Fireside Chat: From Operator to Investor (and back); Perspectives From Wearing Both Hats | LSI USA ‘23


Henry Peck

Henry Peck

VP, Strategy & Growth, LSI
Josh DeFonzo

Josh DeFonzo

Co-Founder & CEO, Mendaera
Read Biography
Dennis McWilliams

Dennis McWilliams

Partner, Santé
Read Biography
This panel provides insightful perspectives and valuable lessons learned two professionals who have transitioned from positions in start-ups to the investment side, and vice versa.


Henry Peck  0:00  

Thanks, everyone for being here. And thank you Josh and Dennis for doing this fireside. As Scott said, this one's gonna be open fun. You have two incredible operators turned investors turned operators and continuing to be on both sides of the table and the perspective that they bring on both the operator and investor functions and the market and the conditions that we're in at large, are incredible. I'm going to ask a couple questions that I've been dying to ask both of them in a public setting. And so we'll see how that how that goes. And then after that, we are going to pass the mic around any questions that you have for them, open it up, let it rip. I'm just going to sit up here and cross my legs and have a cocktail like all of you. So start it out, why don't you guys introduce yourselves for the audience and we'll go from there.


Dennis McWilliams  0:40  

Okay. Dennis McWilliams, partner partner at sante ventures, that many of you although it's it's hard to see from up here with the lights so, but I believe I have met with most of you out there in the audience. At least that's what it feels like. But I'm a partner at sante ventures. We're early stage Life Science investors. My personal background, I actually I've been an operator most of my career started in the early 90s, doing biotech and tissue regeneration technologies. In the mid 2000s, I pivoted and started a company called Apollo endosurgery. Raised angel money raise seed rounds, raised venture dollars raised that dollars, scrapped together like you guys did, and eventually Apollo actually actually did fine, and then made the transition to sante a few years back. So live in Austin, Texas.


Josh DeFonzo  1:32  

I'm Josh DiFonzo. I too am primarily an operator. I've been in the medical technology field since 2003. Spanning everything from orthopedics and implants to surgical endoscopy, which is how I met Dennis, what 15 years ago, something like this now was that or is health. In one of the primary investors, there was a group called Lux Capital Management. They were early investors, I lead product strategy and operations for that company. That company was acquired by Johnson and Johnson. And after about 18 months or so the integration, I joined Lux Capital Management. And if you'll recall, what was it one or two years ago, we we had sponsored us back together. So I will take no spec questions. Just totally kidding. Actually, it's really a great experience, I helped them as a venture partner. And at the same time also spun another robotics company out of Lux Capital Management. And so it was doing double and triple duty for at least two years here. And these days, I probably focus about five to 10% of my time on investments. And then the other 100% of my time, is on the startup. And so that's my background in a nutshell as well


Henry Peck  2:37  

love it. So let's chip away at that five to 10% that you focus on investments first start there, and then we can go maybe back to your other 100. And so then Dennis and Josh, both wearing the operator hat for so long, and having the success that you did now, working with a portfolio of entrepreneurs and founders and looking at emerging founders, emerging entrepreneurs and executives, I have to imagine you look at those operators with a bit of a different lens than, say people who come from pure financial backgrounds, or maybe even some of the other people in your funds and partners that you work with. So talk a little bit about how your role as an operator has impacted the way that you interface with those entrepreneurs and executives and maybe where your bar is dependent on the stage accompany that type of founder all that good stuff. Why do you have to start?


Dennis McWilliams  3:26  

Okay, I guess I'm starting. Josh. Yeah, no, I so I think it does bring a really unique perspective. You know, if you sat in in the CEO chair, if you've run a venture backed company before, I like to think I think a couple more to my portfolio company CEOs might be out there, I'd like to think that I'm, you know, I'm a little more empathetic to the plight and what our companies are trying to do. And, you know, I, you know, for me, at least, I tried to be more of an assistant more of an amplifier for CEOs, kind of to help them go. And so I, at least what I have found over the the few years now that I've been doing this, when I'm partnered with the CEO of my portfolio company, who's willing to partner back, it works really well, because they're really open to the ideas, I learned things from them, I can help them kind of wade through various things in the handful of occasions where they've not been willing to do that when they're trying to kind of play their own games that are just different dynamics. That does not work very well, I don't, I tend to have a lot less patience for that than maybe some of my partners as well. So I think it probably cuts both ways. For the most part, I like to think that it that it adds value. You know, I don't sit there and try to do the jobs on my CEOs. I mean, I've done that before. I don't I don't want that job. And so I try to help them any way I can.


Josh DeFonzo  4:43  

Yeah, I think it's well said, this idea of like advising, coaching and mentoring is sort of my first instinct, generally speaking, and then I'll kind of cut to the other side of Dennis's point, which is also like I'm also I would say, a lot less patient when people don't take that sort of Advice to counsel and to heart. And so at the end of the day, you know, my main objective is to help develop entrepreneurs less on the operating side. But I tried to give them insights about like, Hey, how is the venture group going to look at this? Like, what is your business? What type of venture groups should you be talking to? You know, I'll do pitch rehearsal with them oftentimes. And that really, for me is like the first litmus test, right? Because I in no way shape or form? Like, do I ever stiff arm an entrepreneur or an operator, I just tried to provide guidance. And so whether or not that guidance is taken even to one or two degrees, I think, is my litmus test. And if it if it's not reciprocated, a kind of like, this is gonna be really tough. And then also, there's like a higher bar for quality. I think as well, like, I don't expect that a budding entrepreneur knows everything out of the gate. Of course, none of us do. But it's really like, how much effort do they put into the feedback that you provide? How much do they clean up the pitch, and we can get in all kinds of details thereafter,


Dennis McWilliams  5:56  

getting a board book done on time, right?


Josh DeFonzo  5:59  

Like just scheduling your board meetings, just schedule your board meetings for the year, just schedule your board mean, that's like the biggest piece of advice I can give you. And don't surprise your board members, when you have the board meeting, if they don't know what the agenda objectives issues are at the company, like, I learned that from, I think some of the best of the best CEOs is like, make sure that they are always prepared, and that you are always prepared.


