Harsh Realities in Building and Financing Medtech Ventures | LSI USA '24

Jonathan Norris  0:00  
I'm really excited about this panel. Yeah, we have a great group of folks here to talk about some of the harsh realities we're all facing. It's obviously in a downturn, what I thought I'd do is take a first couple minutes to go through a couple slides, maybe setting the stage for what we're seeing in the market. You know, I'm John Norris, with HSBC Innovation banking, brand new division of HSBC, group of us from SVB, left and are doing our own thing. They're a sort of high touch commercial banking venture debt. So happy to talk about that. But first, let's go through a couple of slides and sort of set the stage for some of the harsh reality talk we're talking about. And again, you know, this paper is on my LinkedIn as well as HSBC Innovation bank, it's like 70 pages long, but we're going to look at a couple slides here. So the first slides are looks at overall investment into healthcare venture backed companies in the US and Europe, I think, a couple takeaways 50%, down from 2021 28%, from 2022. But ahead of 20 2019. And I think, you know, obviously, yeah, there's, there's a couple of things at work here, when you see less dollars coming in one a lot more inside rounds, which we'll talk about in a moment. And then to, you know, the big mezzanine rounds to public IPOs that we saw in 2021 has has largely kind of faded away. Specifically, when you think about med tech, a couple of things, one, if you think med tech tends to be more of a steady Eddy area. So actually, the investment in med tech has not had as big as significantly as a decline as we've seen in the other sector. So only down about 19% Since 2022, actually up since 2020. So from that perspective, the amount of capital that's actually going into the sector is pretty good. And I think, you know, there's not as crazy step ups, as we saw in other sectors, so there's not as much to fall when you sort of recalibrate and a little bit of a slower marketplace. And by indication, definitely seeing more activity in neuro neuro stem brain computer interface, a lot of imaging, specifically in oncology, you know, less non invasive monitoring, I think that was something that got a lot of headway in 2020 2021, some nice exits there, I think a lot of people have placed some some big bets there. So a lot of capital. And so we're not seeing as much investment right now, I think cardiovascular is pretty stable, but on the early stage side, not seeing as much series A activity in that area. And this one, I wanted to just really focus on for a little bit saying, you know, insider rounds have been prevalent and 2023. And inside rounds really defined as, you know, a insiders passing the hat, either you're bringing in boy b1, new investor doing a small round, or you're passing the hat on existing investors and doing a smaller round than you would have done otherwise. And why is this happening? Really, it's a function of milestones moving, as well as a slower pace of of investors, you know, folks are taking their time making new investments and milestones that had previously unearthed a new round with with a step up have been changed, you know, in down cycles, those milestones get pushed out people asking for you to do more to actually get to that new round. But on that same note, we do see a number of step ups that we saw in 2023, there were 50 deals that we saw leveraging PitchBook data, where there's actually a new investor coming in and stepped up from the post of the last round to the pre of the new round. But what we're seeing here in device, I think, which is, I think, a leading precursor to the other sectors is you're starting to see in series B and later these valuation resets. So you know, got ahead of ourselves and 2021 the comps were bigger, bigger valuations. Now we're seeing the new investor lead deals that are re resetting the valuation, I think that's good. And that's, that's a part of the, the cycle. And we saw one in three where we actually had the data to calculate the step, step up or down one and three, Series B or later deals were step downs. But again, still seeing good activity. And if you look at private rounds based on post money valuations, you know, a couple of things come come to light one, yeah, later stage deals, a lot more commercial stage. But instead of seeing, you know, growth investors and private equity folks who are coming in, leaving these they say drowned, you're seeing should more traditional venture. And that's sort of the good news, because the bigger venture rounds that are venture investors that are focused on med tech have new capital that they've raised over the last two years, so they do have capital to sort of put into play. So with that as sort of an overview. Yes, we're seeing more inside rounds. Yes, you know, there are some step ups but you know, maybe flat is the new up. Yeah, the idea let's let's get into talking to yeah, this amazing panel and get into sort of where the harsh realities are. and how to navigate them. So with that, maybe we'll, we'll just cut the the slide deck and then we'll start with some introductions starting with India.

