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Medtech Investing: What VCs Want Right Now

Speakers

David Uffer

David Uffer

Senior Partner & VP, Alira Health
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Lu Zhang

Lu Zhang

Founder & Managing Partner, Fusion Fund
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David Kereiakes

David Kereiakes

Partner, Providence Ventures
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Andy McGibbon

Andy McGibbon

Managing Partner, Sonder Capital
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Greg Madden

Greg Madden

Partner, SV Health Investors
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How have recent market dynamics changed the strategies of active medtech VCs? What kind of deals are they looking and what is catching their interest at LSI USA '22?

David Uffer  0:00  
St. Patrick's Day, and we all should be having a lot of fun. But I'm thinking I'm going to have a lot of fun. And I hope you all do too. On this panel, I want to invite each of my panelists that represent the venture community to please join us on stage here.

Let's start with Greg and we're just gonna go right down the line, if you could just introduce yourselves a little bit about your your fund and typical thesis for deploying capital. And then we'll get into a little bit of the programming.

Greg Madden  0:34  
Sure, thanks. Can you hear me? Greg Madden SV health investors managing partner at the firm, we're a broad based healthcare investor investing in everything from seed stage companies, to buyouts. We have five fund investing teams across biotech, medtech, healthcare services, healthcare information, technology. Firm has over $2.3 billion of capital under management, and med tech, we've got an early stage vehicle, investing typically between 5 -$8 million in companies over their life, then we've got a growth equity vehicle that comes behind that, or can invest to Novo and companies investing typically between 15 and 20. Usually, those companies have between five and $50 million in revenue. I'm one of two managing partners, and I sit on the Investment Committee of both of those funds.

David Kereiakes  1:23  
Hi, I'm Dave Kereiakes, with Providence ventures. Scott, thank you. A great conference. So far. Thanks for giving us the opportunity to all get together. It's nice to see everybody again. I work for Providence ventures. So Providence ventures represents Providence, with the third, the third largest health system in the country, they've allocated us 300 million to manage on their behalf. We look to try and leverage the system, the insights that we can get from all of the various sandboxes that we have to plan we have 52 acute care hospitals 1000 outpatient sites were at risk where fee for service we are urban rural. And so we try to identify the problems that are plaguing the health system, identify unique solutions that are being used in one of our seven regions to help address those problems, and then give it legs and support by investing five to 15 million. We can lead, co lead, follow. But really try and help and leverage the unique insights in the various sandboxes that we have to play in so Thank you.

Lu Zhang  2:36  
Hi, everyone. This is Lu I'm the Founder and Managing Partner of Fusion Fund. So we're a Silicon Valley based VC firm focus on early stage deep tech and healthcare. And it was in healthcare we invest acquired a wide range of from med tech to AI in healthcare to a digital asset life science and do those therapeutics. Typically, we prefer to lead around and in the CCSA stage and also continue to support a company without Porada allocation. So in total, we have roughly $300 million under management right now. We also plan to launch a $200 million vehicle to mainly focus on growth stage as well. And myself, I actually was an entrepreneur, I build and ran a medical device company focused on diagnostic of type two diabetes, which eventually was acquired by Boston certificate. After that I went to the dark side, start to invest in by the way, you really have the strong mandate to be the true support and also friends to the entrepreneur. So I launched the fusion fund in 2015. Now we're investing out from our foundry.

Andy McGibbon  3:36  
And I'm Andy McGibbon. I work with Sonder capital, we're a new fund in the context of Sonder, which is really a continuation of some investment activity by a few folks in particular Jay Watkins, if you saw the panel yesterday morning, and Fred Moll, and so they've been investing in early stage metal tech opportunities, mostly devices, but kind of looking more broadly at diagnostics and health tech as well. So we took that investment activity they were doing on an ad hoc basis, bundled the team together. And that's when I came on board. And there are now five managing partners. And we raised $100 million fund focusing primarily on seed and Series A, you know, letters don't always capture the true spirit of the opportunity. And so we don't really focus on any specific clinical area, we look for really you these kind of significant asymmetric opportunities for value creation, and kind of try and leverage our background as operators as innovators to really help the companies forward. So

David Uffer  4:32  
thanks, everybody. We have quite a diverse panel. When I was walking over here to start the panel, somebody grabbed me by the arm and said, David, this is emerging med tech summit. And Scott titled this what do VCs want now? Can you find out what they really want right now? Some people have felt that there has been a little bit kick the can down the road. It's more growth stage, but I felt that that was quite appropriate, I have seen some funds that have changed their thesis and theme. But there's still a Series A, B, C, there's different investors. But let's talk about what, what specifically you want now, and then what you're seeing in the marketplace as well, because we have four funds represented, but you syndicate you see a lot of others, and where they're looking to go. Andy do you want to start?

Andy McGibbon  5:22  
Yeah, sure, I could start. What do we want right now? Is a little bit of a tricky question. I mean, we are operating really at that front stage. So I think the whole impetus for starting Saunder was really seeing that there is a lack of capital and support for that capital at those early stages. So what we're trying to do is find opportunities that have these kind of, I've mentioned this asymmetric concept. But if you look through a checklist of risks, you can have, you know, yellow and every box with one box red. And for our thesis, that's okay, if you tackle that red risk, and it unlocks tremendous value creation, that's okay for us. So, we operate across clinical areas, we like things very early where we can partner with the entrepreneur. So you know, we have everything from EMT, to orthodontia, to gi to cardiovascular. So, you know, it's hard to generalize what we're looking for, but really anything early stage where you're still facing some significant, you know, risks moving down the road where you think some operators could bring some expertise and, and support. That's what we're looking for.