Dennis McWilliams  6:19  

Because I think you're you're part of the perspective you gain as an entrepreneur, as you're kind of building companies and raising more and more complex financing you, I think the role that you think of a CEO, or at least I know, for me, in my entrepreneurial journey, what I thought the CEO was earlier in my career was, hey, you're driving the company, you're pushing that you're making a lot of different things happen. And it's you, that's the driving force of that. And I think that's that, that's always the case, it's probably more so earlier in the company, as your company evolves, your role changes a lot as a CEO, and, you know, really your job almost becomes, you're kind of like the representative of the investors in the board within the company. So it kind of goes both ways. I mean, they're the conduit of information to the board and to the investors driving that strategy on the top line. And then you're also reverse driving that back end. So what you decided as a board from a strategic perspective, the CEOs, the one that's now deploying that within the organization, so it's a much more close knit relationship and see young CEOs who can evolve into that and can build those trust. Now, it goes both ways, the investors have to be willing and bet to be trustworthy as well. But when that happens, that's when you see companies performing really, really well. And when it's not, that's when when you run into trouble.


Henry Peck  7:29  

You mentioned this idea that you are advocate, you're kind of the conduit of information and representation of the investor community to your company. And you talked a little bit about pitching the right investors and developing those proper relationships. Maybe for you know, for the operators in the room now that you've been down that journey, and are on this side, what are some of those finer points about managing a fund being a venture partner that you wish you knew or could convey to help people understand how you go about building those relationships and what it really means how they run their businesses as VCs, that could help operators be more successful.


Josh DeFonzo  8:07  

By a contemporary example, we the number of decks and inbound requests we had for meetings, like as Silicon Valley Bank was melting down was astonishing. So it's sort of this idea of context, I think, I don't appreciate I don't think I appreciated I certainly did not appreciate until I went and spent time with the folks that looks just how busy they are. I mean, the amount of inbound that they get is astonishing. And so the first thing that I tell many entrepreneurs, when they talk to me about wanting to raise, like oftentimes, it's because I have like the locks business card that like we want to talk to such and such partner. And a lot of it is like so much of it is context, right. And Dennis had alluded to, you know, on the operational side, as CEO, being able to go between levels, like when you're when you're running the company, and it's like five to 10 people, you're running the company, you're driving the ship, and you're always driving direction. But once you become like a small village or city, you're really providing context and prioritization, right? Whether it's for the team or for the investors, and you're hopefully connecting that. That same awareness, that same like context is super important. When you go if you're gonna go talk to Asante, you're going to talk to luck. It's not quite as simple as like, what portfolio companies do they have on the page. And yeah, I'm a match. And here's why I'm a match. So there's some element of like, what kind of capital do they deploy? What is the environment that they are in? Dennis just announced, like two or three other deals? Because if so he's probably slammed. And so so much of this is about timing. And so one of the other sort of thematic things that I counsel entrepreneurs on is like, you always want to raise money, I get it. And it's always a sense of urgency, but you really want to be in a position where you can afford yourself, poise and pace. And it's easier said than done, right? But you want to make sure that you're not like, I've got to close this round in 30 days, because it's going to create frenetic behavior that is literally just gonna like, I think cause most investors to scatter from my opinion, but I can't


Dennis McWilliams  9:56  

reinforce that more. I think it's a great point. I mean, one of the things I didn't appreciate It was, I think a lot of us know, the basic rules of when you approach your fund, have some context understand is that the right stage? You know, have they invest in other companies that kind of look like you not necessary competitive, but like, do they invest in the types of deals that kind of looks like your deal? Like, those are some of the basics. And I think a lot of people know, I never really appreciated the personal dynamic of when you're going into a fund. I mean, your your comment about the amount of deal flow I mean, Asante, particularly as an early stage investor, I mean, when times get tough, I mean, we get massive amounts of deal flow. And if I don't have context for that, or if I'm in the middle of another deal, like you pitched me, I've got a deal right now that I'm working on that I'm hoping to close in the next three to four weeks, I just don't have like, you pitched me a new idea right now. I'm like, I'm cringing thinking about, like, I just tried to get this thing done is like, I can't even think about trying to get something else done. So this ability, you mentioned the word poise. I mean, I think having the ability to build some relationships with funds, so that like, when I'm coming up for air, you know, in May, and kind of thinking about like, Okay, what looking around now, what do I do next, I kind of might already know, because I may have met it and LSI, or I may have met it, you know, at JPMorgan in January. And not that we're slotting deals in like that, but like, you kind of do because like, you know, when you pitch a fund, there is an individual or a couple of individuals that are going to have to do a ton of work. I mean, if they decide to move forward on that. And so we don't do that lightly, because we you know, it's you know, we're trying to be right on these things. And so I think just realizing that and like, you know, knowing that if you keep pushing, pushing, you're not getting the response, or you're probably not resonating doesn't mean, so you're not a fit it just like they don't have bandwidth, being able to gracefully step back and say, hey, you know what, when it can maintain a relationship, we'll check back in a few months. I just love that when I get that from an entrepreneur. And that kind of buys you a little bit of a credit to come to come back and down the road.


Henry Peck  11:48  

Not to not to make a bad pun, since we have cocktails up here. But what would be the sober take on how long? You know, an entrepreneur executive, you'd say before you actually do that deal. So


Dennis McWilliams  11:58  

the one I'm doing right now, we've been, I would say working on it for almost two years. So like we met, it was part of a thematic research, we got to know the company, we thought it was really interesting, we went up and visited, we didn't really align on deal terms, we kind of took a step back. And we did this dance for a couple years. And they came back and the timing was right, the deal was right. And, you know, we knew them. And the timing just worked out really well. And so, I mean, that's probably a little bit more on the extreme. But you know, I mean, we're typically going to known a deal at least six months, if not a year. You know, if not, we definitely know the space. So if you're coming to us with a new deal in in a space that you've not seen us invest in, that's harder to because now I have to get really smart on the space, and then get smart about your deal in the context of that. And that's going to take us longer as well.


