Medsider: Learn from Medtech and Healthtech Founders and CEOs - From Investor Pitch to Eventual Partnership: Interview With HealthQuest Capital Founder Garheng Kong

Episode Date: January 11, 2022

In this episode of Medsider Radio, we caught up with the  HealthQuest Capital Founder,  Garheng Kong, who worked at GlaxoSmithKline, McKinsey, and TherOx before transitioning into healthcare investing with Intersouth Partners and Sofinnova. Garheng’s resume is broad and deep. He has earned numerous degrees from two of the nation’s most prestigious universities — Stanford and Duke — and funded an equally impressive collection of healthcare companies throughout his career. Garheng and his team see up to 1,000 investment opportunities in any given year. The experience has taught him how to assess which ones are right for the firm, and which he can afford to let go of. In this interview, Garheng shares keen insights for startups and innovators preparing to pursue funding, along with observations about how the healthcare industry has shifted thanks to the global COVID-19 pandemic. Before we jump into the conversation, I wanted to mention a few things:If you’re into learning from proven medtech and healthtech leaders, and want to know when new content and interviews go live, head over to Medsider.com and sign up for our free newsletter. You’ll get access to gated articles, and lots of other interesting healthcare content. Second, if you want even more inside info from proven experts, think about a Medsider premium membership. We talk to experienced healthcare leaders about the nuts and bolts of running a business and bringing products to market. This is your place for valuable knowledge on specific topics like seed funding, prototyping, insurance reimbursement, and positioning a medtech startup for an exit.In addition to the entire back catalog of Medsider interviews over the past decade, Premium members get exclusive Ask Me Anything interviews and masterclasses with some of the world’s most successful medtech founders and executives. Since making the premium memberships available, I’ve been pleasantly surprised at how many people have signed up. If you’re interested, go to medsider.com/subscribe to learn more.Lastly, here's the link to the full interview with Garheng if you'd instead read it.

The question is how do you separate yourself from a thousand other opportunities? And so I'd say one of the key success factors for companies is, of course, how entrepreneurial and creative they are. As from a leadership point of view. And, you know, you would like to think in a pure world, whatever shows up in your executive summary is the key determinant. But how it comes in is actually really important. And so the best way to engage is, of course, through a warm referral. And if you don't happen to know us directly or know somebody in our team, I would go to LinkedIn or do something and find somebody who knows us so that the introduction comes in through

a warm referral. I think that's a really important component. And of course, we have a whole ecosystem of CEOs and colleagues and corporate partners and so forth that should be able through one degree of separation make that connection. Welcome to Medsider Radio, where you can learn. from proven med tech and healthcare thought leaders through uncut and unedited interviews. Now, here's your host, Scott Nelson. Hey, everyone, in this mediter interview, we're sitting down with Garheng Kong, the founder and managing partner of HealthQuest Capital.

Garheng is the only member of his family who isn't a practicing physician, but he's still involved in their profession through funding health care advancements as a venture capitalist. Garheng's resume is broad and deep. He has earned numerous degrees from two of the nation's most prestigious universities, Stanford and Duke, and funded an equally impressive collection of healthcare companies throughout his career. Garhung got a start in investing with InnerSouth partners, and after fine-tuning his skills, he launched HealthQuest Capital, a private asset firm focused on providing growth capital

to companies transforming the healthcare industry. Here are a few of the things that we're going to learn from his experiences. Companies that pursue venture capital funding should approach it very strategically. Focus on warm introductions and carefully constructed pitch decks that answer common investor questions. Second, syndicated deals are also an option for startups but require a strategy that ensures the product doesn't fall victim to having too many cooks in the kitchen. Two to three primary investors are ideal when going the syndication route. Third, the pandemic has changed the future of healthcare and investors are paying attention

to emerging trends as they make decisions about what businesses to fund. Solutions in healthcare that address national migration patterns in the emerging gig economy are two areas that have piqued Garung's interest. So before we jump into the discussion, I want to mention a few things. First, since you're listening to Medsider, you're probably aware of how expensive it is to run clinical trials. Anyone who spent time in the MedTech space knows that you typically need to commit hundreds of thousands of dollars, oftentimes millions, towards clinical research. But it doesn't have to be that way. And here's why. Proof Pilot is a new kind of hybrid clinical trial platform

