Medsider: Learn from Medtech and Healthtech Founders and CEOs - Planning Your Regulatory Pathway Around Your Product Roadmap: Interview with Virtual Incision CEO John Murphy

Episode Date: April 11, 2022

In this episode of Medsider Radio, we sat down with John Murphy, President and CEO of Virtual Incision.With a background in life sciences, aerospace, private equity, and venture capital, John co-founded Virtual Incision in 2006. The company makes miniature, portable robots that can be used to perform specific operations. The first iteration is designed for colon resections, with new variations planned for the future.In this discussion,  John shares tips on how to raise funds as an early-stage medical device company, planning a regulatory pathway that complements your product roadmap, and how to follow a dual-track approach to exiting (warning: it’s a lot of work).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. If you’re interested, go to medsider.com/subscribe to learn more.Lastly, here's the link to the full interview with John if you'd rather read it instead.

Probably because of my operational background, my approach to being an entrepreneur is really to first and foremost be a maker that you build and learn and iterate on your ideas and, you know, focusing on the toughest problems first. And I'd say, you know, at virtual decision, we've got a little bit of an MIT approach, which probably isn't surprising given Shane's background. And I also had a son-attent undergrad there. But it's, you know, Mendi Manus Mantras. It's mind and hand. It's a hands-on practitioners approach. So even Shane would tell you, rather than measuring twice, cut once, you should measure once and cut twice.

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, it's Scott. In this episode of MedSider, I sat down with John Murphy, the co-founder and CEO of Virtual Incision. With a background in life sciences, aerospace, private equity, and venture capital, John co-founded virtual incision in 2006.

The company makes miniature portable robots that can be used to perform specific operations. The first iteration is designed for colon resections with new variations planned for the future. Here are few of the things that we discussed in this interview. First, more funding is coming into the medical device space, but it's still tricky bringing investors on board in early rounds. Consider approaching regional funds, which might be more inclined than nationally known firms to support local companies. Second, design a regulatory pathway that complements your R&D strategy.

If you're working on brand new technology and plan to create further iterations, consider applying for a de novo classification. This can serve as a foundation for the 510K notifications you file for later variations. Third, consider a dual-track approach to exiting, preparing for an IPO and for potential acquisition at the same time. You'll have to hit a lot of milestones, but it's worth the effort. Okay, so before we jump into the discussion, I want to mention a few things. First, this episode is brought to you by Qualio, one of the most trusted providers of quality

management software for life science companies. That's Qualio with a Q, Q-U-A-L-I-O. Over 300 leading worldwide therapeutics, medical device, and clinical research organizations leverage Qualio's cloud-based quality management system software to unite their team's processes and data. With Qualio, life science companies can safely scale and swiftly bridge product development and quality management, while also seamlessly addressing complex compliance and rigorous. regulatory approvals. To see Qualio in action, visit Medsiderradio.com forward slash

Qualio. Again, that's MedsiderRadio.com forward slash Qualio. For Medsider listeners, Qualio put together a free guide on how to transition your company to a paperless e-qMS. It's available at no cost by visiting Medsiderradio.com forward slash paperless. Again, that's Medsider Radio.com forward slash paperless. So there's two links for you to remember. See Qualio in action by visiting Medsider Radio.com forward slash Qualio. and get Qualio's free guide on how to transition to a paperless EQMS by visiting Medsider radio.com forward slash paperless. 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 MedSiter 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. John, welcome to Medsider. Scott, thanks to have me. It's nice to spend some time with you.

I know we're calling from the same side of the country here in California. You're just in the northern part. I'm in the southern part. Yeah, looking forward to the conversation. It should be a fun one. Indeed. So with that said, I provided a kind of an overview of your background, on a very high level overview of your background,

kind of at the outset of this interview. But I always love to start here first. I'd love to hear kind of your elevator pitch on your professional background, leading up to kind of your current roles at not only virtual incision, but also, you know, Tri-Valley Ventures and kind of what you've done there. Yeah, great. Scott, I'm a London native. I grew up in a place called Shepherds Bush in West London,

up until I was about 22 years old. And I did a computer science undergrad. in London and then did an electrical engineering and computer science masters over in Chicago because I had fallen in love with the US following about a six-week Graham bus tour around the perimeter of the country with some friends. And so it wasn't much later that I arrived here with just a couple of bags in hand and had never really looked back. So, you know, my early career work was in software engineering and systems analysis.

other than I did an MBA in international finance, and that set me off on a great global career where I really worked on kind of deep tech embedded systems in sectors like aerospace and life sciences, you know, more in corporate world. And then I did a couple of middle market private equity O roles before landing at virtual incision. And like as you mentioned, we're in northern California here.