Josh DeFonzo  12:48  

Yeah, and every partnership is different. But I would echo exactly what Dennis said it mean, take these numbers as directionally correct, but not accurate, maybe 10 15% of the time, particularly for like growth investments. Sometimes its momentum, and it's a shorter cycle. But it's often when it's a syndicate or an investor with whom you've already co invested number of times, and they're sort of leading and you're coming along, those can happen quickly. Those are great for the entrepreneur, of course, and great for the fund when that happens. But I would say seed series A all the early stuff, Dennis is absolutely right. 612 plus months. Now, that's not to say that everybody has six to 12 months. But I can just tell you from like the internal, like Slack channels that happened at the fund, the number of popups, I get on my laptop, like hey, I met so and so this week, like no action right now. But they're making a lot of really great progress. And I really like so and so. Right. And just that awareness like those, those breadcrumbs that are left within the partnership actually make that partners job. I'll caveat this by saying all funds are different in all firms are different. But at least representing what I see from locks is that a lot of it is like a group decision. So it's not just convincing Josh or Peter or somebody else on the team. It's like the whole firm has to feel really, really pretty good about it. So that consensus building takes time. And it's best done through relationships, frankly,


Dennis McWilliams  14:07  

what right so then think about that, you've got to build the relationship with an individual partner associated within a particular fund. Get them excited, which takes time we just talked about that can take several months to do it. And then let's say you get me excited about something now I have to go get the folks Asante I mean we're a consensus organization, I need to kind of get their buy in and I can't just show up one day and throw a pitch in there with no context and expect that that's going to go well. So there's you know, there's a lot of kind of planting seeds in the ability to kind of watch a company track along and show that progress helps out a lot.


Henry Peck  14:38  

So, a couple days about a week ago, you're getting a bunch of slack pings that somebody you liked this person, maybe met this person, take a sip, we're gonna talk about it. You're in the middle of some research, you're working to close a deal. And you see the first tweet that something might be going on with Silicon Valley Bank.


Dennis McWilliams  14:55  

I mean, none of us on the wheel of fortune of shit that has our stuff that happens in In venture startup world, no one had global banking crisis on their bingo card. I think it was just a cut all of us off guard, Mike. I mean, I think it was just you know how quickly things moved from really Wednesday to Thursday night, when my phone started blowing up on Thursday night, syndicate partners and CEOs calling. And you know, mind you, you know, the Twitter wars already been going on all day long. And I'm very happy to talk about the advice we gave, I mean, you know, we, we had, I'd say, at least half of our portfolio in Silicon Valley Bank, our fund, you know, banks with Silicon Valley Bank, they've been a great partner, you know, they're there for a reason. You know, we looked at where they were in, like, where deposits were, and kind of the health of the bank, maybe not from a shareholder perspective, but from a deposit perspective, we're like, I mean, they're solving, you know, they're bonds are undervalued, they have to hold them. So we kind of recommended like this, hold tight and see how it goes. And, you know, completely underestimated the bankrupt concept and had, you know, actually a really interesting conversation with a syndicate partner on a deal where, you know, we were kind of giving competing advice on that. And Friday, they were like, look, you know, that was a mistake. We could have done anything anyway, because you can, if you're, you know, Thursday afternoon, it was too late. And then so the announcement comes to 4pm on Sunday that the, you know, they're getting backstopped by Twitter. So we'll wake up Monday morning SUV is the safest bank in America. So it's like, you know, that's how quickly things changed. And, yeah, it was frightening time.


Josh DeFonzo  16:30  

I mean, I don't have a lot to add, other than my personal experience was that my finance person texted me quite literally in my iMessage. Like, it's like money out of SBB. Yeah, question mark. And did we get hacked? No, what's going on banks failing, okay. Okay. So I mean, it's one of those things like you're in the middle of an interview. Number one, and again, because I sit adjacent to locks, you know, I was riding shotgun with them, they're like, and credit to them as a firm. And I'm sure that many other venture firms did the same. It was like, Okay, if we have a liquidity issue, we don't think that the Fed is going to let this go belly up. Worst case scenario, we've got a liquidity issue, like, we will set up a fun to deal with payroll. And so like, you start to think about the health and solvency of all the people that are employed in your portfolio. And, yeah, it's just you go into how do we manage this crisis as effectively as possible? And yeah, as Dennis said, it's not one of the things that you plan for on a Thursday afternoon, right. It's fun weekend, though a lot of action on twitter bot action on Twitter that we can


Dennis McWilliams  17:34  

look, I mean, I think we're so I think everyone is trying to figure out, well, what is good Treasury policy? Like, what are we going to do you get the company $5 million, you can split it between 25 different banks had to fit together? I mean, every bank account you add is is an exponential increase in progress. So it's like you're you know, so in, in to, like, if everybody had had two bank accounts on Thursday, that thing would have collapsed. And second. So, you know, I think we're all trying to, you know, take a step back and say, Okay, what is good policy? What is the government going to do to kind of prevent some of this stuff as well, which I kind of hate saying that as a kind of a libertarian type. But, you know, really, like, you know, there's just not a good way to hedge that type of systemic risk, you know, back in, oh, 809. I mean, I think we kind of all saw it come in, right. And so you kind of plan for a little bit. But you know, here, this was just, again, just not not what we planned for.


Henry Peck  18:23  

So you talk about a an external market force or condition that you maybe didn't have on the board. But Scott talked about a panel that you did a while ago at LSI. I want to maybe revisit a panel that you did it all sigh while ago, that when we think about things in the external marketplace, that we're impacting investor behavior, company behavior, talk about kind of the SPAC ecosystem and what was going on a couple years ago, when it was seemingly really exciting and new when we were all talking about it. And it looked to be something big. And then where we are now kind of comment maybe on the evolution over the past few years. And from your perspective, having run one. Yeah,