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defense quickly and review data and preliminary analysis within hours, all in one compliant platform. Get up and running quickly with an annual license fee and launch as many trials as you like with an unlimited number of participants. To get started, visit medsiderradio.com forward slash proofpilot. Again, that's medsiderradiot.com forward slash proofpilot. For the medsider audience, with an annual contract, ProvePilot will provide IRB approval for your first study at no cost. Some exclusions apply, so visit Medsider Radio.com. forward slash proof pilot to learn more. Okay, second, if you're into learning from proven MedTech leaders and want to know when the new

content and interviews go live, head over to Medsider.com and sign up for our free newsletter. You'll get access to gated articles and lots of other interesting healthcare content. If you want even more inside info from MedTech experts, think about a MedSider premium membership. We talked to experienced healthcare leaders about the nuts and bolts of running a business and bringing products to market. This is your place for valuable knowledge on specific topics like seed funding, prototyping, insurance reimbursement, and positioning a MedTech startup for an exit. In addition to the entire back catalog of MedSider interviews over the past decade,

premium members get exclusive Ask Me Anything interviews and masterclasses with some of the world's most successful MedTech founders and executives. Since making the premium memberships available, I've been pleasantly surprised at how many people have signed up. So if you're interested, go to Medsider.com to learn more. All right, without further ado, let's get to the interview. Hi, Garhang, pleasure to have you on Medside Radio. Thanks for your time. Thanks, Scott. It's great to be here.

Yeah, looking forward to the discussion. I think it's going to be a great one for anyone that's involved in, you know, medical device, health technology startup. So with that said, let's first start out with kind of a high-level overview of your background. We could probably spend half the conversation talking about your kind of trajectory within health care. but maybe we'll, maybe you can provide just kind of a brief background and then, and then secondarily, tell us a little bit more about health plus capital as well. Sure. Yeah, happy to do that. I guess the bullet points on me are actually pretty easy. You know, I grew up in Fresno, California, which is agricultural community. I ended up going to Stanford for two degrees. I was a chemical engineer and a biologist.

I actually played volleyball there, so I had a good time. And then I did four degrees at Duke. I did my master's in PhD and biomedical engineering, my MD and MBA. And six degrees later, I thought I should probably get a job. So at that point, I went to then, Glaxo, welcome now Glaxis-Smith. I was at McKinsey. And then I did a couple of stints as a founder and CEO in healthcare and got lucky twice. And then now I've been investing in healthcare for the last, you know, 22 years and had the pleasure and privilege of starting HealthQuest about nine years ago.

So that's sort of a quick background, but the real genesis of HealthQuest, a little bit more on the personal side, turns out that everybody in my family is a practicing physician. I'm the actually only non-practicing doctor in our family. So my wife, my sister, dad, mom, everybody are physicians. We joke about it. You can get your, you have to get your MD actually. You can flip hamburgers, do whatever you want after that, but that's the right of passage. And, you know, my father was a cardiologist. turns out so is my wife. And, you know, he might have seen 50,000 patients in his career and he knew them all very well. You know, he knew, of course, their medical issues, but their family members and so forth. And of course, he knew all their names. And I like that concept, but the idea to

maybe innovate and, you know, invent a new medical device or diagnostic, we had the opportunity to reach more people. You might not know their names, but you have more scale, was really attractive to me, and that's how I got involved with innovation and developing products and then ultimately companies. And then for me at least, I thought, well, if I can do one or two companies, maybe I should partner support 50 companies and really have the opportunity to impact patient lives, although you won't know their names at this point. It's much larger scale, but the opportunity to reach folks. That's the sort of personal aspect as to how I got into healthcare investing and why. With respect to Health Quest and what's