Anita Watkins  5:11  
I'm Anita Watkins. I'm the managing director for REX Health Ventures where the corporate venture arm for UNC healthcare based in North Carolina. We invest across the entire healthcare spectrum, particularly love med tech, and we'll talk about that a little bit more.

Daniel Hawkins  5:29  
My name is Daniel    Hawkins. I have been in the med tech space about 30 years. So I've seen a couple of cycles. This is my ninth startup I'm involved in right now and in the AI space for managing high quality images using Mr. Ben robotics and vascular and most recently a company called the Vale, which will be part of the topic today on harshest of harsh realities.

Sean Cheng  5:51  
My name is Sean Chang, I'm the managing director at Ascension Ventures and head of med tech Life Sciences practice there. We are a multi health systems Strategic Fund. Ascension is our largest LP, we also invest on behalf of 12 others, including Intermountain adventhealth, really mid to large size ID NS that pull the capital together, invest in anything that really touches us health systems and hospitals. And yeah, looking forward to the panel and therapy session.

Omid Akhavan  6:23  
Hey, guys, Omi, Dr. Vaughn, I lead Anthro Ventures. We're a family office based out of DC, investing mainly in clinical through commercial stage med tech, started my career management consulting, did strategy business development, fortune 500 company went into investing and doing that. But now I'm also the CEO of one of my portfolio companies, which is another harsh reality, but I'm living as an investor.

Jonathan Norris  6:49  
Awesome. So again, you know, great panel for this discussion topic, which is a hard one. So I'm going to ask a few questions. And we'll let sort of a panel sort of jump in. And maybe for this first question, Daniel, we're going to keep you at last because I'm going to ask like sort of a follow up question let you get into this. But first question is on pivoting. Right. And so, you know, let's talk a little bit about lessons learned. You know, when you think about, you know, where you have a company where product market fit isn't quite right, or sales channels not working or, you know, things of that nature. And maybe we'll save the sort of discussion on how macroeconomic trends sort of impact your pivot to Daniel, and then we'll we'll riff off of that as well. But any of you want to get started with this? Sure.

Anita Watkins  7:29  
And I think what I'd like to focus on is not pivoting too soon. The reality of today's market, especially for companies that are selling into health systems, is that margins are razor thin. And those decision making processes are taking longer and longer. And we're going to talk about cash management, as well. But I think making sure that you don't panic as a company and say, Oh, perhaps product market fits not there. You'll that's why we're not getting the contract across the line, I think really doing that customer discovery and understanding what's going on. And that's why having investors like Shawn, and I around the table can really help you understand what's going on within the market. I can't tell you how many times I'm cooking dinner, and one of my CEOs calls and says, We've got three hospitals that just won't sign what's going on. What do you see in in your health system? What do you think that could be going on here. And that's something you've got to understand. And again, just not panic. But understanding Product Market Fit way early in the process is absolutely critical. Again, having investors like us that can connect you, with the end users can connect you with the health systems understand does this fit workflow, if it doesn't fit workflow, you're not going to sell, if it doesn't fit the actual need, that you're trying to address. The physicians not willing to change their current procedure. Even if it's the best idea, I'm one of our companies that failed incredible product. But the procedure that's currently being done, this physicians would just not pivot, it's a very complicated procedure, they turned, they spent a very long time training to do that procedure. And to get them to change gears, once they became really good at that procedure is really, really hard to do. So understanding all that on the front end is absolutely critical. Sean, you want to join in on this? Yeah, I