I've lived in Pleasanton with my wonderful wife, Liz, for about the last 20 years. We're in the East Bay of San Francisco, and we're lucky to have raised four terrific children, and, you know, they're off doing cool things now. And it really is because I've been here for such a long time. I think this is a really spectacular startup ecosystem here in the Tri-Valley around this area. And so I joined Tri-Valley Ventures with a couple of co-founders there. to fund a number of startups in the East Bay. I think we're the first venture fund in the East Bay.

So I love I've gone full entrepreneur and investor on these things, Scott. Yes, sitting on both sides of the table. And I know we're going to spend most of our time talking about sort of the journey at virtual incision. But can you touch real quickly on Tri-Balley? At what stage you typically invest in companies? Are there certain categories that you typically like to invest in? Can you tell us a little bit more about that? You know, it's all about early stage seed investment and series A mainly.

And it's for all companies only located in the Tri Valley, which is, you know, Dublin, Pleasanton, Livermore, a little bit up the Bay Area here. So, you know, we've got a lot of SaaS. This is maybe one of the homes of Enterprise SAS from Viva to all sorts around here. but also a lot of deep techers tied to Lawrence Livermore National Labs. And so we see device, we see AI, we see software as a service. So fund one was just a small little fund that we invested in, you know, a dozen companies or so. We're just off on closed out. Again, a Michael Cap Fund too to do the same for over the next few years.

So, you know, bio, med device, SaaS, those types of things. scene. So it's really exciting. Okay. So all, but all early stage, all pretty early states, right? Yeah. Okay. Okay. Very cool. Yeah. The fun, the fun parts, in my opinion, I think. Yeah. Yeah. So, well, this should be good because I'm interested to get kind of your, uh, your take on a few different, a few different talking points, especially considering you've got experience, right, kind of, you know, operationally running companies, um, as well as, as well as investing in the early stages. So, with that said, let's transition to, to virtual incision. Can you take, take this back in time. I think your LinkedIn profile says you technically started at virtual

incision back in 2012. I'm not sure if that was really, if things started earlier than that or maybe a little bit later. But talk to us a little bit about kind of how the idea for the mirror platform kind of came to be. Yeah, you know, Scott, I think the founding story of virtual decision is pretty cool because somewhat surprisingly, the University of Nebraska Med Center in Omaha acquired Da Vinci's serial number eight or something like that. And they recruited in my co-founder and chief medical officer colleague, Dmitri Olinikoff, to come in and run UNMC's, you know, and minimally invasive surgery in their fledgling robotics program. So Dmitri, he's a chief of surgery, he's an advanced lapiscomic surgery, a luminary surgeon in many ways. And so he started thinking about how you could

use little robots on the inside instead of big robots on the outside for things in general surgery. And about that same time, he met my co-founder and chief technology officer colleague, Shane Fariter, and Shane was just returning from three stints at different NASA sites. He's a Mars rover guy. He's an MIT-P-H-T robotisist, maybe a top 10 roboticist on the planet. Who knows? A good Nebraska guy heading back to Lincoln to be a professor of mechanical engineering at at UNL. So again, they started this in the early 2000s, formed the company in 2006. And then I met them at J.P. Morgan. I think it was January 2011. And I was just gripped by this crazy idea of mini robots for general surgery, because I had been a supplier to intuitive surgical. And,

and was totally amazed about their pioneering work, and the incredible work they've done over the last couple of decades here for robotics in the OR. But this idea of mini robots that you could deploy anywhere in any OR in any setting really grabbed me. And so here we are with the mirror platform today. Got it. That's cool.

I'm originally from the Midwest, so very familiar with Omaha and Lincoln, which is for anyone familiar. about 45 minutes west of, 45 minutes to an hour west of, west of Omaha. So definitely cool, cool institution, a lot of great minds there. So, and I would encourage everyone, we'll link to the website in the show notes for this interview, but go to virtual incision and check out some of this technology. It's really cool, especially if, if you're kind of, you know, following the robotic scene, tons of activity. It seems like, you know, every week there's a new,

a new robotics company that I hear about. So before we kind of get too far into learning, kind of, you know, lessons kind of learned that you've, you've gleaned along the way along your career and especially with respect to virtual incision. John, tell us a little bit more about how your technology, the mirror platform, is different, right? And maybe don't go too far into the weeds, but like, how is it different than, you know, a lot of the other robotics companies that are in development now? Yeah.

