July 2018
Laconia Venture Asset Management’s monthly newsletter
provides curated content for family offices.

Topic of the Month: Due Diligence for Venture Capital
Venture capital can be a daunting asset class to analyze. If you are familiar with private equity, you are probably used to judging a company based on detailed financial modeling. With venture capital deals, the numbers and parameters you have for mature companies just don’t exist yet. That doesn’t mean that you can’t conduct a thorough analysis of a company before investing.

This month, we take a deep dive on our due diligence process where we take into account factors from product market fit to capital strategy.
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Interesting Learning in the Numbers

Corporate Venture Capital investing has been growing steadily since 2013, as more and more companies see the value in investing in startups. Last year saw a 19% increase over 2016 in total deals completed and an 18% increase in total capital invested. 
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Spotlight Deal of the Month: PillPack
On June 28, Amazon announced that it was acquiring PillPack for $1 billion, an online pharmacy that pre-sorts medication by dose and delivers to every state in the continental US.

Prior to the acquisition, PillPack had raised $118 million in three rounds of venture funding. Most of those investors made 8.5x on the deal, with some making as much as 11x.

What does this mean?
In short: Amazon is making yet another foray into healthcare. At the end of January, the e-commerce giant announced plans to form a healthcare company as a joint venture with Berkshire Hathaway and JPMorgan Chase because, as Berkshire CEO Warren Buffet so delicately put it, “the ballooning costs of health care act as a hungry tapeworm on the American economy.”

The purchase of PillPack allows Amazon to add overnight drug delivery to its online empire. The big caveat is that in order for PillPack to deliver to a customer, PillPack has to be in that customer’s insurance network. Pillpack is already in quite a few networks, which is a big part of why Amazon made the purchase. 

However, Amazon will still be playing catch up with pharmacies like CVS and Walgreens that are already part of an extensive range of networks, and they have more control of their network status as Pharmacy Benefit Managers (which Amazon is not). On top of that, because those big pharmacies are Pharmacy Benefit Managers, they will have the leverage to keep Amazon out of all their insurance networks. 

We won’t be seeing customers switch from CVS to Amazon anytime soon, unless those customers are willing and able to change their health insurance. They might not even want to, with CVS rolling out a prescription delivery service nationwide within weeks of the PillPack deal. 

What else should I know?
The big players of the pharmacy world are already feeling the waves from this deal. Within twenty-four hours of the acquisition being announced, Rite Aid and Walgreens stock had each dropped 10%, with CVS falling 6%.
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