Sean Cheng  9:32  
completely agree with them. When you say and I'll say that the you know, I think in the past, we've had decades of health system thinking where the clinicians really pounded the table and you had a champion in there and then you got your device or product through and there was really no accounting at the, you know, certainly practice level, but even at the hospital level or even the health system level. And there was a number of procedures were error, we see as negative contribution margin. So every time you do a procedure, because the SP of a specific device or catheter or product ends up, you know, with your reimbursements, and the negative sides, or the health systems losing money rolled up, but there was no accounting of it. So you couldn't really track it. And I think many med tech companies had great revenue because of that at the expense of these hospitals. And they're now getting smarter, I would say in the last five years, becoming more aware of contribution margin at the procedure level. And so what we see now looking forwards is, you know, two really major trends, one is the group purchasing offices are working with the, you know, their service line leads to say, Well, do we need that premium product, when we can sort of buy this new, a slightly less one? Or if there's only one out there? What can we invest in, you know, through the central venture side, to really create more competition in the market? So I think that's all to say, the landscape has changed a little bit. It's not to say it's always about the the cost side of things for health systems, but the voice around, you know, contribution margin is becoming more more, you know, apparent, and I would say, how that what that has to do with, you know, pivoting is you may assume a certain ASP going out to and your tam is that big, you know, I think those need to be down adjusted. And I would say oftentimes, you know, sitting on the investor side, you know, the, the pivot is not hard, but the fact that you have, you know, four or five, six board members, or a CEO there, and then it is a differential equation of do you adjust the price? Do you kind of change the population? Do you adjust the device, it becomes a very complex conversation to be had. So even though if you knew the answer, you know, it's hard to kind of veer your board towards that. And so I think it's a very nuanced art to do that. And, you know, we're as board members, we're all open to be convinced, but it needs a little bit of education as well. So,

Omid Akhavan  12:16  
so I know they've they've talked a lot about the commercial side of pivoting, I know a lot, I assume a lot of the audience is kind of in that building a technology, getting through clinical trials, trying to get a product to market. And I think, as you think about building a med tech startup, you go through multiple, you know, re incarnations as a company, right. It's never a smooth journey, you start with a great idea of vision that you're going to change the world. And you begin this journey with some very generally inspirational physician advisors who are encouraging you. And then you go, and you start meeting investors at a conference like this, and you get 100 noes, and you're kind of discouraged, you know, then finally you get your break, somebody gives you that seed check, you're like, Yes, I'm gonna, you know, now I can buy the supplies I need to make to the next step of the journey. And what I find really interesting about building a med tech startup, unlike technology startups, there are so many points at which, you know, the winds can blow in a direction that derails you. So whether it's the FDA, whether it's reimbursement, whether it is access to capital, whether it is your device, failing on the bench, or in an animal study, or you know, being delayed because of COVID, your, you know, access to your clinical trial is pushed out 18 months, because you can't get through contracting at a site. And so I think, you know, the big question around, when do you make a pivot, right, what do you do comes down to the reality of what is happening around you, in your specific sub sector, and for you as a company, right, based on where you are? stage wise, and I think a lot of that then feeds into your access to capital, right? So if you everyone says, Oh, I'll find you once you get your idea approval to go to your first inhuman. And then, you know, you realize, oh, FDA wants you to run a GLP study that you know, costs you $150,000 And you go do that, and you have great results. And the investors say, You know what, like, I really want to see human data, you say okay, fine, I'm gonna, you know, you talk to your advisers and say, Hey, there's this great place in Colombia or in Australia or Mexico so now I'm going to journey you know, outside the United States and go find a clinical site X us to start this first inhuman and then you you land some successful data, you come back to the investors and half those investors said, Hey, show me some human data. They'll say, Well, I want to see like 20 More patients, right. So like the it just it just, you know, in the bar keeps moving. And I think part of that and I've seen it especially in the last four or five Five years is that there was, you know, as we're in this bull run bull cycle, there's a lot and you have to think as an entrepreneur, you also think about what the investors are dealing with the same way that you are struggling to raise money. Funds also struggle to raise money. Why? Because LPs are getting tighter with their checks, right? Whether it's family offices or pension funds, or, you know, you know, other other institutional investors. And so I think that trickles down into the reality of running a startup. So,