So I think we're unique in that we've got a two-pound robot versus a 2,000-pound robot. We definitely see this type of platform complementary to the mainframes of today where you might have a mainframe robot in one or two rooms. But then I think we've been thinking about what about the other 80% of ORs? We've been thinking about, you know, academic centers, yes, and high volume centers. But what about community hospitals and rural settings and their ambulatory surgery center and OUS? what kind of solutions are really going to, you know, be plausible in those locations. And so we focused on a device that, you know, can be mobile and used in any OAR. It's foundational, beautiful technology, robotics excellence, as you'd expect, you know,

on some of these, you know, the existing platforms. But again, it's a small package. it can be set up in any OR in, you know, under 10 minutes. There's no draping. It's easy quadrant changes for multi-qu quadrant surgery. So we're really taking a specialized approach to a robot for a specific procedure instead of a general, generalized robot. So our first indication is colon resection, which is probably the marquee surgery. in general surgery.

And then we'll add a family of these many robots for things like hernia repair and gallbladder removal and then on to hysterectomy or gastrectomy and those types of things. So, yeah, I think take a look at the website. You get a little idea of what we're up to. Got it. And I'm presuming, so you mentioned that Shane and Dimitri kind of initially started the company. What did you say back in the, was it the early, mid-2000s, roughly? Yeah, mid-2000s, 2006 was the business.

Yeah. And then, so when you first met them, you know, at JP, Morgan kind of in that 2011 time frame. How much, how much progress have they made on the, on the technology at that point in time? Yeah, you know, it was more the idea. This has been a miniaturization journey, really, over the last decade, tell the truth, Scott. And our current robot, we kind of, you know, from the prototype side is what we call Alpha-5. And that's what we're going through the FTA-I-D-E and De novo process with now. But, you know, back then, it was, you was alpha one. We started with a robot that you had to assemble inside the abdomen, in the insufflated

abdomen. And then alpha two, we were able to get one arm in at a time and, you know, with the two arms. And then alpha three was a breakthrough because it was the first wholly contained robot with its whole, you know, a separate but integrated flex-tit camera. And then we went to OUS first in man in Paraguay on that device, we learned a lot in those, on that small clinical study, and that spawned Alpha 4 and Alpha 5 development. So, you know, along the way, lots and lots of preclinical labs, we probably built 40 or 50 or 60 different types of robots and devices. And so that's been the journey to get to this stage. Got it's cool.

The website that I mentioned earlier, virtualincision.com, If you actually go to the sites, you've actually, you've got really cool images of these different alpha products, alpha one, two, three, four, and five. So it's kind of cool to see that progress. Well, with that said, John, let's talk a little bit about funding, right, these early prototypes, right? And that early journey for a startup like virtual incision, especially considering, you know, you sit on, like I said before, you sit on the opposite side of the table as an investor too. So when you think about kind of that, those dynamics, you know, operationally running a startup versus investing in them, for other entrepreneurs that are in the same space, right, they need

to raise their next run of capital. And let's maybe frame it up as maybe early stage capital C, maybe series A or B, not late stage. You know, is there a couple like really key kind of things that you think those med tech or health tech entrepreneurs really need to understand about this process? yeah Scott you know what's off by saying I think all rounds are difficult and particularly in device and you know this we've really kind of just emerging from a little bit of a nuclear winter really in device funding and you know it was the same for biotech before that and they've they've emerged beautifully and you know health IT has been on a great run and now device I think is starting to get better too

is considered more part of the solution with novel treatments and cost control and and there's data with everything too now. So it's all changing over that last decade. And so, you know, the things I think about is, you know, most of the traditional VCs, if they exist now in device, right, or later, are going much, much later stage, at least a Series C and beyond approvals and things like this. So it's really tricky to line up your Series A's and your B efforts. So I like to keep the series somewhat pure if you can, you know, friends and family and seed to get things going. And then if you can find some early stage capital, people who understand this stage, maybe regional capital. That certainly we got our early series A was done in Sioux Falls, just three hours from Lincoln, for example.

And that can help you, you know, build your early concepts and prototyping. And then series B, keeping it again traditional and focus, where you're really moving then on to advanced prototypes and then your early cling reg hurdles. And then series C again is regulatory approval and early commercialization. So I think some, if you can keep it, some discipline by funding stage, I think that's good. But the most important thing, I think for the entrepreneur,

in all these cases, whether you're in tech or med tech or wherever, is to just have this compelling mission to guide you through. These journeys are usually seven or ten years. They're long, so you've really got to believe in what you're doing. And then we're lucky in device to have this kind of great noble purpose to our endeavors, but there's also no hiding and impostors don't survive. So it's just absolutely essential to focus on the clinical solution and the clinical, solution and the clinical workflow and building great gear and solutions around that.