Lu Zhang  6:28  
Yeah, so for us, definitely things we're always looking at is medical device was the platform play. So lots of diagnostic to farm cancer, heart disease, mental disease, especially for me personally, I'm super passionate about solution focus on mental disease. Now, mental well being but mental disease relate to the aging population. And the four things are, I will say progressing is we've been investing more and more since 2019, about this workflow efficiency within the healthcare system, I kind of summarize as technology solutions to solve the triple A issue we have in the healthcare sector, accessibility, affordable and accuracy. So that's something we're kind of relatively new, but we're allocating more capital. The last part is even newer, I expanded a team, I actually doubled the size of the team in the past two years, couple new hires I made are from Gina tech, and Amgen. So we're more interested in the Digital Life Science. And there's also our products.

David Kereiakes  7:24  
So I may give a slightly different perspective at least from the health system. So I think this is one of the most exciting times to be in healthcare, just because of how disruptive the market is and how health systems are willing to bring on disruption. The may not be surprising, but what we learned over the past two years or so is that the business of delivering care is a losing one. And hospitals, if they are just delivering fee for service care will go out of business. And so you're starting to see new sites of care open up a transition outside of the towers. I mean, just last year, Providence's labor costs went up 10%. Our spend on drug and medical supplies went up 13%. But reimbursement because it's it's lagging is flat, and so on a slim margin business. So this is a unique time where new reimbursement models are having to come into play. Health Systems are having to find new revenue streams and are willing to listen when they can because the house has been on fire for a while but it is at least the doors are opening for disruption and innovation. And it is a really unique time to be here.

Greg Madden  8:51  
I guess I'm up next. I'm not going to tell these folks my secrets. Proprietary now. Just kidding. So look at we're interested in backing passionate teams that have experienced in their relevant areas of interest. We're interested in investing in companies obviously with big markets and are disruptive to the provision of care that David just talked about specifically, the medtech convergence fund, our early stage vehicle was formed in order to exploit the convergence we saw between information technology, connectivity and data alongside medical devices to provide holistic solutions to care to drive down costs to increase access, and deliver ultimately better outcomes.

David Kereiakes  9:41  
Can I ask maybe just a question because I think you touched on interesting topic from the provider perspective we've been talking a lot about. You hear a lot about decentralization and most people's mind kind of go to blockchain and fintech and everything but you know, when we think about decentralization, you know, it's a shift to an alternative site of care and I think that gets us excited as well as just. Anything that follows that trend, I mean, whether it's moving, you know, surgeries ASCs a lot of those kinds of things.

David Uffer  10:06  
Lu, are you investing in these areas and I've seen this theme I was with a facility just down the road from here, they have two chief medical officers at their hospital. One is for acute care, and everything is quote, unquote hospital home, the ASC the patient engagement at home and monitoring those patients, engaging those patients. Lu, are you finding technologies that are enabling that or enabling the speed from taking patients from acute care out into the community? Actually, we do have couple of portfolio companies focusing on using AI to helping with patient engagement. And not only for hospital, there's even stronger demand from insurance company and also pharmaceutical company. So it's actually a very interesting model that they're not selling to the patient, they're actually selling the directly get invariably contract from pharmaceutical company. And although they probably have the device as a point of care to the patient at home, but they eventually become a data play.

Well, let's talk about the data play. Through COVID, we saw a lot of interaction between remote patient monitoring more of the data, the transmission of that by necessity, you're not able to access the patients, your patients weren't able to access the facilities or even their clinicians. I didn't say anybody gave birth to these devices overnight. They were there. I think we just didn't see a lot of use case. And now the clinicians were by necessity, starting to trial them. Have you seen an acceleration in that? And have you changed the nature of your look at investing in these technologies? David?

David Kereiakes  11:49  
So, yes, I think one of the most important aspects that they can offer is patient qualification, right? So understanding what patients should get a total joint and where should they get it. And then engaging that patient after their care to make sure that it is a good outcome, and that they do have a good experience. We now for the first time, really ever in health care, we have a consumer, and they have a choice of where they go for care. And we are increasingly at risk. And so that needs to be a good experience. And they need to have a good outcome. But I don't want to over play it. I mean, it's okay to have a dumb device. It is. And I think the value prop is hard enough to define and differentiate yourself that you don't need to have that distraction to create an AI or a big data play or if it's there, absolutely utilize it, and try and find it where you can, but I don't think you don't it's not a requirement.

We we just sold a business called boulder surgical as a surgical sealer and stapler and didn't really well. And it there was some data aspects of it. But in reality, it was just a great technology. And we were able to position it and build the value prop to navigate this, the purchase committees and give the physicians what they really wanted when they needed it. And that's okay. So it is, again, a really unique time where we're seeing a blend between digital health and these unique insights, and just surgical tools. And if you're able to find that mix, that's great, but I wouldn't force it.

David Uffer  13:41  
Well, Greg already told us he's not going to give anybody hints on this. So we're gonna go in a different direction, ask a different question. I want to go back a little bit to the purpose what we're here for there's over 200 presenting companies. You certainly can't host 200 meetings. And nor should you because there's some that are gonna fall quite outside your theme and thesis for investing.