Josh DeFonzo  18:57  

I mean, I think I think there's still merit to that instrument, I would say, when we formed ours, and when you saw the bolus of other special purpose Acquisition corporations being formed in like, let's call it late 19, probably more. So. Second half of 2020. We were sitting amidst, you know, maybe was a year seven years from the 2012 cycle. So we were sitting at the tail end of an extreme bull market, very aggressive monetary policy. And I would say asset prices, whether it's like a painting a luxury watch a vintage car, a Silicon Valley startup, they were all inflated. I mean, I think that they were all really high. And so you had at least in my view, on this private market, where there were valuations that were extraordinarily high. I think the IPO market was open then but it was different flavors of companies going through different pathways. Our view was then and we still maintain that the spec is a reasonable outlet for some companies. Having said that, the macroeconomic forces that came to play what you've seen play out with many of this backs, like those many of them didn't end up well, I think me, you can count on one hand, those that are still trading, you know, near within 20% of their $10 price. And so for us, we did structure ours with, I think, some financial discipline, you put the money into the promote, and then we have what's called a forward Purchase Agreement, which essentially said, we were going to put some multiple, like three times the amount of money into the investment in the company after the combination. And that discipline was a really good governor for us like that feature of our spec. And so we we ultimately got close to transacting was one of these situations where the company wanted capital, but it was a development stage biotech company, we were successful in raising part of the funds that they wanted. But given that environment, it was like, Well, why would we transact because you're just gonna go to a secondary market and a distressed environment, it didn't make sense. And so what I still like about that, that product, if you will, is the ability to build an investor syndicate in the public market. I think that is really strong. But but it is not. It is not something to be taken lightly. In other words, Quality Matters, whatever that you do. So whether it's on the private side of the public side, like you've got to have sound fundamentals in place, and I think, unfortunately, too many companies got through that didn't have those. And, you know, the results are, speak for themselves.


Dennis McWilliams  21:13  

Yeah, I mean, I think we were looking at it, we didn't have a spike, we were obviously watching that and start one week. And, you know, Sunday, we do a reasonable amount of biotech investment as well. And you were seeing a lot of activity on the biotech side, and obviously a lot more IPO activity on on the biotech side. And so we were getting a lot of our CEOs in the biotech side seen this as an alternative financing vehicle and pursuing that, you know, maybe a company that was having maybe their stage wasn't quite right, and they're trying to raise money more traditionally struggling a little bit with that not quite an IPO candidate, thinking that a SPAC might be a way and there was this dance, I remember and you know, it was probably you guys were on the other side of this where dispatch companies were starting to realize their clocks are ticking a little bit, you know, you've got companies as the market starting to tighten up, that are like, who, gosh, we better finance fair what to do. And there was a lot of time, a lot of churn I think wasted on both sides of companies, you know, spending time thinking that the SPAC would be a good vehicle for them to go, only to realize that, you know, okay, it's a great vehicle, but you still have to go out and raise money. And like, you know, again, your structure was in the discipline is interesting, because kind of forced to maybe a higher bar on that, which would increase the chance of success of the pipe that goes, but a lot of these words, and like, you know, we found out the hard way, we had one company that, you know, signed into a deal and then went and did a pipe. And we learned it was just literally the same funding process that we just went through. And, you know, if you couldn't do it independently, you weren't able to do it as a SPAC. And I don't know, and then it just really quickly unraveled after that. I mean, we did talk that, you know, when when there were so many being created that like you, we all know, we're in a bubble. And like, you know, that was the sign like to us, like you never know when it's going to really go. But like, we thought, this speaks back, this is probably the peak of the bubble.


Henry Peck  23:00  

Well, gentlemen, thank you both for answering all my questions, I want to make sure that I think I've got plenty of mine out, I want to make sure that everyone in the audience who has questions has a chance to ask them. I think I hopefully speak for you guys, when I say they'll probably answer anything. And but you may not like their answers, I can't promise that. But thank you very much. And we have a microphone circulating. So if you have a question, raise your hand and embroidering around.


Speaker 4  23:33  

So you guys both do biotech and medtech. Lux also does some deep tech and other areas, right? How do you kind of think about the risk reward when you look at some of these different areas that are definitely not an apples to apples kind of comparison, and you have a portfolio that can go after these different sectors? How do you kind of think about where you decide to put your investments within a given portfolio?


Dennis McWilliams  23:58  

Yeah, we talked about this a lot. I mean, it's part of our strategy that we pitched our limited partners. You know, biotech, we kind of like to say has a lot of alpha. I mean, you can make an investment in biotech company and market size, I don't wanna say is irrelevant, but is never really, really the issue. It's a lot of technical risk, a lot of clinical risk. But if you're right, you know, it's pretty easy to paint a picture for a billion dollar exit. It's really hard to do a billion dollar exit and med tech. I mean, you did one, I mean, there's a handful of them. Where that happens and prioress is probably the only one that did it. Pre revenue, right. And so, you know, on the med tech side, we see that, you know, maybe a little bit less alpha less ability to go drive that multibillion dollar exit for an early stage investor. But we like about med tech, it tends not to slosh around as much as by you know, biotechs either on or not, you know, med tech. I mean, I'm sorry. I mean, I've done med tech moments, my entire career. It's always hard. You know, sometimes it's a little less hard. Sometimes it's a little harder, but it's always kind of hard. But there's a a lot more discipline in the med tech market in the med tech ecosystem. And we like that as an event. So I don't want to say it's a safe harbor for us, we kind of always keep the med tech stuff going but valuations ever get too high. You know, IPOs, yes, common can drive a little bit of Alpha on what you're doing. And then health Tech's, you know, kind of in between, you know, health tech, I think we're all trying to learn what that business is really like, in really, how do you drive real cash value back, I mean, there were a lot of really good paper gains and some valtech stuff that happened over the past three or four years, when there was actual cash back to funds that they can distribute to their LPs, that's still still out there a little bit. But the ability to be able to hit real milestones on a smaller amount of capital is unique to health tech, compared to both med tech and especially compared to biotech.