So that's a few of the things that, you know, I think about when looking at building these companies. Those are good thoughts. And so if I, if I, if I, maybe this is a fair, a fair summary of kind of your answer would be thinking about like making sure that you're strategic and you, in thinking about your capital raises and in aligning with, you know, a classic, you know, classic stages or inflection points of the company, right, from prototyping to early stage kind of development to reg and then clinical maybe in the later stage rounds. And then secondarily, what I heard from you is there's got to be, there's got to be sort of an underlying kind of, you know, driving passion or mission behind behind the company because these are long, these are long journeys,

right? This is not, this is not typically a one, two, three year turnaround. It's a, you know, it's seven, ten, fifteen years, you know, in the making. So there's got to be, there's got to be some, some meat on the bone from that standpoint as what I kind of understand from you. Yeah, exactly. Great power of course. Yeah, thanks. Yeah. And it reminds me of a conversation I recently had with Holly Rockweiler, who runs Medora. She's up, she's, well, I think they used to be based in Northern California there, but she's in Portland now. We talked about the very same thing, that how, how crucial it was for her, like, in their journey as a company, that she was actually very passionate about the problem, the clinical

problems that she was trying to solve. You know, and she mentioned the very same thing that you did is like that absolutely was critical, right, and kind of pushing through all of these, all of these hurdles, you know, that you need to cross going from one stage to the next. And so with that said, John, let's transition to maybe the opposite end of the spectrum, right, where you've got, you know, maybe the company's, you know, well, well funded, you've closed on your series C or your D, you're hitting your milestones and thinking about an exit, liquidity event, whether it's an acquisition, which is probably the more likely scenario,

or an IPO. Can you talk to us a little bit more about your general approach to that? I don't want to sound too vague, but maybe what are some of the key things that other startup founders should be thinking about when it comes to when it comes time to a potential exit event? Yeah, you know, first I think an important mindset is that you run your company as if you're going to own it forever. So that kind of just sets a baseline. But then I say, you know, following a high-quality dual track to either an M&A or an IPO is a good way to go. So some might say there's even a tri-track approach these days, including, you know, the SPAC IPO and things like that.

But I think a solid dual-track approach is still the way to go, particularly, you know, in device. because pre-revenue or small cap public companies, that are extremely tough. So again, keep it more traditional, you know, post-approval, solid revenue caggar, healthy R&D pipeline, all that if you're going to position for the public market exit. And then on strategics, I think pre-approval M&A is still very rare. So unless you're in really sizzling hot segments like,

surgical robotics potentially or something like that. So you really just have to complete your regulatory milestones. And, you know, there's a number of these usual prerequisite milestones around clinical value prop, your IP, your quality management system, your financials and financial audits and your HR house being in order. So there's a ton of work to put some teeth into your dual track, whether your IPO or a strategic M&A. And then for strategics, I think you just got to keep them up to speed with your progress. M&A is definitely the lifeblood, you know, it's the innovation engine for a strategic. So they want to talk to and see your progress and that can lead to good things.

So that's how I think about our situation for dual track M&A or IPO. And then PE is a whole different bird altogether. it's a little bit different type of company. Obviously, you're leveraging EBITDA, you're really executing around operational efficiencies or growth vein and these types of things. So that's different. That's for a more long-time entrepreneurs, I think, that maybe can get some payback, you know, in their company and then go on to the next stage. But that's a little bit of a different situation again. Got it. I love, I love the kind of the thought process or the kind of the mindset of that sort of that dual or even like tri-tifecta sort of approach, right, with a M&A, you know,

an IPO or a SPAC. And so I love kind of the framework. But when it comes to strategics, you know, considering that's probably the most likely outcome for most most med tech startups or healthcare startups in general, how often, like, do you have a, do you have kind of a preferred approach for how you typically like to keep strategics involved kind of along the journey? Is it, is it once a year you're reaching out? Is it, is it very intentional? Or is it, you're trying to catch up at various conferences? Presuming we actually get, get back to those at some point in certain conferences. But yeah, what's your, what's your general kind of perspective on, on how to, how to run those conversations? Or, you're keeping.

Keep strategics up to date. Yeah, I think there's, first you've got to understand who you really want to kind of work with. And so maybe there's a handful of folks you want to keep up to speed as likely M&A exits. And then you're right, you're just building a rhythm. And each firm may be a little bit different. One might be a quarterly update, you know, with the BD team, you know, spearheading. Or others might be, you know, you're at Sages conference. and you want to do a private tech demo with them or share your, you know, your approach on the

clinical side or feedback and things like that. So I think you're looking for a regular rhythm. It could be quarterly. It could be, you know, depending where you are, maybe a six-month update could be good because you've hit certain milestones or accomplish certain things. But, you know, get to know the teams early and who you're dealing with and what their interests are. and kind of get on that kind of rhythm, I think, is how I think about it. 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.

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