a path to our door. Why not?

I believe this came down to distribution – our path to making sales in the industry. Customers of security equipment buy from large, well-established companies. These customers may not like their vendors, and may even know about better mousetraps being developed by startups, but they are afraid to purchase from small firms with all the attendant risks. Startup companies who successfully partner with the larger firms can do well, but creating such partnerships can take many years, not least because they upset existing supplier relationships. No-one gets fired for buying from the big guy, even if the mousetrap isn’t quite so good. Thus it was with Retica. The government agency procurement teams were understandably wary of a small startup with no balance sheet and no track record, however good the technology. Commercial buyers (of security systems for banks or casinos) waited to see if the government buyers would validate the system by making purchases. Large integrators were happy to continue to sell what they had previously been selling; it was almost as good and had far less risk in their eyes.

It is possible to succeed with a better mousetrap. Disruptive innovation usually involves bringing a better mousetrap to market. But the more entrenched the existing players, and the more conservative the buyers in the marketplace, the more difficult it becomes to achieve such success. Venture capital is about trying to calibrate all the varied risks, including this one.

So, knowing all this ahead of time (which we did), why did we invest in Retica? Two reasons; we loved the team, and they were building a better mousetrap.