we do specifically, you know, the focus at health quest is pretty straightforward. You know, if you go to our website, you'll see a mission statement that says, you know, our mission is to improve people's lives through health care innovation. And we do that by partnering with best in class people. And ultimately, we do that through investing in transformative healthcare businesses. But more tactically speaking, you know, our focus is around value optimization. And as you know, of course, value in health care is defined as two things. And it's really better patient outcomes and then better health economics. So for us, it's kind of cost benefit, if you will. So we invest in all manners of commercial stage healthcare businesses that result in better

patient outcomes or better health economics. So that, of course, includes medical devices and diagnostics and digital health, you know, tech-enable healthcare services and so forth. Ironically, we don't do much biotech investing because of the binary risk nature to it. And most of those companies are not commercial as well. Maybe the last bullet point I'd share is we typically invest sort of 20 to 30 to start. We can go as low as probably 10 or 15. And we've gone up to call it 100 in any given company. So pretty broad range.

We do like to be active partners. we're on the board of all the portfolio companies that we've had the opportunity to partner with. So I'll pause there and happy to answer any more questions. Yeah, I want to get into kind of this hypothetical scenario that will play out for a would-be, you know, a med tech entrepreneur, health tech entrepreneur. But before we go there, I'm just a couple of a couple follow-up questions. So one specific to your background, just more of like just some context. I mean, incredibly impressive resume.

I mean, I think for anyone, that's an understatement. It reminds me of a good friend of mine, Ryan Eagland, who's the, the chief medical officer at cardiovascular system. It's like, you know, this MD, PhD, MBA from like top tier, top tier school is kind of similar to yourself. So with that said, when you, when you kind of were earlier on in your career, did you know, I mean, did you have kind of sort of a bias towards like kind of the startup sort of ecosystem? Like what kind of brought you down this particular path? You can add to a little bit more, more detail there. Yeah. You know, do fair, I was extremely naive growing up. I thought everybody was a physician that if you got

your medical degree, you needed to see patients. And so really it was incremental steps where I realized having an MD is actually a technical degree. You can see patients, of course, but you can apply it towards innovation. And then I spent time at a larger company, Glaxo, and realized that there was a lot of scale, but it was not the fastest moving situation. And so that's actually where I ultimately got involved on the entrepreneurship side. And I actually realized that in some sense, large companies are set up to do things that are wonderful and fantastic, but really small startup, high growth companies can cause the most amount of sort of change and innovation.

And so that part excited me. And maybe the other thing I would say is there are a lot of really smart, hardworking folks at big companies. But because of their size and scale, you know, they need to have 70 or 80% of that population be, you know, more yeoman in some sense. Whereas in the startup world, you don't actually have room for that. So everybody, position by position, needs to be super passionate and talented and hardworking. You don't really have room for the kind of 80% player.

And so it's in some sense pretty Darwinian in nature as well. And so that was attractive to me in terms of what you could do per sort of pound for pound, if you will. Got it. Yeah, that makes a lot of sense. And kind of circling back to some of your kind of the way you described Health Quest Capital. So you mentioned check size, right? Or like, I guess, dollar capital invested in the company. Do you typically like to lead rounds then? Yeah, I would say we lead most of the rounds that we do. It's not an absolute requirement. but if you, if we went back in sample, probably 80 to 90% of the time we're leading the rounds. Occasionally, we do participate.

We were quite active. I mentioned we're on the board of every partner company. So that happens to be our tendency. Got it. And then you mentioned commercial stage quite a bit. So do you invest only when a company has a product that's ready for commercialization, have they hit a certain regulatory milestone or do you get involved, you know, prior to that, maybe in a more clinical stage.

Yeah, no, for us, it's really a question whether there's binary risk. So there isn't a revenue requirement per se, but what we don't do is invest in companies that on the front end of a PMA or any sort of regulatory moment. And of course, that means that we miss some really fantastic companies

that have technologies and ultimately get acquired long before they ever get commercial. but because of the span of what we invest in, including, of course, medical devices, but all sorts of connected devices, combination devices, AI applied to healthcare and so forth, it keeps our focus, I guess. Got it, got it. And would you say that you're sort of vertical agnostic then, or category agnostic, you'll invest in orthopedics, cardiovascular, the entire gamut?