Jonathan Norris  15:33  
yep. And maybe you wanted to focus on Daniel last for this first question, you know, serial entrepreneur, you know, we were talking specifically you were mentioning, you know, the razor's edge of success failure. And a lot of times that macroeconomic parts to the the equation can be, you know, the difference between winning and losing. And maybe we want to talk a little bit about what what your experiences have been over the years with some of the companies you've been involved with, because obviously, there's been some some challenges and some of them agents successes. Yeah,

Daniel Hawkins  16:05  
so no greater truth, you can execute like crazy as a company. But if the macro economic winds are not behind you, or they're not visible in front of you, or worse, if you if they come from the side, and completely tip your sales over, what do you do? Those are challenging moments. And I've been involved in a few. This is my ninth startup I'm in right now. So I've been in involved in aid, and six of them were either acquired went public, or both, and two didn't. And the two that didn't, were due to macro economic related effects. One of them was post 911. I was working with, with Leroy hood, the founder of Amgen, and the inventor of the human genome sequencing machine, to do what is essentially 23andme. And 911 happened. We couldn't raise money, so we shut down. That's brutal, right? Brutal for lots of reasons. But in this context, the economic fallout from that was side winds, you just went straight down headwinds, you can see side winds, you can't see. And that just blew us straight down. You know, most recently, and one that I think a number of folks here that I recognize a lot of faces have asked me about is available systems. And we raised $140 million. And we were going after a giant issue. And I still firmly believe we were right. I know we were right, in what we were trying to get done. But please recognize when you go after a big issue, and you're creating markets, the time course of market creation, can transcend a cycle. And when it does 2023 is what happened with us when it does and your financing falls within the transcendence of that cycle. It's assignment, and you just go down. And that's that's as brutal as brutal gets we were executing like crazy. We were doing well. Now, mind you, we started off and had to pivot. As John had mentioned, we've been talking about on the panel, we pivoted a commercial model. And that was the consequence of changing from one commercial lead to somebody who had a very different viewpoint in commercial and we were able to try some new things. And we ended up with get ready for this $25 million in guaranteed contractual revenue, and over 50 in negotiation simultaneously, and we couldn't find just sit with that for a second. That's brutal. That is brutal. It's because of assignment. And the fact that we were heavy, heavily concentrated in a small number of customers. That second part is why the first part blew us over. And you just you have to recognize that you are in fact on that razor's edge. Most people don't recognize it Intuitive Surgical went through one of those. But it's a company today that has a highest market cap of any independent medical device company in the world. They went through one of those. Imagine if when Intuitive Surgical went public. It couldn't have gone public. Imagine if they had to stay as a private company, because they went public, it shot up to 17 dropped down to two and lives there. Now, I would imagine you all wouldn't be that interested in financing through that 18 months of I'm not sure what we're going to be able to sell. Right so the public markets brought a lot of capital in so they could live through that. And then they pivoted from cardiac surgery to prostate surgery and that was a consequences of a series of events that were serendipitous, but that's what then launch the right at shockwave medical. We went through the exact same thing we had to live through a cycle. And if we did not go public in 2019. For those not familiar I'm the founder of Shockwave have ran it for a number of years. If if we did not go public in 2019, and instead by cycle, we were going public in 2023, we wouldn't have gone. It wouldn't be a $10 billion market cap right now. Is that because we didn't execute? Well? Absolutely not. We were crushing it. side wins. Right? So it's a little brutal, sorry, it's kind of a downer thing to say, I get it. But it's not because of poor execution that things don't move forward very often it is terrific execution and macro impact.