Josh DeFonzo  25:49  

Yeah, I think that's well put. And so Lux is a generalist fund, I focus exclusively on healthcare when when I do help the fund. And so it's often to my chagrin, that I have to compare any potential investments less so on the biotech, but like health tech, life science tools and instruments, med tech, to a deep tech company, or even we don't do traditional SAS, but but things that make a big difference. And so our criteria is really the same across the board. I mean, I can give you the whole, we aim to get 10x. But we do aim to have significant returns for our investors by backing, you know, generational founders, generational companies, right? That's our view. As, as Dennis said, unfortunately, med tech is just more capital intensive. And so the kinds of med tech companies that we look at, you know, as it pertains to this audience more, so are those bets that generally are a little bit bigger, you know, we won't necessarily look at something that is a tech acquisition, I think those are perfectly acceptable opportunities. I think they address unmet needs help patients are good for strategic, but it's just not necessarily what Lux is going to do. Because if you look back at all of the data, you know, the capital in versus the returns is not quite the same multiple that meets our hurdle rate. And so a lot of it is just juxtaposition of those different opportunities, and which ones give us the biggest bet. So, you know, we are we are pro medtech. Having said that, but it is largely things that look a little bit more or as a nature, so a lot more robotics, usually multidisciplinary research and development. And then it sits at the intersection of disciplines, either on the commercial side or clinical side.


Dennis McWilliams  27:21  

And how are you curious about your some of your original comments on how, when you think about a venture fund, there's no okay, do they invest in my space, they invest in my stage. Also, lots of venture funds have multiple different philosophies of how they'll look at a particular space. If you take med tech, for example. Yes, is capital intensive, it's harder to scale. You know, there's almost like, you kind of see a dumbbell strategies between venture groups, I mean, Sunday, we're early, you know, early works, if you can get an exit reasonably early, for the amount of capital that we're deploying. So we tend to, frankly, do more PMA stuff. So things that are gonna trade on data, where, you know, first in human study, evaluation is a real value driver, you know, there's a timeline to pivotal in somebody's buying the company on hope not in a revenue multiple, that works for us, as early stage investors, there's a whole nother group of med tech investors who are on the opposite end of that dumbbell, where they're like, look, we want to be on the other side of that risk, we want to be very predictable, you know, abilities to understand the scientific and regulatory risk on that. But they're deploying a lot larger amounts of capital, because what they're driving for is getting something from, you know, a couple million dollars in revenue to 10 to 20. And then getting the revenue multiple on that, but they've deployed a lot more capital. And so So again, there's different ways that people think about parsing that and we don't put that on our websites and stuff. But if you if you talk to funds, you'll learn that about them. And you know, again, that doesn't mean that your business model is wrong for you. There's like tons of great business models out there and medtech that aren't good venture investments for Asante. But it's just you got to be cognizant of that. And when we give you that feedback, I mean, it's real. It's just how we've learned how to make money.


Josh DeFonzo  29:01  

Yeah, that's a great point. You know, even less so than the PMA or non PMA side of things, you know, betting on data versus betting on commercialization, I would say the number one reason that something is a mismatch, even if by profile by by by qualitative attributes, I'm a robotics company, or whatever it is, it looks like something Lux has done, I would say 90% of the nose in the healthcare space, they come from the founder, because their strategic mismatches and so our bell curve is like big investment in seed series, a very little except for follow on participation in B and C, or growth. So like, we won't do anything in the middle. So I see tons, dozens of incredibly attractive companies that are like a maybe going into their B where they're still pushing through a pretty significant development path. And by that point, it's usually a valuation and a return calculation that just says, Hey, this is an incredible business. It's just not for us.


Dennis McWilliams  29:53  

And I run it you and I were both at companies that had to go through that stage through that, that you know, you think about EGS and like, you know,


Josh DeFonzo  29:59  

say I wasn't You name it. Yeah.


Dennis McWilliams  30:02  

Apollo because look it early. I mean, you know, at Apollo, we hit that, like, we got our products approved, we're doing a couple million in revenue. And we're thinking like, how do we scale to 20 30 million and no one wants to invest in that risk, because you don't get paid for it as an investor, so


Josh DeFonzo  30:15  

we need another round.


Dennis McWilliams  30:17  

I mean, we had to get creative and how we're gonna do it. And we ended up acquiring actually we bought using debt, we bought a sales organization of Allergan effectively is what we did. That's how we solved it. I wouldn't recommend it, that was actually really hard. But again, it's like you, you have to get really scrappy as it relates to that so and then you'll get like a shockwave. So that's, you know, Inari that sail right through that. But those are companies that probably had 95% gross margins out of the gate. And you know, so you got to think about your businesses will do, like, do you have the ability to scale revenue, and build margin, because if not, it's gonna be hard.


Josh DeFonzo  30:50  

That's the other thing to go back to the point that we mentioned earlier, the relationship piece is really key here. Because if you are like, let's say, for Lux capital, you're in that sort of no man, no person's land between seed a and your C or D. That's like true growth. Having that relationship is key, because they are such wonderful networkers. And I know that many other venture firms are but if you have like an authentic relationship, like they will find someone who will fill the middle for you. I'm not going to suggest that it's easy, but like having those relationships that are really meaningful is going to make fundraising so much easier. And so I talked to many CEOs and their common refrain is like, I'm always fundraising. I always feel like I'm fundraising. It's like, sure, but like, you should actually not look at it as like the transactional side, give me a term sheet and let's get the docs going. Like that's the wrong way to look at it. I think you definitely need to look at it as like bridge building and developing meaningful relationships. And I think all too often, I've been guilty of that as an operator. So


Henry Peck  31:45  

any other questions?


Josh DeFonzo  31:47  

Oh, no, Scott's got the ringer.


Scott Pantel  31:52  

All right. You guys both have a reputation for being really nice, guys. I want to know, I want to know, some backstories here. We'll we'll go to Dennis. We'll pick on Dennis Josh. When have you seen him? What does it take to get him upset?


Josh DeFonzo  32:12  

So Dennis and I got cocktails flowing now. And then like I mean this I have to go back to 2009 I was like a wee lad and Dennis. So Dennis was at Apollo endosurgery. We're going to be talking about natural orifice trans and aluminum surgery all night here. So Dennis is at Apollo and I was at a company called intragastric solutions. So we are effectively competitors. And I think one time they like sages, which is the surgical Gastrointestinal Endoscopy conference, like they put us right across from one another. And I'm like 27 I think I was staring Dennis down. He's wearing cowboy boots and I decided as I looked him up now I'm like, I think he could probably beat me up so but I don't remember Dennis ever frankly getting getting hot about I do now with me, so I don't have a war story for you other than being terrified of him.