I get asked every day, David, how do I get to these people? How do we get on their desktop? How do we get their attention? I think would love to hear from you, Greg? Is it from an advisors that somebody that makes a friendly introduction? capture me in two pages, or I need an eight page deck so I can look at key elements. Email me Call me.

Greg Madden  14:26  
Yeah, I'm Irish whiskey, maybe. Yeah. That always helps. No, I would say the warm intro is always helpful. If it's a trusted source that we know it's to some extent pre qualified or at least pre screened, that it's interesting or something that we should spend some time on. So that helps quite a bit. But absent that, I mean, I think we have to start as do research on the investors. You know, spend a little time on the website. Understand if your mission fate fits our mandate, because if it doesn't, it's just not worth spending the time. It's better to be more rifle shot than it is to just kind of blast out a general email to lots of investors, I think you have to customize your pitch and your story to investors for which it's most likely to fit.

You know, the other thing I would recommend is that as you think about approaching investors, we see a lot of stuff. I mean, I get, I mean, dozens of emails a week, and some days, I might get a dozen a day. I spend probably three to five minutes when the deck first comes in over the transom. If I can't figure out what they do, or why it's exciting, I mean, it's just I move on to the next thing. So something that's punchy, something that articulates clearly, you know, the problem you're solving, and why that's a you know, what your why your solution is novel, and why it's going to be a big commercial success. You know, that's what I need to understand almost upfront, behind it, I obviously want to then look at the management team and make sure the backgrounds are suited to be able to deliver on the on the promise. But really, I think the best thing you can do is really understand your audience, and then deliver a concise value proposition that's easily understood. And that is, I think, gonna increase your hit rate, at least getting a 60 minute discussion, whether in this world over zoom, or in a conference like this 30 minutes. Because, you know, I probably had 120 requests, and I fit in somewhere between 24 and 30 meetings.

Andy McGibbon  16:32  
Maybe I can add something to that, too. I think, you know, that is kind of the curse of venture, right? I mean, it's still very much easier to get in the door, if you know someone. So I think, you know, that can be frustrating. One thing that Sonder has done and you know, is set up a dedicated email address called close the gap. You can see it on the website. But for underrepresented folks in industry, you have basically a direct line to the partners who will review your your material will talk to you about your material, even if it's not a clear fit. Because I think one of the challenges is since it is so referral driven, it ends up being a little bit of a closed circle. Right. And so anything we can do, you know, as venture capitalists to try and open that up, I think is worth doing. So. Yeah, good. Add a few words, please.

Lu Zhang  17:15  
Yeah. So I think the first thing you both mentioned is really make sure that you have send out super concise the message because really, it's hard to read such a long email in order to gather key points. Another thing is for me personally, sometimes I even pray for a founder referral versus investor referral. For example, today, half of the company I met who is is actually a co founder referral. So we believe good founder really knows good founder. And also to to the other panelists point that really study the investor. For example, for us, I also promotion that we actually have founder, founder office hour, we have that information embedded into our website, we want to say wishing founder actually gonna research what we're doing. And also find that information, sign up for the founder office hour, be able to directly talk with my team. So that's something really worth a founder to do some study and also be able to get to know the investor. And that as in the last one is really just a quick suggestion based on my past entrepreneur journey, is when I was a founder, I hate VC for so many different reasons. But later, after I become an investor, you know, I try to think about, okay, what is the misalignment from the both sides of the table. So I always tell founder hours use opportunity to talk with VC as a free consulting session, that your perspective is totally different. You're not obsessed with whether he's gonna give he or she gonna give me money, but really focusing on getting feedback, getting perspective. And also you feel more comfortable asking help, by the end of conversations that you know, anyone else I could talk to, and pick their brain about how to do my company better because no early stage, we are expecting talking to a perfect startup company, because it's impossible. But we're here to evaluate the risks and also offer help.

Andy McGibbon  18:55  
Yeah, and I think just building on that it's a partnership, right. I mean, in the end, we're your partners, if you know, as soon as you become a portfolio company, our interests are very much aligned and in creating value. And so you know, that mentality of it's a consulting, free consulting, so that's a great way to think about it.

David Uffer  19:13  
Gee Lu that's the first time I heard anybody say I hate VC.

Lu Zhang  19:18  
Really, I heard so many first time first turn it never.

David Uffer  19:23  
So it was with a friend earlier today, who said under COVID amazing that we were able to spin out ZimVie out of Zimmer Biomet without any interaction and people didn't see anybody talk about the investment environment under COVID. And it's not so much rearview mirror because I'm hoping we're looking forward. We still have a little bit of a hangover and not quite out of the woods yet. But more so what changed and what you think will continue to be present in how you changed and said, Gee, that's a pretty good way to adapt. It's either more efficient, it's better for me it's better for the company's? Greg, have you noticed a lot of change or you'll be back to the same old?