Jonathan Norris  20:33  
Yeah. Thanks, Daniel. And obviously, this this harsh realities is the name of this panel. So you know, getting real is is really important. I appreciate that perspective. Daniel, yeah, maybe let's move to thinking about inside arounds, you're raising less cash than you want to, or you have a cash runway, and you realize that the milestone the value inflection milestone has been moved. And you have to think about, you know, winnowing down and cash conservation. And like, what do you think about? And how do you advise companies? You know, what do you cut? What do you keep? What do you lean into? What do you don't? You know, that's sort of this first question, if you want to talk about it for companies in revenue, and whether you want to, you know, pump the brakes, think about path to profitability, etc, feel free to layer that in. But maybe we'll start with a meeting, and we'll work our way down.

Omid Akhavan  21:24  
Yeah, so I think, you know, when I, when I look at investment opportunities, and I think most investors would agree, you typically, you want a platform technology, you want something that's going to change the world and be a platform, but you also want focus, right. And so when somebody says, I have a platform technology, I can do this, this and this, and I can solve it, you know, everything, you automatically turn off, but in reality, deep down, that's what you want, because your tam can double, triple, quadruple. But when it comes to executing, in a medical device startup, you want to figure out your killer, the company's killer app, what is that killer application that nobody can live without? What is the problem you are solving that nobody else can solve? And how do you articulate that value proposition to physicians, to hospitals, to investors, and I think as a CEO, that is the number one thing that you have to do is really know what is the value proposition of what you're doing? And then ultimately, how do you then prioritize the programs in your company, right? Because you have multiple applications always right, you do want to diversify your risk across multiple disease states or applications. And then ultimately, as resources become tight, you may have to decide to cut back on certain programs cut back on certain investments, maybe you can't go after both neuro and coronary and peripheral and you can you have to focus on one. And so I think you rationalizing those decisions, both based on market feedback from investors, right? Where you say, oh, that's like, that's a really well, have you thought about X, Y, or Z application, taking the feedback from your clinician, advisors, ultimately. And then also your existing investors, right, because they have a stake in the business, and they're there to help you and to guide you, and to, you know, make introductions and just help you think through these problems, can

Anita Watkins  23:28  
I jump in there, one of the things to be really mindful of it, especially when you do have a platform technology is my Doc's will come to you. And they will say, Oh, this would be really cool to use this way. I'm sorry, if there are physicians in the room, they have no clue how the business of healthcare works. And so be very mindful of not going after that shiny new thing, that shiny new application, because that physician may just want to publish a paper, you know, in that particular application, or they have a particular interest, it's not necessarily going to serve you. Well. I think the other point that I'd add on there is you talked about your board and your investors. One of the things we've gone through, especially during 2023, with all of our companies, is we did an alignment check with every board. What are the expectations of the different series of investors? What are the what's the mindset around the table about the trajectory of the company? We found in several companies, that one, one series of investors, they're ready to get out there? Absolutely. They're ready to sell. They don't care if we're not going to meet this next inflection point. And then others were like, No, we've got to we got to pony up, we got to get cash round the table. We need to make sure we can get the company through the next inflection point. And that took a lot of work and strategy to make sure we could find that sweet spot of alignment, most of the rest of companies, there was alignment. But that's an important gut check to do with your board, especially if you're really early stage. And you've only got two or three board members, making sure that you're working as a cohesive team and you're all thinking strategically aligned is, is really, really critical. I

