It’s time the Wizard gets his due

It’s time the Wizard gets his due

With Father’s Day coming up this Sunday it’s time we give the Wizard, Momma Kliff’s husband his due. Listen the guy just turned 95, no small accomplishment and while his musing may not get the ink Mom’s has the Wizard like Momma Kliff had a keen understanding of our wacky world even though he may not know it. Yes the Wizard and Momma Kliff were quite the pair and frankly had their hands full with four rambunctious boys.

“Money only solves problems money creates.”

This is one of our favorite Wizard sayings as it directly applies to our wacky world. We cannot count how many times companies believe they can solve a problem just by throwing money at it. It particularly applies to all the Dexcom wannabes who seem to believe that with enough money they can compete with Dexcom and Abbott.

It would be foolish to say that money isn’t important but as we have seen time and time again money alone does not in any way guarantee commercial viability. Dexcom wannabees have many hurdles to overcome but a consistent problem they fail to deal with is how once they jump over all these hurdles are they going to run a commercially viable CGM company. This takes more than money and requires vision combined with talent.

Dexcom and Abbott have not been successful because of money alone each has developed a sound well thought out strategy.

“Events will dictate which decisions are made.”

This is all too true in our wacky world as far too many companies are reactive rather than proactive. Just look at what’s happened with Medtronic. Back in the day when they ruled the insulin pump kingdom Medtronic drove change and innovation. Today they are reacting to change and falling behind on innovation.

“The difference between success and failure often times comes down to salesmanship.”

This is exactly what’s going on at Livongo, OneDrop and just about every company pushing way cool whiz band as a cure all for diabetes. Let’s be very clear here as no one would ever dispute that a more educated patient is more likely to achieve better outcomes. Nor would anyone dispute that coaching can help patients deal with the myriad of variables that impact outcomes. However these companies are not increasing in value because they have found some sort of magic potion or have something truly unique or innovative. No they are increasing in value because they have a great story, the benefit of good timing and lots of very slick salesmanship.

This is to a great extent why so many of the analysts and investor ignore the mundane yet critical factors such as do they make money. This is why the let a company like Livongo get away with their very interesting way of calculating revenue. They ignore the fact that Livongo is not alone in this space and competition will drive the fees they charge DOWN. They confuse clients with actual paying active members.

It’s this last point we’d like to examine further as we have been searching for any explanation as to why Livongo is now worth almost $7 billion. In our quest to find an explanation we have reached out to as many experts as we can find, people who may not be part of our wacky world yet have updated ways of valuing companies. Rather than use traditional valuation methods they believe in today’s internet/digital age these methods are outdated and do not reflect the true value of these companies.

Although we’re giving the Wizard his due today we must bring Mom back as she used to say something is worth what someone is willing to pay for it. Right now people are paying a very hefty price for shares of Livongo. Using any traditional metric this valuation is just crazy hence why we are looking for alternate explanations.

The experts we’ve spoken with for the most part mention how many clients the company has and how this number is growing. Now remember that clients are not the same thing as paying customers. Livongo defines a client as business entities that have at least one active paid contract with the company at the end of a quarter. A paid contract comes from getting employees to sign up for the Livongo platform and then interact with the platform. This is when Livongo begins billing the company the per month per patient fee. This is when REAL money starts coming in the door.

We have consistently stated we could care less how many clients Livongo has what we care about is how many ACTIVE members they have and their ability to attract NEW ACTIVE members and retain existing ACTIVE members. This is how they make money. Yes the more clients the company has the greater the number of POTENTIAL ACTIVE members, so it would be foolish to completely dismiss Livongo’s ability to attract and retain clients. However since these clients do not pay anything to sign up and only begin paying when ACTIVE MEMBERS join the platform using this one metric alone is misleading.

To us everyone is confusing clients with real paying ACTIVE MEMBERS which we consider a much more important metric. Throw in all the way cool whiz band AI+AI, the digital health sector being hotter than Georgia asphalt and the Big MO and that’s how get a valuation of $7 Billion. A valuation that cannot be supported by traditional method. A valuation that as Dad said really comes down to salesmanship.

So to the Wizard and all the Dad’s Happy Father’s Day. And Dad don’t worry that you’re not as famous as Momma Kliff for as you used to say she deserves a medal for putting up with you and us her rambunctious children.