Greg Madden  20:07  
Well, I think in terms of portfolio management, it's it's going to change very much. I don't think there's a need for quarterly board meeting, I think some of those can be done over zoom. And then obviously, at least a couple times here, you want to do it in person. But I think the I think we overvalued in person meetings, particularly when there's lots of travel and inefficiency associated with it. I think we also missed something I mean, today, and yesterday, I met with, as I said, a couple dozen companies, and two thirds of them I don't think I'd ever heard of before. And so I just don't ever remember experiencing that at a conference before. And I think it's because we haven't done it for a couple of years. And, and so there is something missing. In that regard, I would say the efficiency for both me as a raiser of capital, for funds, as well as for companies, I think has gotten more efficient. I think the screening call in the 45 minutes or whatever it is over zoom, is really efficient to figure out whether or not it's worth getting together in person. And so I think it enables me, frankly, to see more opportunities than when, you know, an executive had to come to my office, I had to make sure once a day I was gonna be there. I can meet companies, when I'm traveling, I can meet companies when I'm at home or when I'm on vacation. And that's I think that's that's huge. The problem is, we're not all connected enough to be in an ecosystem like this, where you're bumping into people and seeing companies that you otherwise hadn't found you and you haven't found them.

David Uffer  21:40  
Great, David, to your experience.

David Kereiakes  21:45  
Not much more to add, I mean, it's I missed these environments. And being able to interact with impasse, people along the way and say hi, and a lot of this job is just showing up and, and being there and being in the right place at the right time. And you have to be there in order to be at the right place at the right time. And as Greg mentioned, it is hard to keep track of everything that's going on from your home office, when you have kids climbing over you and running into the room and  you're always personal. It is. Yeah, so it having events like these are really nice. And so there's there's things that have been nice, being able to screen a little faster and be a little more efficient. But it'd be nice to go back to some of the ways we did things before.

David Uffer  22:42  
Lu, your fund is an early investor, as you said, but everybody has a different stage that they're going to invest. Is there anything that's really too early to look at? And in other words, if somebody wants to least get on your radar, maybe it's next year that they're going to be raising a round that could be appropriate for you. But is it a waste of time to be on your radar screen to get to know them? Is this a relationship when I was doing m&a at the corporate level, I wanted to see companies 2,3,4 years because before I was going to acquire them, I have to socialize that attorney with that's a different issue. But I want to know what's coming up next and have that relationship and watch them for a while.

Lu Zhang  23:24  
Yeah, I don't think this is the same for other research focus firm. But for us, we actually like to talk with founder even they think about fundraising, because a couple reasons. And the first thing the same as you mentioned, we want to get to know each other. It's about partnership is like eventually gonna get married when you sometime to date each other. And also be able to make sure this is good partnerships, especially for us most of the deal will prefer to lead. So but on the board, you know, this is a really important commitment for us. So even sometimes the founder just got started, they probably won't think about fundraising another three or four months. So we'd like to at least put them under our radar. Sometimes we even offer help offer a suggestion. We give them honest feedback to the founder. And a couple weeks later, we're checking to see whether funds already have the capability to integrate out this feedback and grow from there, including the introduction were given to the weather, they were able to convert it to potential commercial, you know, pipeline. So that's the metrics we've been kind of tracking as well. And another reason we tried to talk with founder earlier is also for practical reason. You know, last year Silicon Valley has been crazy in terms of the evaluation. Has we've been honest with everyone and I was competing early stage deal with Sequoia, with Andreessen, was Hygeia, with the Vision Fund from SoftBank. So we also want to talk with founder early on to really share our knowledge about how to best structure around and how to choose the best partner for your early stage fundraising. Then make sure they have the right expectation when they start a fundraising.

David Uffer  24:57  
Andy, I see you shaking your head do you want to see these folks well before they might be appropriate for you.

Andy McGibbon  25:03  
Yeah, absolutely. I mean, I think echoing everything there, you know, again, it's a partnership. It's about, you know, seeing how you can grow even in that, you know, six months, three months, who knows how long that time is. But things are so dynamic in those early stages, it's a great opportunity for us to see how you're reacting and how you're growing as an entrepreneur. And also for us to learn more about the opportunity, and bring folks close to us whose opinion we also value to, you know, help you out. So again, coming back, I guess, to the idea of it being a consulting project, it's free consulting, so take it.

Greg Madden  25:37  
Yeah, I would just say, the biggest mistake I see companies make is they go to launch their fundraising, they don't know the VCs. Takes them a while to sort of line up all those meetings, it delays the fundraising process, number one, number two, they start to learn things. And their story starts to pivot mid fundraiser. And that's not great, because you can't go back, you know, six weeks later, and that actually changed a bunch of things. That doesn't build a lot of credibility. And so if you're out there a year before, you're building a network, number one, number two, you're getting real feedback without asking for money. Then when you come back and see an ego maniacal, VC like myself, they say, "Hey, we listen to you look at all the things we did, because you're so smart." You know, it's a good conversation to have a more positive conversation to have than to come in and have me just critique it and feel like, you know, we're, we're not aligned.

David Uffer  26:31  
Is it a negative when people change a little bit of the tract or their story? Because I see people that as you saying, you're always going to learn something else. And things do change as you go along. And some people are afraid to say, well, I said, this was my plan before now we've changed.

Greg Madden  26:47  
Yeah, it's just I would say, if it's, you know, within a period of a specific fundraising, it looks a little whipsaw. And you know, you're not prepared to really execute. If it's, you're getting a feedback a year in advance, you've really thought it through, you've done additional research, and you come with a more comprehensive story. That reflects some of that feedback, I think you're just gonna have better success and look, look more prepared to execute, which builds investor confidence.