Daniel Hawkins  25:19  
love that you did that. That's, that's bold to do that. You know, the how you position yourself, I'm gonna get off with something you said a moment ago. I'll pick back on intuitive for a moment. I was the first non technical guide intuitive. So my job was to help Fred. Fred ball, set the specs on the DaVinci. Then my job was all the downstream stuff and market creation and all the rest of that. Yes, we didn't name the company, I had to name the product was all this other stuff. But one of the key things he asked for is what what's our killer app? What are we going after? Because the ultimate platform of platforms, right? Arguably, the one that fell out as being the most obvious was cardiac surgery. And you might think, Well, gee, they're not doing much of that doesn't actually matter? Because it was financeable. Okay, so that's actually why we started off there. Now, if you go back and rewind the tape for those who were have been through a few cycles of this and know what was going on at that point, it was hardcourt, and cardiothoracic systems were both public. And neither one of them was doing fully thoracoscopic between the ribs fully thoracoscopic cardiac surgery, one company that could do that was intuitive. So we sold eight systems on that and had a backlog of 13. And we went public. And the reason why it went up is because of that story, because hardcourt was worth a billion or two or whatever the heck it was. And the reason it went down is because it's a terrible market for a robot. Right, that's just reality, it's a terrible market for a robot, you can't have that as your killer app, the pelvis makes so much more sense. prostate surgery makes so much more sense, because of all the nerves and the vessels. And it's a pain to deal with and all that. And you don't have a beating heart to deal with. You don't have to decompress, and you don't have to worry about decompensation from folding up. And it's 1.1% of all all surgeries for cardiac surgery or limit LEDs, right, left internal memory to LEDs, single vessel, that's all the robot could do to be clear, and we went public on that. That's insane. Right? That is absolutely insane. But nonetheless, that's what we needed to do, right to get to get that to ultimately go public. So I'd have to agree with the notion that with platforms you have to focus platforms are also where your your truest of opportunities are. A shockwave we were using lithotripsy, angioplasty balloons. And my board has some very savvy folks. Jay    Watkins and Fred Maul and Antoine kapernick. And they were looking at me saying no, you're running three companies peripheral coronary, and, and structural heart. You can't do that. And I said, Okay, great. pick which one you don't want. And they couldn't. So I kept doing all three, right? That's kind of how that works. But we got a little lucky, because we could borrow from one platform to the next to the next. You can't always do that. So I agree with the notion of focus.

Omid Akhavan  28:15  
I think just like one point that you made, and I think you know, every entrepreneur in the audience should hear is that your job as a CEO, is to tell a story that convinces the investors to come on this journey with you, right, that they're willing to reach in their pockets, put money, their time, and invest emotionally, as well into what you're doing and to support you in being successful. And I think that is the key to, you know, like, as you said, is to fundraising and to surviving. The challenge is because you have other people around you, whether it's doctors or investors or advisors, who are there on this journey with you, because of the story that you are building the story that you are telling.

Daniel Hawkins  29:05  
The to be clear the story better be true. Yeah. It better be true. Yes.

Jonathan Norris  29:13  
Do you want to add anything? Yeah, I

Sean Cheng  29:15  
would say you know, then the product versus platform debate, it's two sides of the same coin. And I think the best CEOs who raised they can read the room of who sits on the other side, and then pitch that story, whether it's a product or platform, and both can be true, right. And, you know, it's not deterministic where you had after you raise the money, but certainly I think, you know, exotics and so for a couple billion and I'm seeing a lot of urinary incontinence stories coming out, right, and a lot of they're getting funded. And so, you know, are they all going to head towards that? I don't know. But But certainly, that's a hotspot area. So, you know, I think on the other side of it is going through a couple of these now and seeing couple, you know, already done and dusted, you could sort of continue to burn and reduce burn and my retrospective look at the companies that were successful, there's a lot more cars to be turned over, it's not just, you know, I'm gonna run out of money next month, and then that's it, you're gonna wind down, you know, the sort of wind down term, you know, maybe kicked around, but your investor is going to be there at least a portion of them, and they'll support you through the next few months, and then you'll you'll see the light. So I wouldn't say that it's a binary thing where you know, you're gonna run into a wall. And that's, you know, if you're rational, logical, that's not going to happen, and the investors will be behind you for that.