Dennis McWilliams  33:00  

I mean, I do get I mean things that way things that make Dennis mad. Yeah, I mean, I didn't know we're gonna go there. I don't


Scott Pantel  33:06  

want to make this a negative thing here. I just want I want some backstories How about some near death experience we talked about near death experience, oh, I can tell it near near death experience near death experience and something something we should learn from that.


Dennis McWilliams  33:17  

Back. And this this point, when I mentioned this is like so Oh, eight or nine, which we like lots of us have scar tissue from? Oh, 809 when the markets collapse, and no venture fund has money, they're not gonna raise money. And we're just hopping around and you know, happy entrepreneurs raising money for our company thinking everything's gonna be okay. And not realizing like, you know, what we were walking into in this desert. And so, you know, as we kept going, and you enter this thing, muddy, ever know what bridge world is where you're just bridging? You know, I think we did, like 11 Bridge financings in a row 11. Like literally, it was just like, I got a bridge, like send the like, I didn't have to call the attorneys, I would just edit the Word document myself and send it out, just change the date change the date on it. And I mean, that I mean, in that was that was super painful. And so we had applied for a grant City, Texas had some and still does have some actually really interesting incentive grants. And so we had applied for this one, and we really thought we were gonna get in, I'll never forget, I was in Cleveland, Ohio, doing a lab because we thought Boston Scientific was gonna buy us. They did just 12 years later. And so we're doing this lab, and it was snowing in Cleveland, and I don't want to offend anybody from Cleveland. But like downtown Cleveland in the hotel when it's snowing and like you're stressed, and I'm waiting for the phone call from this, this government offices going to give us this $3 million of sleep to save our assets. And the guy doesn't call doesn't call doesn't call and it's just like, it's 330 and I call him and finally, debt is bad news. Like you know, we turned you down and I'm just like, Oh my God, and I'm just like, call my CFO and she's already started drinking and I remember looking out the window and like just the Dennis's staring out the window. Pottery what he's gonna do is like, like, there's a rooftop of the building below about tennis. And you know, if I jumped like, it was just this barren landscape and yeah, I just it was in I spent the night in Cleveland went back and yeah, we scrap through we found a way to pull through it. But man, you have to dig deep enough times to do that. I mean, we had so many near death experiences at Apollo. And I remember another time, you know, I had a separate American Express credit card that I use to sort of figure out what was an Apollo expense? Not everybody's doing that when you're early. My wife calls in one day, he's like, why is American accent especially we owe him $140,000? Like, because at the end of the day, it's your credit, and like, wow, it's just a mistake. Apollo is gonna pay for that. And we had like, $40,000 in the bank. So it's like, these are the stories that you guys all live through. And, you know, it doesn't always work out. But if you persevere long enough, again, I don't have any job. I mean, look at the guy is always smiling. He's always dressed super nice. Like, you know,


Josh DeFonzo  36:00  

I mean, do you want me to do the anger thing? Or the Near Death Experience thing? Take your pick. Yeah, I mean, near death experiences, right. So I think including this back, right, there was a big sum of money I think I've helped across like for companies probably raised north of $750 million. And none of it was easy. All this is in the public record. So I don't think I'm sharing any confidential information. But you know, I'll just name these number of the companies rather than name them. My second startup, we were trying to raise funds, I think it was like our series D, we're really getting close, we have a term sheet, and then we got hit with like a key tam lawsuit like, this is gonna go well, right. And it had to do with claims about billing and reimbursement and how the company went about, you know, guiding physicians to do that. And it was just, you know, that's it's not the same thing as SBB melting down, but these are like, you're, you're putting all of your blood, sweat, and tears into fundraising, and then you get hit with something like that, right. I think you know, even in the gastric solutions, days, there was a, sorry, in the name Oris company to company do, even in the more contemporary experience, you know, we had an IP matter that came up during fundraising, right? It's like, well, hang on, we've done, you know, FTO, and we feel good about our IP, and then you get a lawsuit that comes out. So a lot of times, it's the exogenous things, the things that are unrelated to your business that like, honestly, will get you to lose your cool, right? Because you have somebody you've built the relationships, you feel like the relationships are there, you got the term sheet, you're maybe even at definitive docs, and like things happen. And I you know, there have definitely been times I don't know if Henry seen it, but I've gotten hot as an operator at a company. And it actually doesn't almost ever pay to do that with investors. And it's not just because they hold the power just like in so damaged the relationship. And so I think I've learned over time, you know, you don't don't send inflammatory emails, I used to do that in my 20s. So anybody who still do that,


Dennis McWilliams  37:52  

stop, read it, set it aside, read it in the morning


Josh DeFonzo  37:55  

to yourself, maybe send it to your significant other and see how they feel about you. Like, inflammatory emails, text me like stuff is just not helpful. I mean, we all have some inclination to do it. But like, I've learned those lessons with Scottson bad emails, or, ya know, I mean, it happens, it gets it gets the gets the best of us, you know, all the time. So I think it's like, it's what I said earlier. It's like poise. Like, I think you got to just take it not to be too Zen or meditative on anybody. But like, to the extent that you can take a breath, Dennis said it earlier, running med tech companies is hard. Investing in med tech companies is hard. At the end of the day, we're all doing this, because we believe in the ability to like, help people through our innovations. And I think you gotta like really try to center on that even when you're getting completely shelled. By the outside


Dennis McWilliams  38:43  

world, we used to talk about like, like your well, how do you manage the stress of doing the startups or all this other stuff? We used to say, like, you got to learn how to stare into the abyss. I know that sounds terrible, but you have to and like I remember, it's thinking through, you know, Apollo during these days, when it was just not looking great. And like, you really just kind of play the chess match. Okay, well, we don't raise money, what happens? And how do we take care of the people? How do we do those types of things? And then like, you never want to do that. But somehow emotionally thinking through that, and just understanding like, look, these people who get jobs, you'll help them do that. You'll get them through that. You can come to a piece on that. You don't feel so fatalistic that if it doesn't work, that your life is over, because it's not I mean, you know, there's so many great success stories of entrepreneurs who are there, you know, how to deal, you know, fail, and they wound it down very professionally, investors really, really appreciate that. And then you know, that, you know, just because you failed, doesn't mean they won't invest in you again. And so I think just keeping through that, and, you know, again, you said again, Josh, this idea of poise. I think it's just such an important way to think about it in terms of how we do this and how we lead how we lead our teams and how we represent our companies to the outside world.