David Uffer  27:15  
Great. David, let's shift a little bit here. Move talking about how you're looking at things. On the flip side, are there areas or segments that have completely lost your interest in the last few years? Or looking out forward? That was hot? Before I'm not going to touch anything? I hate to say a particular clinical segment, I'll get beer thrown at me. But you can try.

David Kereiakes  27:43  
Yeah. I don't, I don't know I think maybe a little differently. I get excited about things. And I think all of us are on this in this job. Because we get excited about things and we want to see advancements in care. And so I do try to go contrarian. But it's harder nowadays, because there is a more capital on the sideline than anytime in history, all geared toward health care. And so it, which is great, right? I mean, when we saw the power of what resources and the entrepreneurial spirit can do in this country, when we created a vaccine and 12 months, right, and got it out to millions of people in no time. Right? I mean, that is a miracle. And within 24 hours, everybody across the world had the DNA makeup of the virus, which is remarkable, right. And so getting to see where I think modern medicine has failed, which is disparities in care, behavioral health, women's health, there's a there's some in getting those areas, the resources, there will be a lot of failures, but there will also be a lot of great success there. So again, I'm excited about it. I do look more contrarian. I do just try to follow whatever Greg does, and it seems to work.

David Uffer  29:14  
I was I was reviewing some Silicon Valley Bank data. And med tech came back very strong for investing. When I looked at the last few years, the core device diagnostics was stable. That's my polite way of saying or optimistic way of saying flat David, wee optimistic but a huge amount into the health IT area. And I'm not talking EMRs real device based technologies that are going to be applicable. But we didn't see a lot of exits. The good side on that though, I didn't see a lot of failures either the company's will continue  to operate and get funded. Does this look too long of a cycle to you? Or is it okay? Are you seeing trends that why they're taking a long time to exit? Greg?

Greg Madden  30:12  
I think part of the reason money's flowing back into the med tech segments is we had an IPO window open for a couple years. And that also held the viable alternative to the strategics. So that also helps m&a and we saw medtech multiples at all time highs, I mean, double all time highs. So some of that will come back to normal. I think growth stage med tech, that will continue to be interest, these are companies that, you know, have their approvals are, you know, growing pretty predictably. And I think, I think that's durable, early stage is always going to be more volatile, I think you said, you know, med tech kind of stabilized, and it's called hitting rock bottom.

In terms of the amount of money that was flowing, I'm very excited that it's coming back. In addition to a positive exit environment. The other reason is just the potential of some of these technologies that the other panelists talked about in terms of moving care towards the home, and other disruptive modalities, which are, you know, huge economic opportunities that just didn't exist. I talked to some companies today that talked about computing power, or processing power, you know, using diagnostics that five years ago wouldn't have been possible, right? We have a level of connectivity that's making things possible that didn't exist, you know, five years ago. So they're just, there's innovations and battery technology, there are things that the med tech industry is utilizing, that I think will create a renaissance in the types of opportunities we invest in, they may not be, you know, the next mitral valve.

So it'll the med tech industry will look a little more diverse. But it's no less med tech. There'll be regulated medical devices, driving real outcomes. And I think as other said before, for the first time, these devices will also be collecting real data, which is a treasure trove of value itself.

David Uffer  32:08  
Andy, you get a ton of diversity and approaches to you as well. Trends or issues along the lines of IT, health technologies?

Andy McGibbon  32:19  
Yeah, there's probably a lot of ways to peel that apart. I mean, I think, you know, if we speak health IT specifically, you know, there has been, it's a more accessible area of healthcare for a lot of folks that might not be as versed in healthcare. And so I think that might have something to do with it. You have some investors that are coming into the space that, you know, you know, let's see how that plays out in the long run. I think, you know, this idea of enabling technologies and what they've been able to do for medtech, there's, you know, there's the integration of technology into the device itself. But I mean, I look at one of our portfolio companies, one of our first portfolio companies that we got excited about uses, you know, 3d scanning, 3d modeling, 3d printing, like, you know, laser cutting all these technologies that are around and they've been around for a while, not necessarily brand new, but you can put these together and interesting ways to create devices that, yeah, you look at the end product, and you're like, Okay, well, that's cool. But it's actually really fascinating the technology development from other areas that have gone into it. I think you combine that with the, you know, the structural changes in healthcare. I mean, I agree, absolutely. This is like a very exciting time to be to be doing this.

Lu Zhang  33:27  
So I really want to echo that because that's also one of our mandate that how to bring the technology from the tech sector to the healthcare sector, and also great opportunity, because for us, we're not only investing healthcare, we invest in deep tech as well. I was invest a lot of edge computing company initially and later we found okay, besides AI edge computing for healthcare is important because we have huge amount of data, we need to make sure there's no latency to have live, you know, processing capability. And meanwhile, okay, data privacy is important for healthcare or learning for healthcare data. That's another thing and we'll we'll talk about the hardware, how about the Nano robot application for healthcare, there's also create lots of new opportunity. And then we'll have this new type of flexible electronic sensor also had amazing applications, 3d printing, like 3d metal printing, new material. I'm a material scientist from Stanford. So I saw lots of great tech solution be able to apply to healthcare, and also leverage the huge amount of a high quality data generating healthcare to create a new solution. So that's a really, really exciting, we call it interdiscipline type of innovation. We're investing in our solving power.