Yes, we are. So we're therapeutic area agnostic. And I think for us, again, it comes down to better patient outcomes, better health economics. And as I like to say, we're very happy to do the Nobel Prize, but we're also very happy to do what I call the paperclip of health care, which is low tech, but it got used 10 billion times last year. And if you make it a little bit better, it's also great. So we are pretty open-minded about that. Sometimes we get asked, well, what are the things that you won't do?

and it's more personal experience than it really is, I would say, a specific category. So for example, you know, sepsis has been a really hard category. So sometimes we're more cautious about that. A wound healing, for example, has been a very difficult category. There's nothing wrong with it. Those are both huge market opportunities. But we've had a little bit more trials and tribulations in some of those areas. But overall, we're actually quite open.

minded. In fact, one of our main feces is in fact that the best opportunities are on the edge of the box. And I'll give you an extreme example, not extreme, I guess, but an outlier example. One of my current partners, Randy Scott, who I've worked with for over 20 years, when we first met, he was a CEO of a oral health care company, his words. My word is a toothpaste company, but it was an innovative, bioactive ingredient. And I think he talked to, 50 venture capitalists, all of who said, I'm not doing a toothpaste deal. And we ultimately partnered, and it was a fantastic investment for us. He did a great job. And it was an outsized multiple because we were willing to even look at a toothpaste deal. So I guess my point is we explicitly

want to be open-minded about the kinds of companies that we partner with. Got it, got it. On that note, I want to get into the kind of the substance of the conversation here. Do you invest in consumer companies to then? Or is it just specific to kind of like traditional B2B kind of plays? Yeah, so we have a significant focus on, I would call it B2B, where we're thinking about hospital systems, payers, you know, larger institutional sales. But we do actually have multiple partner companies that have a consumer-facing component to. And so, for example, we're involved with a company called Everly Well and not Every Health, which is a home diagnostic business. A lot of people know them for their consumer-facing home tests, which of course is important part of

the business, but what people may not know is that they have a very significant enterprise business where they're doing businesses with large companies and state agencies and so forth. And so that's what we really underwrote. So if you look at our partner companies, they may have aspects of that, but the main thesis is more typically enterprise. Okay, okay, very good. I love everything well, by the way. Yeah, great investment.

I love that. And it's been cool. I mean, obviously, the COVID-19. kind of pandemic sort of like served as a great tailwind there. And I'm sure, you know, I think we're going to kind of chat about your experience is investing throughout this, this COVID-19 window. But yeah, I love what's happened, what they've done. Yeah. That team's done with everything. Yeah. So on that note, let's get to, this is going to be a fun conversation because I'm going to put myself in issues of a would-be,

you know, med tech, health tech, med tech, entrepreneurs that's trying to get your attention. and maybe what I want to do is kind of work through, and we probably won't have time to get totally in the weeds here, but I want to kind of work through this process of like, how do I get the attention of Garhang or your team at HealthQuest? What does this process look like, you know, if presuming your team is interested? And I kind of want to take, you know, the,

I love med tech folks or health tech folks to kind of hear from the other side of the table, so to speak, you know, get your perspective on these deals. So let's start there. And let's just start. with that, you know, someone that wants to get your team's attention. Can you kind of provide us a little bit of insight into what, what that looks like before, like, how does a, how does an executive summary or pitch even get to your desk? Yeah, no, that's a really important question. You know, just give you a few numbers, right? Our team will see about a thousand opportunities in any given

calendar year. So it is, I think we saw 260 last quarter. So plus or minus call it a thousand. So it is a lot, right? And the question is how do you separate yourself from a thousand other opportunities? And so I'd say one of the key success factors for companies is, of course, how entrepreneurial and creative they are, as from a leadership point of view. And, you know, the, you would like to think in a pure world, whatever shows up in your executive summary is the key determinant. But how it comes in is actually really important. And so the best way to engage is, of course, through a warm, And if you don't happen to know us directly or know somebody in our team, I would go to LinkedIn or do something and find somebody who knows us so that the introduction comes in through a warm referral. I think that's a really important component. And of course, we have a whole ecosystem of CEOs and colleagues and corporate partners and so forth that should be able through one degree of separation make that connection.

