A cure for health care inefficiency? The value and geography of venture capital in the digital health sector

Relative to other affluent countries, the United States devotes disproportionate resources to health care with disappointing results. Recognizing these problems, entrepreneurs are increasingly applying information technology to health care equipment, monitoring, treatment, and service delivery, creating a sector known as digital health. These technologies, once embedded and distributed around the country, hold the potential to substantially alter the efficiency and quality of health care through the better generation, processing, and use of information; the reduction of overhead costs; and the empowerment of patients. This analysis finds that digital health venture capital investment is a substantial and growing share of total venture capital, creating, even in its infancy, valuable returns for owners. Venture investments in digital health are more dispersed geographically than total venture capital, yet digital health entrepreneurship has no geographic relationship to the traditional health care sector. Rather, the presence of workers in advanced service industries strongly predicts digital health investment at the metropolitan scale.

The Gig Economy Is Real If You Know Where to Look

A number of reports in recent weeks have stressed that employment effects of the so-called gig economy—contract workers on software platforms such as Uber and AirBnB—have been overstated. At minimum, these reports indicate, any increase in gig economy employment hasn’t shown up in the aggregate statistics—at least not yet anyway.

But my analysis tells a different story, showing that the impacts can in fact be seen if you look more deeply at the data and in the right places.

The Farm Goes Digital

Digitization is transforming products, processes, and industries across the economy, and could be the key to sorely needed productivity growth across a wide range of sectors in the coming years, from manufacturing to mining, and from healthcare to home automation. One area of the economy that stands to benefit greatly from the coming wave of digital disruption is the oft-forgotten agricultural sector. Not only are the digital applications compelling, but agricultural innovation is an imperative—with no end in sight for global population growth, environmental degradation, and growing ecological constraints, increased productivity in the farming sector is a must. However, agricultural productivity growth has been steadily declining the last few decades, making a sustainable and inclusive global food source all but guaranteed. Technological innovation can—and indeed must—play a big role. Though in the early stages, emerging “AgTech” innovations have begun to show promise.

The Rich (Late-Stage Bay Area Startups) Are Getting Richer

Last month, venture capitalist Fred Wilson of Union Square Ventures posted a blog entry titled: The Rich Get Richer. In it, he notes that alarmists of a venture capital fuelled startup bubble are missing the point—it’s not an entire sector run amok, but rather, a small number companies that are driving headlines, consuming capital at a high clip, and reaching ever-higher valuations along the way:

As this brief analysis shows, Fred is right: a small number of later stage companies are skewing the overall numbers. However, there is one other point that Fred did not mention: this trend appears to be geographically concentrated in the Bay Area.

Establishments ≠ Firms

This article originally posted at the Updated Priors blog

I recently read a paper that took an innovative approach to at least partially answer a question that is boggling the minds of many economists and other observers: why has the firm formation rate declined precipitously the last three decades? I think it’s one of the most important topics in the economics profession today, and warrants a great deal of continued research in the coming years.

Aside from liking what was new about this paper, something else stood out to me—something I’ve seen before. The paper itself isn’t important here, so I’m not going to reference it explicitly—I’m not one to needlessly criticize someone else’s hard work, particularly when doing so isn’t central to the argument I’m trying to make.

The paper analyzes the relationship between, let’s say variable X, and the “startup rate,” defined as the rate of new establishment formations, not firm formations. This was done, presumably, because data on the former are much easier to obtain. But firms and establishments are not the same, and evidence suggests it has increasingly become important to distinguish between the two.

In research published last year by Mark Schweitzer, Scott Shane, and myself, we showed that the source of new business establishments is increasingly coming from existing firms, or what we call “new outlets”:

Figure 1: Distribution of New Establishments by Type (1978-2012)

Furthermore, because new outlets are generally larger than are new firms in terms of employment, economic activity at new business establishments (as measured by employment) occurs in no small part in new outlets:

Figure 2: Distribution of Employment at New Establishments (1978-2012)

This is something that is not occurring in isolation. The data show that this trend has happened in each broad industrial sector (9 SICs sectors) and across each state (data are not available at the metropolitan area level) during the last three and a half decades:

Figure 3: Share of New Establishments that are new Firms by Sector (1978-2012)

Figure 4: Ratio of New Firm Share of New Establishments in 2012 over 1978 by State

Among the sectors, the shift from new firms to new outlets as the source of new business establishments was greatest in finance, insurance, and real estate, the very broad transportation and utilities (which includes communications) sector, and in construction. Agriculture, retail trade, and mining saw the smallest changes over the 34-year period—but changed nonetheless.

For the states, the chart shows the 2012 new firm share of new establishments over that same share in 1978. Since the data are sorted by largest ratio at the top, states experiencing the smallest shifts from new firms to new outlets as the source of new business establishments are at the top, while those witnessing the most change are at the bottom.

In short, the importance of new outlets to the formation of new establishments has grown steadily and significantly during the last few decades, and this shift has occurred in each of the broad industry sectors and US states. As a result, studies that substitute new establishments for new firms—including when exploiting industrial and geographic differences—are increasingly using less precise estimates over time.

Start-Up Capital Is Spreading Across the U.S.

Startups have seemingly never been more popular, particularly in the U.S. Investors like Steve Case and Brad Feld are betting on companies outside Silicon Valley, predicting that “the rise of the rest” will geographically level the entrepreneurial playing field and make startup communities more prevalent throughout the country.

But what do the numbers say? Are startup hubs really forming all over the U.S.? To begin to answer this question, I analyzed data on a small subset of early-stage entrepreneurial ventures that are focused on high-growth — those receiving venture capital funding. I aggregated venture capital deals for each U.S. metropolitan area — 381 in this case — annually between 2009 and 2014, looking only at “first fundings,” or initial rounds of professional venture investment (those most closely associated with starting-up).

This analysis demonstrates that while a handful of well-known cities continue to dominate the landscape of early-stage venture-backed entrepreneurship, a non-trivial amount of catch-up by other cities has occurred.