Daniel Hawkins  30:43  
Yeah. And Let me chime in, if I could briefly on that, because I've been asked a whole lot about chocolate or sorry about a veil. Why didn't your insight investors participate, to be clear, anyone who could participate, and otherwise had disposition, and those aren't necessarily a one to one to your investors, they were all in. I mean, my board was humble humbled me, I should say, and their engagement and how much they were pushing into our story, up to the last moment, pushing into our story, a good board who's truly committed will do everything they possibly can, but recognize there could be limitations in their fund, that would keep them from actually doing what you want. Right? Something as simple as you're able to fund on a non priced round, but a convertible note, but that particular fund is not structured to allow convertible notes to be possible. So what is otherwise your greatest friend on the board in your advocate for the last 357 12 years, whatever it's been, might blank you because they just can't, structurally, they cannot. So you need to recognize some of that within there. But inside arounds aren't necessarily a bad thing. It's the coalition of the willing. But it's it's a belief system to carry forward because there is another card. And sometimes you turn over that card, and you just got 21. So the right investors are always going to try to help you do them.

Anita Watkins  32:15  
One thing that I really want to point out on cash management is leadership. You know, I've seen leaders I've seen my my CEOs when cash is getting tight. In order to get to that next inflection point, take no salary. I've also seen my CEOs who don't hit their quarter had to hit their numbers for four quarters in a row refused to take a salary cut. And they're treating it like a lifestyle company, when you've got investors sitting around the table that have been there ponying up time after time after time. And the CEOs response was, Well, it's you guys to job to keep funding me keep funding the company. And so I think it's, you've got to demonstrate leadership, you've got to be willing to make the really, really difficult decisions. Because it's not just you, it's your team. It's an and this company went under, I've only had three companies go under in 12 years. And that one didn't have to that was the arrogance of the CEO. And it was an unfortunate talk about side when one that none of us could have anticipated.

Jonathan Norris  33:31  
Interesting. Yeah, so maybe maybe another pivot on onto this, but still sort of the harsh realities of you know, you think about down rounds, recaps, your liquidation preferences, etc. So has there been sort of valuation capitulation in the market now, as investors as you are seeing this, and then, you know, sort of the add on question is, you know, what does that mean for the founders and really, you know, the key employees about, you know, making sure that they're still Yeah, incentive to be, you know, great contributors for the company.

Omid Akhavan  34:06  
I have. So, I will say, I guess when you think about a down round, or you know, financing you typically think about dilution, right. So I, you know, we had a $50 million post money, I gotta raise another 10 million, but I'm getting that offer that a 10 million pre mine, I'm taking 50% dilution, right. If that 10 million is the difference between your company staying alive and getting the next milestone or going bankrupt? Well, you could own 100% of it, and it goes bankrupt, you have zero. So ultimately, I think as a as a founder, as a CEO, as an investor as a board, you have to make the decision as to a does this thing still have legs? And if it does, is it worth continuing forward on this journey? And let's say we get through this difficult financing cycle, and we get through our clinical study or we get through our prototyping or we get through early, you know, limited market release and start launching the product, do we think that we will be successful, and therefore be able to create that value in the future? Now, the one thing I will, I will say is that, as a founder, who is disengaged and disassociated, nobody cares about you, right? You're not involved in the business, you're not adding any value. Sure, you invented the technology, you're gone. So the people that matter for investors are who is still there is a team properly incentivized as a CEO, CFO, CTO, you know, head of commercial head of strategy like are these people incentivize and your key employees to continue to work on this journey? Right. And that is incentivization by equity, and the, you know, ESOP, play stock option pool. And that will always get reset. Even if you get even you get crushed to $2 million pre money, there will be an ESOP, there will be an incentive, and people who stay on this journey will be handsomely rewarded, if it's successful in the end. So I think just my view on, you know, recaps and restructures is, you know, like, some of the best companies like inspire medical, right, as an example, they got recapped, 50%, before they went public, at a Forex step up, and now they're six plus billion dollar company. And so even the best companies ended up going through hard times and getting, you know, a reset of valuation. And that's not, you know, it's it can be a product of the market, right, like, just look at, look at the public markets for the last four years. COVID. You know, in March, everything dropped, that everything went through the roof, you know, some things kept going through the roof, something's crashed. So you just don't know. And so some of that is cyclical, some of that is intrinsic to the value of the company.