So I think that's probably first thing I'd say. The second is in the absence of that, we've actually seen some very, I would say, creative entrepreneurs. And we know if we're on the back end of the dear sir, you know, I'm doing this company and they cut and pasted it a hundred times. But what we've always found to just a little effort, which is, you know, dear Health Quest team member, whoever that happens to be, you know, I noticed that you made this investment and it's related to what we do and you made this other investment. and oh, by the way, I heard you speak at Medsider and I really liked your comment. And, you know, that's probably five minutes of homework, three sentences on the front end. But the probability of somebody aren't in reading that and responding is much, much higher as well. So, you know, a couple things to consider.

I mean, we do have a submit business plan over the website and somebody will read all of those. But I think getting traction is less likely to be through that third avenue. You got it. No, that's good stuff. I'm reminded, like hearing you describe that reminds me of a couple things. One is, and I'm sure you've probably seen this. There's like one, there's the clear copy and paste, right, which is like, dear, dear sir or dear doctor, you know, or however they want to introduce, you know,

like provide that that introduction. Then there's like the person that sort of wanted to be to personalize things, but like clearly missed the mark. It's like, whatever automation tool they're using was like not in line or pretty off. And then there's like the real winners that's like, oh wow, they actually did listen to that interview or they did read that thing I wrote or they like it's clear. It's very clear that they did take the time. And I don't know, it just like I'm not sure if we'd agree with this, but it's like sort of like I've seen it as well. Like it's it's very clear that people that actually did take the time to do a little bit of research and advance. And it's less so much that you feel satisfied that they spent some time looking at what you did. it is that it's a proxy for how they operate and how dedicated and diligent and how much perseverance they have, not in the discussion with us, but the discussion when they're talking to customers and other partners. And so it's actually a helpful filter. Yeah, that's a really good

point. I'm also reminded of this story from the early days of, I can't remember the entrepreneur's name, but he's the founder of Grasshopper.com, which was kind of like one of the first virtual phone systems. And I remember him telling the story. This was before it was like, I think this was maybe early 2000s where it was let like, I mean, it wasn't as easy to get in contact with someone. And they sent, you mentioned the how, right, how someone's actually going to, like, try to get in front of you and your team. But I remember him saying, telling the story about how they, they created, because the company name was Grasshopper. They did, like, they identified, like, a custom bakery to make these, like, chocolate covered grasshoppers that actually taste

good. And then they did handwritten notes and personalized them to all these, like, pretty, you know, pretty influential journalists at the time, because they, they, they, this was. back when maybe earned media looked a little bit different. Yeah. And it was a clear winner for them. But they like, they went clearly above and beyond, not just with like a gimmick,

but they, you know, they introduced like it was a handwritten, personalized note to that journalist, you know, and so I don't know. I'm reminded of like creative stories like that that aren't,

that kind of gimmicky, but it's very clear that, you know, there's a personal touch as well. So yeah. Yeah. I love your, I love your response about serving as a proxy

for how someone's going to execute too. So that's good stuff. So let's pass forward. Presume I've got your attention. now. I've done my diligence. I've made it in, so to speak. You mentioned a little bit of thing. You mentioned a little bit about what may turn you on to saying, yes, I'm interested in learning a little bit more like what's a clear no. This is not something I want to even take a look at. Are there like strong signals either way when you look at an executive summary or a pitch deck