David Kereiakes  34:37  
Yeah, I'd also say pure medtech. There's procedure data, there's, it's you can back into a market size, right? And if I'm an acquirer and I have to put my job on the line on saying I want to buy this and I want to put our money in and this is my name on it. I can feel comfortable in presenting how I got to that market size and why I'm going to pay that back. When you mix in the IT and the digital health side of it, too, you get into that gray area where it's really hard to predict the market size. And I think we've seen a lot of companies misjudge that a lot of investors misjudge that. And market sizes and healthcare can vary. It can be deceiving. And when you're having to, we have to convince somebody at a certain level, I mean, if I'm selling something for 100 million bucks, I mean, that's a rounding error for a lot of companies, and no one's going to put their job on the line for it. Right, no one's gonna lose their job for doing that, that's risk that they can take, once you get higher up, when we're talking about these market sizes that are a little gray, take a little more convincing, somebody has to say, I'm all in on this. And this is why and they have to present it to their board and convince somebody. So that's, that's where it gets into that gray area where I think we're still trying to figure it out. Because the market is changing the markets moving. And so I think we are going to see it, but we also will see how badly we misjudged as investors as entrepreneurs in the next couple of years. So

David Uffer  36:08  
You brought up TAM, let's ask a really basic question. But I get asked this every time when I was reviewing companies, it seemed that everybody felt that they had to put a billion dollar TAM, or they couldn't even talk to an investor. How do you look at TAM in a couple of different regards? Because I would always whittle it down to say, you can tell me you have a billion dollar TAM. But a third of those patients are not going to be eligible. They're not applicable here. I want to get to the real applicable population. I want to ask that. And then the second part of that is, if you're going to be in a billion dollar market, with only two players versus a $2 billion mark with 10 players, how are you fairly evaluated on these companies? Because I get a lot of consternation from people say how do I approach these people when it looks like I'm not so excited $600 million, but this is novel, and I'm the only one that's going to enter this market? Lu?

Lu Zhang  37:07  
Sure, I think that's also kind of relate to, sometimes we wanted to share knowledge from VC side to let the founder understand the why we have this type of requirement for market size, because we also need to consider our founder potential return. For example, I did a medical device company, my image acquisition assay for my company is roughly 100 million dollars. But the one I started to run the 100 million dollar fund. If I only have a company X, it was 100 million dollar I own 10% of it, it won't return majority of my fund. That's the kind of the challenge for a VC running a couple 100 million dollar fund, we have to look for a billion dollar exit in order to make sense for us to invest and eventually generate a good return from the fund level. So that's the essential fundamental metrics we're calculating when we're looking at market size market opportunity. For your second part of the questions is the okay forehand, half a billion dollar market size, really no technology. Eventually, it's a half a billion dollar exit, it just, you know, really want to support but I need to consider the founder return. So that's the difference between the individual investor, angel investor and the principal and the professional institutionalize the VC. And another thing is to your first part of questions, we definitely want to see honest number from founder in terms of calculation for time. Another thing is, trust me, all the investor, we're going to do our own due diligence, the first thing we're going to do as a market analysis, we're going to calculate our own time, if we saw the big gap between our time data versus founders number, that's the negative signal already.

Andy McGibbon  38:42  
Yeah, absolutely. I think the honesty piece, and again, come back to the idea of it being a partnership, it's gonna come up now or later, if you're, you know, not being really genuine about that TAM that you're addressing. So just, you know, do some work on it, make sure validated, check it with others. And then I think, you know, from a software perspective, when we think about TAM, and I think, you know, fund return, you know, there's a multi component thing when you're thinking about fund return, and there are situations where maybe it is a smaller TAM, maybe there's a smaller opportunity, but you can make up some of that through ownership or other ways. So I think, you know, there's ways to think about how you build a business and also how you construct the fund portfolio. Sometimes in a funds portfolio, you want some quick flips, that might be smaller, you know, TAM's at the end of the day. So what it comes down to is alignment of interests, and the TAM has to be a critical piece of that and being accurate as much as you can.

David Uffer  39:36  
Greg did or anything else to add?

Greg Madden  39:39  
Well, one, I totally agree with credibility point. And okay, you can show me what the total addressable market is. I really like it when you can segment it down to what the total accessible market is, and be realistic about it. I'm willing to look at markets that are 200-250 million, but the rule of thumb is, you better be able to get to an exit on less than $20 million invest. If you've got a, you know, 500 to a billion dollar exit, or a million to a billion dollar exit potential? Yeah, those are segments where you can invest more heavily, it can cost more to get to market, because you've got a higher top and and just when I look broadly at out there, typically accompanies exit price is capped at what the total accessible market is, it's kind of it reads pretty closely, right? So as you're thinking about, Okay, do I have a good value proposition for an investor? You should be thinking about that 10 times difference between what is it going to cost you to get to an exit, if it's, you know, if the if the accessible market is 10 times that, and you're probably in a safe zone, if it exceeds that, then you've got a probably a very interesting value proposition.

David Uffer  40:37  
 Great perspective, one of the biggest questions I get asked when people are trying to put together their deck

David Kereiakes  40:45  
Be honest to you, because you're not going to change the market side, it is what it is, and you're going to figure it out pretty quickly. And back the envelope, I say, if it's a $200 million market, that somebody's gonna pay 100 million for it, if you dominate that market. And so then you have to back into the capital cost of capital that you're raising and making sure everybody does well at $100 million at at that, that point, I love the smaller markets, I think they usually have a big medtech asleep at the wheel, and you can just clean their clock just and dominate them. And, and again, the acquires that they're not going to put their job on the line, and they don't have to worry about it. It's a rounding error for them. And it's a tuck in, particularly when that division is getting creamed. So, but again, you have to be honest with the market size, you can't change that. And this, it's going to be what it is. You can grow it, you can eventually but not in a investment horizon that we are beholden to.