Henry Peck  39:50  

If I could ask just one follow up to that. So I you know, I talked to a lot of younger entrepreneurs, right. You talk about the crop whose first jobs were at aurus. A lot of those people will start companies and they say A very different world, obviously. But a lot of those people will go on to start companies. And I think some conversations that we've had is, you know, hey, we know we get one call to Josh DiFonzo. Right. But if, if it doesn't go, well, a lot of people I think are worried about that first startup not going? Well, I think we haven't really talked a lot about what do you do in that case, when you're when you have that need to wind down? Or if you're worried about that reputation? Is that is that risk? You know, is that really that high? Is it something that you have been through where you've seen entrepreneurs that have wound something down and go back to those same investors with success and preserve that relationship and that reputation in the broader market?


Josh DeFonzo  40:37  

I my personal viewpoint on that. And like my own experience, it's not I would not suggest that my first two startups were failures, but they were not resounding success. And, frankly, the way I found myself at Oris, I had been described more than once as a battlefield upgrade. What does that mean? Well, I started my first my first like, actual operating role, I began in sales. And I was motivated to go into product management and subsequently executive manager because I was selling bad products. I was a distributor, and it wasn't saying that they were bad, they didn't work, but they like you call customer service. Nobody picks up the phone. You ever recall, nobody communicates product managers are in meetings all the time, they can't help you. And I just went like, this is not the right way to run a company. And so in a stroke of naivete, I said, I'm gonna go make products and so, but my first two companies weren't, weren't great. I was a product manager. And one of them I went from Product Manager to interim president, like seven years, and I had this massive sense of imposter syndrome. And and I stepped back from that set up a consulting business, which is kind of what led me to Oris and working with other companies. But I would say, You're not always going to succeed. I mean, it's all about like how you conduct yourself and handle yourself in the face of failure. Now, if you lose Dennis's money, is he going to invest in you again? Probably not. But no, no, but I think it's I think it's how you conduct yourself. I think oftentimes now as far as that is actually concerned, like losing money from one investor, I think if it's like technology risks that you just couldn't control, I think that's one thing. I think it's like, if you get the technology to the gate, and you have a complete market mismatch, like that's depending upon your background and pedigree me as though commercially oriented operator, like, that's a big no, no, right? I don't know that I would never work again. But But I think it would be more of an uphill battle. Suffice to say, my message is that like you have to be, when you get into startup game, you have to understand that failure could happen. And then you have to do everything you can to sort of acquit, and like reduce risk along the way. That's kind of how I look at it. Like, I think if you have the unbridled enthusiasm, this is never gonna fail. Like, I don't I don't ascribe to that. I know, there are certain CEOs who do that, but I think it I think your blinders are way too narrow. And I think that your like, residual risk is way too high, if you conduct yourself that way. So and I think the investors know them, you know,


Dennis McWilliams  42:50  

you can, totally resonates what you said in terms of, you know, there's almost like a self awareness that you can look for, as you know, you know, being able to embrace the fact that you understand why your company failed, or why your technology failed, be able to talk about that, how you maybe acted before that, when, you know, maybe we didn't invest in it, and we kind of told you that and you know, your reaction to that will probably remember. But, you know, again, we like, you know, we have lots of examples of CEOs that we invested in, you know, something didn't work out, a lot of times, it is kind of existential risks that, you know, no one really could have seen, and we've invested in them and backed them and companies down the road. So I just think it's, you know, again, you're looking for that leadership, we're looking for the person who kind of thinks, can can look externally at themselves at their company, and be honest about that, while they're in it, and then maybe in the post mortem, as well. And so, you know, look, I mean, you sometimes you get into things, especially as young entrepreneurs, like there's always this challenge of, you just want to be a CEO and start a company. So you jump in, you start something and you didn't really know maybe, and you're in there now like oh, crap, like, I wish I would have known like how hard this was gonna be or you've done that you hear that a ton from from, from young entrepreneurs as they go, you're gonna get a buy on that, like you take your lessons learned that you manage your investor dollars reasonably respectfully on that you maintain good references with investors. And you'll get another go at that for sure.


Josh DeFonzo  44:15  

Yeah, I mean, final final comment, I would add to that, as well as like, I keep saying it's like this idea of the relationship. It's the idea of like, being prepared as operators, right. Like, as an example, every company with which I've had the pleasure and stress, frankly, of operating with the board and the investors is like, you have to set expectations, right. So even today, like I go in every board meeting highlights, here are the things I'm concerned about. Let's go through them. I make sure everyone's really aware. And none of those are like planting the seeds for later excuse. I don't ever view them that way. I view them as like, I need to make you aware of the risks that we're getting into and here's what I'm gonna do to manage them. It's never like I told you for four board meetings, that risk was going to come up and shucks, it did. Like it can't be that right like, and I see that orientation on occasion as well. So I think a lot of this is just It's really how you conduct yourself. And I think it's, it's this idea of, you know, intellectual honesty, you're like really maintaining relationships and then working your butt off. At the end of the day, it's what you expect from everybody. You know, we can we can talk about balance and all that philosophy, but you got to try your best, these things are not easy. So they're not 40 hour week jobs. They're not, not even five days a week, most times, so it's like, it's how you conduct yourself. And I think you said, adapt and learn.


Henry Peck  45:30  

Any other questions, we can do one more on stage. And then I know there'll be around for the evening, if anybody has any more.


Speaker 6  45:47  

So yesterday, one of the on one of the panels, one of the moderators really was adamant about sounding the alarm on capital drying up. And he was claiming that all the VCs, were going to start holding capital and reserves, just to focus on existing portfolio companies and getting them through the next 18 to 24 months. You guys agree with that?