that would cause you to lean in or just kind of dismiss it at first blush? Yeah. So I would say probably every firm may be slightly different, but at least speaking for Health Quest, what we want to try and do is get the most information as quickly as possible because we're obviously looking at a number of opportunities. And in this day and age, and I don't know if it speaks to patients or lack thereof, you know, a typed out two-page executive summary, which is what we used to say, especially probably less effective than just a short deck where people can click through it and get a sense of it. So just from a medium point of view, I would encourage short decks as opposed to two or three or four pages of text. So that's just one one thought. The second is, you know,

the components that are easiest for us, by the way, not a requirement, but since you're asking me to prioritize, I mean, we look at the team page first. And so if, you know, if the entrepreneurs have expertise in that area, they've done it before, that's a big plus. Sometimes, That's not the case because they're first time entrepreneurs, but they've surrounded themselves with advisors or board members who are quite credible. Again, since we don't know them, we're looking for biomarkers and proxies. And so if the former CEO of Metronic has decided to be an advisor to your medical advice company, that's an interesting data point for us.

So we look there first. I do think that everything we're focused on should be transformational, right? because the amount of work it takes, as you know, Scott, to make it company successful is the same, whether you're going after a $100 million market or a $50 billion market, you're going to be working. And so from our point of view, the size of the opportunity and the scale of it needs to be attractive. And by the way, that's not a value statement on businesses. There are some businesses that are great businesses. They should not raise our kind of capital, right?

They should get bootstrapped. They should raise some angel money. And they should go for the $50 million outcome. And it would be a great return for their $3 million investment. But for us, we really are looking for large transformative opportunities. And in part, you know, that fit our capital investment style. So second, I would say results in the overall opportunity. And what's interesting is, you know, I happen to become from a technical background,

being a physician, scientist, engineer. But you'll note that the first two components I'm, mentioned are people in market, I will say that, of course, the product and the technology does ultimately matter and is it differentiated and is a proprietary and so forth, but that's probably third on the list in terms of how we look at it. And we want the delta there to be meaningful in terms of the outcome. And so those are some of the things that we look at from a high level point of view. Yeah, I love the fact, I mean, all fantastic insights. I love the fact that you brought up, you know, the opportunity that may not be a good fit for Health Quest, right? But it could,

it could be a decent outcome, you know, with other potential capital partners or just other partners in general. And I remember, I remember an interview that I did with Paul Buckman. I'm not sure if you know Paul. He was early at Symed, led pathway, a number of kind of cardiovascular startups. Great, great guy. I think he's kind of reached that point his career. I'm not sure how much he's involved in business ventures anymore, but just such a great guy. I remember he mentioned that. He's like, too many entrepreneurs just are like, they're so focused on this one, this one outcome. It's like, you know, maybe, maybe the best play there is a $50 million exit, a $75 million exit. And you don't, you don't need to think about raising a series C or series D for something like

that, you know, and it was just, it was your comments just kind of reminded me of like a, you know, similar, similar kind of thought pattern that you had as well. Actually, you know, that triggers another thought that I think maybe worth sharing is that sometimes individuals in my seat in particular get confused. And what I mean by that is, you know, great companies don't always require investment capital. I mean, there's a lot of companies that were bootstrapped and maybe they raised angel capital, friends and family. They never raised institutional capital. And so what we do is actually not an obligatory requirement for a great business. The flip side is actually not true. They are no.

great investors that didn't have entrepreneurs. And so I think sometimes people get confused because they have a checkbook. And so it really comes down to the right fit. And to be fair, as investors, we have to partner with entrepreneurs. Some entrepreneurs actually don't have to do that. So I just think it's mindful to also remember that. Everybody at our team understands that that's the case. And hopefully, you know, any entrepreneur who interacts with us, you know, feels that way as well.

Hey there, it's Scott, and thanks for listening in so far. The rest of this conversation is only available via our private podcast for MedSider Premium members. If you're not a premium member yet, you should definitely consider signing up. You'll get full access to the entire library of interviews dating back to 2010. This includes conversations with experts like Renee Ryan, CEO of Cala Health, Nadine Miarid CEO of CVRX, and so many others. As a premium member, you'll get to join live interviews with these incredible medical device and health technology entrepreneurs. In addition, you'll get a copy of every volume of

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