Greg Madden  41:46  
So the only other thing I'd add is that as I think about a little more is that if you have a multibillion dollar market, there's going to be dozens of players, right? I mean, people are going to find it interesting. So at that point, it comes down to the real novelty of the product. And so we do get worried about busy markets, there's only so many buyers. But if you've got a novel solution that delivers a an outsize outcome or economic proposition, then that can differentiate itself.

David Uffer  42:13  
You started talking about exits. I always looked at it as a game of Texas Hold'em poker. How many outs do you have? And sometimes there could be 20-30 players that could acquire it. And I mean, if you're structural heart, you might have four or five. Did the exit opportunities really concern you a lot? I don't think I've seen a deck where somebody didn't say, Boston sigh Medtronic, j&j, and then striker as the exit Well, you know, they do maybe five to 10 deals and a good year, we have 200 Presenting companies here. So we know the math of what the exit gonna look like. But are the number of exit opportunities really concerned for you?

Greg Madden  42:58  
Yeah, I mean, that's part of the reason we 10 years ago move to later stage, there's just fewer buyers, harder to predict. But if you get a company to 30 to 50 million in revenue, you've got a lot of options, whether it's m&a or IPO market. And so I want to invest in companies that are 10 to 15. And kind of fund them for three to five years and, and get to an outcome. So I think that's problematic, I would say, in the early stage, and part of the themes that everyone on the panel talked about around you know, how medical devices is changing, why some of the opportunities around connected devices and moving towards the home and consumer product versus, you know, health tech versus med tech, all that's really interesting, because it increases the number of buyers, all of a sudden, you're not beholden necessarily to just Medtronic and Boston, you may have a company that could be interesting to an Amazon or Google or an apple.

David Uffer  43:53  
Yeah, a lot of head shaking down the line

David Kereiakes  43:55  
My my Northstar is you want to build a business to be bought, not sold, right. And so you need to be making decisions to build a great business. And growth is hard to find. Execution solves all problems. Most problems and, in the end, if you build a good business, somebody will buy it. I mean, we try to do our math on the front end and make sure that they're it's strategically in the right direction and who might be around the hoop and, and make sure that there's multiple shots on goal but in the end, you want to be bought, right? You don't want to build a business just to sell and that's that comes through and all the decisions that you're making, and the time horizon that you're beholden to, and those short term decisions so it's just something I always try to advise my entrepreneurs I work with, as they're contemplating what decision to make and some of the harder ones that's just something I always use so

Lu Zhang  44:55  
yeah, so Yeah, same same here. I think sometimes people think Okay, are there says "it's way too early to think about exit. But actually, it's a part of a very important part of our due diligence is exit analysis to understand okay, what is the potential exit route for this company where evaluating merger acquisition who are the potential buyer? What is the potential price range if they achieve what they claim and also any opportunity for potential IPO. Besides that, another thing we did is even at earlier stage, we actually create a CxO network. Now we have 44 executives, mainly CTO from global one Southern Company 1/3, are healthcare like CTO from Medtronic, Senior VP from Unity Health, then we're also frequently discussed with them to understand okay, if they're going to buy whichever company they want to buy, and what are the news information we heard from them about their budget for buying company. I think the good news to you guys is what I heard recently from other CTO is they got empower more empowered by their board for potential integrating new technology into the corporate. So we integrate that information to our due diligence and also share with our with founder to better consider their potential exit route.

Andy McGibbon  46:06  
Yeah, I don't know if I have a lot more to add, other than from a Sonder perspective, I think we also bias ourselves towards new categories, as opposed to something a little bit more incremental, which I think just adds to the optionality when you think about the exit opportunities there. So definitely something that we're keeping in mind, you know, from the beginning, but we also kind of bias ourselves towards those opportunities with optionality.

David Uffer  46:29  
Thanks, one of the biggest head scratchers I came across today, are people actually building their deck and the last page, they're asking me, do we put the revenue projection and and in some people said, I was told, absolutely don't and some are saying, I can't go there unless I show them what my revenue is going to look like. And I've seen it both ways, I've got a certain opinion, but I'm just an advisor, I want to hear from you guys. And David, you're shaking your head a lot too.

David Kereiakes  46:58  
Goldilocks, as me like, not not too aggressive, not too conservative, just just a decent uptick in reason. I mean, we're going to dive into the assumptions behind it. So and we're going to haircut it and build our own. But as long as the assumptions make sense, and that's really where I focus my time and attention, because that helps me get into the mindset of how you're attacking, what are the inputs? What are the factors that drive growth that maybe inhibited? So? That's just Goldilocks?

David Uffer  47:32  
Greg doesn't look strange. If somebody like you were saying, you advise them, they get smarter along the way. Six months ago, you told me your three was going to be $30 million. Now, it's $60 million. What give us here?