Sean Cheng  36:57  
Yeah, I'll just say one more thing. I mean, one thing to stave off a recap, or down round is to take your convertible notes, right. And I've had companies take, you know, six or seven rounds of this and with the founder, and clearly also the common do not realize they don't have a voice. And this is you know, if you build up this and add it all up with discounts. In the end, when it converts over comma gets crushed, your your founder shares are just very low. So be aware of that convertible notes are good for a couple of times, but think about the waterfall as well. And usually, when you have a recap, and that converts to it's not the recap that kills you, it's the next round that comes in. So think ahead a little bit more. And in that chest move, you know, as founders and common shareholders to me

Daniel Hawkins  37:47  
take a couple of points you just said and throw in a dose of personal experience. So when I took over a veil, it was actually a different company called new rep. Okay, it's a new rep was funded with convertible nuts. And the folks involved in that thought that they owned a significant double digit percentage of the company, but they took on enough convertible notes, with preferences and valuation caps and discounts. They actually own less than 1% of the company, and they didn't know it. That's a harsh reality. Okay, so I personally as the guy coming in to build avail off of what they built, took my own equity opportunity, after a deal instead of before a deal, so they didn't get crushed even further. Okay, I got obliterated on taxes for it. But otherwise, the founders would have been destroyed. And they'd spent nine years messing around with it, I wasn't gonna be part of something that destroyed him that way. So I just didn't. I want to say I want to riff on one more thing you said, and then I'll shut up, you would describe the round you're in, you should be thinking about the next one. I'm going to I'm going to put that on a bumper sticker and repeat something Jay    Watkins said to me who for those who know Jays been in the business very, very long time as a board member at a chocolate. He said to me, the round you're raising is not the round you're raising, you're actually raising that one and the next one. Don't ever forget about the strategy around valuation has nothing to do with the valuation you're sitting in. It's the one you're setting yourself up for. Okay, so when I started Shockwave, I owned 37 and a half percent of the company when we went public, you could move the decimal point divided by a number and I'll stop there. And I'm thrilled, thrilled with what happened economically get over the notion that your equity is a digit number, get over that the only evaluation that actually matters at the end of the day is the one at the end of the day. It's

Omid Akhavan  39:52  
where you get liquid in the right and that

Anita Watkins  39:56  
nothing and not pricing yourself out of the market, right Yeah, I

Omid Akhavan  40:00  
mean, I will say like, so if you look at, you know, Jonathan has all the data, but most med tech startups, I mean, you hear about all these like, oh, serious sold for $500 million. And this sold for a billion. Okay, most med tech startups trade for, like, less than 100 million bucks. And anything you see acquired undisclosed, they don't even do a press release. I mean, because I did I we acquired a bunch of stuff when I was at Becton Dickinson, and like, it would never got announced, or if it did was undisclosed, and it's always under 100 million bucks. And so if you do the venture math on that worked backwards that like, your exit value is $100 million, and work backwards, it's gonna cost you $150 million to get there. Somebody's getting screwed, right? And so the question is, who is that person? And the people who always make the money, or the last run investors, and the management team who's there upon exit, and that's, and that's the critical thing. And so, to me, it's like, as you think about this venture math, and going through the machinations, right, like you said, like, even if you get a decimal point, you know, at the end of the day, like you will be thrilled. And so it's a matter of getting to the exit is what's really important, and that's that is the harsh reality is that if you don't exit, you end up with zero. Wow.

Jonathan Norris  41:18  
Yeah. harsh realities. So yeah. I had some more questions, but we've hit our time. I think we learned a lot. Really. If you could join me in thanking our panelists. This is great discussion.