Dennis McWilliams  46:09  

I just said, We're closing the New Deal. First, invest within your know, hopefully, next four weeks, I mean, we're deploying capital. I mean, you know, we're, you know, say we're being patient and the investments that we're making, we're being cognizant of the market, we're probably thinking more about, maybe not necessarily the round we're doing there, but we'll things clean up and clear up when we have to go on raise, again, if we can kind of get ourselves confidence on that, you know, both from a company operating perspective, and from a market perspective, you know, we will still, you know, we are still deploying capital, it's pretty easy to figure out who's deploying capital or not, I mean, you can, you know, if a fund, you know, is, you know, they've got 1415 investments in the current fund, they're deployed out of, they probably don't have many investments last year, gonna see them slowing down. You know, if a company has just announced raising a new fund, you know, maybe they got a fund in right before, you know, the, the the world started moving down last year, you know, they're deploying capital. So, you know, I think, like, Look, if I'm at Tech investor, like right now, like you are hearing, you know, tech investors in some of those funds, who were basically just, you know, ignoring valuations, ignoring market fundamentals, who their LPs are, tell them, please don't call capital. I mean, you're hearing stories about that, but I in healthcare, we are not hearing that and healthcare. Now. Does that, you know, are we in a in a tightening more risk off phase? Yes, we are. I mean, we have AMI, we all know that we're all feeling that. But this is not Oh, eight or nine, like, Oh, 809, like for those that lived in it was was just fundamentally different. And, you know, there was really no end in sight as to what was going to kind of repair the markets in a way that you can see venture kind of coming back. I mean, here, I think we feel like yes, things are going to be tight, probably tight through this year. But next year, as you know, really what you're looking for is these limited partners that are out there who have allocations to invest in private equity. Like, they just got to see that those public valuations go back up. So that balances their portfolio so they can deploy in the private, you know, so I, you know, I think it's just time to be a little bit smarter. We're not where we were, you know, 1224 months ago, but we're not where we were 12 years ago.


Josh DeFonzo  48:20  

Yeah, I mean, there's not bags of cash being fired at a t shirt cannons, like there was a couple of years ago. But I would say, you know, like, sentiment drives behavior, right? The SBB thing, you know, somebody else fire in a theater, there's not a fire. But but you know, people get up and run out. And so I think I wouldn't totally discredit what you're hearing from other people, but I'm much more so agree with Dennis, I think at the end of the day investment firms, it's their job to deploy capital. The bar has been raised right, the environments requiring us to make sure that we are like, even more judicious than maybe as a community we were two years ago. But I think my my, as my father says, cream rises to the top right. And so repeating myself, it's like, I think poise and persistence really matter here. That doesn't mean to be ignorant and say, oh, you know, one investor said that they're not going to invest in. But I do think you've got to stay at it. I think you gotta realize that, since the bar has been raised the same sort of counsel advice we've been given, it's like, the relationship really matters. Taking the time to shore up your business case to shore up the your use of proceeds like do the things you can do to really button up the investment. And the other thing I would say to entrepreneurs, nobody wants to hear this. Like, I think if you did raise in 2019 2020, and you got like a handsome valuation, I think it's time to like, look deep in the mirror and ask yourself like, what, where am I today and is the capital that I'm going to raise really helped me get this to where it needs to be because I often hear and I say this as an owner of a startup company, like I think you just need to be valuation sensible at this point in time. That's, that'll that'll help get it there. So


Henry Peck  49:56  

awesome. Well, since this is our last one, I do want to end with one more question. We're over a little time. But when we have this conversation again next year LSI, USA 24. And people in the audience come and find you guys catch it up at the bar. What will what will you guys be talking about then whether it's technology development and market spaces that are interesting and exciting, what you think the investment climate will look like, then compared to today, what do you think will be the big topics of discussion at this event a year from now?


Dennis McWilliams  50:27  

That's a hard question. Henry.


Josh DeFonzo  50:30  

Give us your top five stocks. Yeah.


Henry Peck  50:33  

Can use chat GPT to write bullets for this one. Sorry.


Dennis McWilliams  50:36  

We won't be chatting while having our GPT avatars to speaking for us. Which is actually super exciting space. I mean, I think Yeah, it's funny that in such a really in, we shouldn't get on the tangent. But in such a really tough market. Those companies are getting amazing amounts of funding, and it's truly transformative technology. And so that will be fun to watch. Look, I think this time next year, cash will be in March, I think we'll be seeing hopefully signs of the public markets opening and back up, you'll see it first happened in the biotech space, they're always a little bit of the Canary on those things. And you'll start to see maybe a couple of med tech companies who get good sound businesses going public. And, you know, hopefully a fairly robust m&a market starting to go I mean, you look to large companies right now are on the metrics that are, you know, they're having tighter times themselves. And so that's impacting m&a A little bit. I think everybody's kind of hoping that as inflation gets back under control, money policy starts opening up a little bit that you know, 2024 is going to be an I would like to say, like a banner crazy year, but I think we'll all be feeling better and funds, you know, you'll see venture fund raising and closing their next funds. And I'm, you know, I tend to be an optimist. I think you have to if you're an entrepreneur, but that's where I hope will be.


Josh DeFonzo  51:44  

Yeah, I was going to express it as hope as well, I think I'm hopeful that the macroeconomic conditions will improve, I echo Dennis's sentiment, like I think that med tech gets a little less affected. Like when the markets are really frothy. I don't know how all of you feel but like people weren't exactly excited when I came and pitched them about like another medical device, right? They're like, boy. So I actually do think this is an opportunity to shine like, honestly, as crazy as that sounds. And you're gonna hear the same comments that you heard like, powder dry, but the fact is, there's a lot of dry powder out there. So I think people are just being very judicious about deploying it. But this is your opportunity to shine, right? Because I think every single one of you likely has a really good business case. The question is whether or not you can find the investor who sees that the capital invested to get to the other side is worth it. And I think that those folks are out there. So I think, you know, I do think that med tech does cut through the noise, particularly in tougher times. And so I would leave you with that, that it's a real opportunity in the next 12 months. And hopefully everybody in the room comes back next year and is well funded. And we're high fiving. And we're all making progress on our innovations, frankly.


Henry Peck  52:45  

Amen. Well, guys, thank you so much for doing this. Thank you every

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