Greg Madden  47:46  
Yeah, no, I think that's a problem. And so I like the approach that David just articulated, I think, look, I also think the ramps highly dependent on how much money you invest, right? I mean, how aggressively going to invest in that commercial ramp. And so that, that can change, you know, I think the articulation of what the assumptions are why you can capture share, probably the best thing you can put in the deck versus kind of this, you know, finger in the air revenue projections, if there's a predicate, you can map to and say, "Well, this is how this product, similar market, you know, similar sort of entry point", how that went. And we're thinking we have that sort of potential. That, to me is one of the best things you can do.

David Uffer  48:30  
Well said.

Andy McGibbon  48:31  
 Yeah, I think if I'm gonna open up somebody's revenue per day projection, I'm not looking at the numbers, I'm looking at the cells that show the actual assumptions that are driving the equation. So

Lu Zhang  48:40  
To add on to that. I think, as David mentioned, mindset is very important because we want to understand the logic, how founder, actual analysis, and also plan ahead for the future growth. And that doesn't relate to that we typically want to combine the revenue projection together with our fundraising plan, whether it makes sense for how much money they plan to raise for a serious ABC stage compare was the revenue projection. And on the other side, you know, don't be too nervous about the exact number you put out there because 90% of the time, eventually the number will be wrong.

Greg Madden  49:09  
100 100% guarantee you and ours is going to be wrong, too. So I don't know I've seen some that say zero that are pretty accurate, at least for a few years.

David Uffer  49:20  
Great. Well, as Nick introduced me, I'd been 25 years prior to it and advisor as a strategic. I get asked every day and I get some people that are afraid to and some people that are asking me to make introductions to 10 strategics. Let's get into the topic of strategic investors. Don't like it want them at a certain point. We'd love to have them there to validate. Don't know what that is.

Greg Madden  49:55  
So, in our early stage fund, we actually have a corporate that is the he SOLP, so and they're in the audience. So I love strategics. No, I look at I think we have them in our funds, not only in the med tech fund, we have six of the, probably the world's top 50, pharmaceutical companies invest in our biotech vehicles, we work very well, with strategics, both investors in our funds and partnering companies, I think the data haven't looked at in a long time. I think the data shows that companies with strategic investors earlier tend to do better. The actual the buyer is not correlated at all with who that strategic investor is. But they tend to be bought more frequently, and they tend to be bought for bigger multiples. I think that's held held true, there's something to the early validation of a strategic seeing how this can be disruptive to their business, that they want to have a seat at the table, or what we call room with a view that I think is I think, is really helpful. And I think it excites at least an investor like me that to see some of that validation from a prospective buyer, someone who's very knowledgeable about the space

David Kereiakes  50:57  
I find a really good attorney first, right? And there are pitfalls, and all of us have scars and have learned. I think as you turn the page, though, it does provide a lot of value like credibility, but goes back to you want to be bought, not sold, right. And so when you bring that strategic into the room as an advisor, they're influencing the decisions as an entrepreneur that you're making. And so do you invest in that r&d? Do you invest in the strategic direction that you think the markets going, or you answering to that specific strategic, which can have an impact on your outcome. And so as an example, I was invested in a business called Varian medical, it's a lung navigation business. And we took a large note from a company called BTG. And in that note, it was able to be converted into equity. And they had an option to acquire us at a set price with a set timeline. So we paid a lot of money for a very good attorney. But it turns out Boston Scientific came in and bought BTG. And they didn't use that, they didn't exercise their right to acquire. And so had the entrepreneur who was a great entrepreneur, we had a great board had we built and listened to everything that they were saying that they wanted to see, we would have been lost, right? But because they were thinking more around how do we build a great business? And how do we position ourselves to where the markets going and be strategically unique, Olympus came in and bought the business and paid a lot more than what we had originally signed up for. So just something to keep in mind. And, again, as you're thinking through what's the best decision for the business, you have to think about that and be mindful because that that decision tree becomes blurred, at that point in time.

David Uffer  52:51  
Different perspectives/Same?

Andy McGibbon  52:54  
Yeah, I'd probably echo the same comments, you know, I think they can be you have to manage it carefully. But yeah.

David Uffer  53:02  
Very good. Nick, if you can afford the audience for a question or two? Or if we're wrap? Ah, I'll let you make that decision. I haven't seen the time. We have one burning desire for a burning question. Anybody in the audience want to raise a hand and ask our panelists, anything we have in the back there?

Question 1  53:22  
With the changes in the economy and inflation? How do you think that's going to change the fundraising environment in the next 12? Months?

Greg Madden  53:37  
It's a good question. So I've got some companies that set a plan, you know, third, fourth quarter last year, planning to raise this year, and we've just seen, CRO costs go up, we've seen cost labor costs are going up. So, you know, I think the reality is you just need to, you're gonna raise more than you thought previously. And I would say, while the debt markets continue to be really robust, shockingly, eventually, the music's going to stop there, too. So as I've said to some of my companies that are here and some that are not, you know, if people are passing out hors d'oeuvres right now, take one, like, you know, you have equity capital available to take it, if debt capital available to take it, because I do think we're probably moving into an environment where that incremental dilution is going to probably prevent you from hitting, hitting a bump in the road in terms of running into a situation where you might not have enough capital in the fundraising market may not be as robust as frankly, it is right now, despite everything going on.

David Uffer  54:49  
There we go. Nick, would you like to close it out? I'd like to, first of all, say this has been the fifth investor panel I've done this year and this was the most insightful by farSo thank you very much and like the audience to thank the panelists here


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