Medsider: Learn from Medtech and Healthtech Founders and CEOs - Why Early Stage Medical Device Deals Aren’t as Bad as You May Think

Episode Date: July 11, 2013

Warren Buffet is often quoted as stating, “The best time to be greedy is when others are fearful.” But can this same concept apply to the medtech space? Can limited partners (the investors in a venture fund) be sold on the idea of bankrolling early stage medical device companies? In this interview with Mike Carusi...[read more]Related StoriesWhy Intersect ENT is an Example of Hope for the Medtech IndustryAre Medical Device Models the Key to Building a Lean Medtech Startup?Substantial and Sustainable – 2 Words That Medtech Companies Should Get Used To 

Welcome to Medsider, where you can learn from experienced medical device and med tech experts through uncut and unedited interviews. Now, here's your host, Scott Nelson. Warren Buffett is often quoted as stating, The best time to be greedy is when others are fearful. But can this same concept apply to the med tech space? Can limited partners, the investors in a venture fund, be sold on the idea of bankrolling early stage medical device companies? Well, in this interview with Mike Carousie, general partner at Lightstone Ventures, we learned why his firm believes the current med tech

environment represents an incredible investment opportunity. Here's some of the points we're going to cover. Because of the challenges involved with raising money for early stage med tech deals, will there be a large innovation gap in 7 to 10 years? For those bloated medical device startups that have raised over $100 million, how much pressure are they under? Why early stage medical device companies should look at biotech and pharma in order to discover creative ways to fund companies. Is the room left for the traditional model of incremental product improvements at higher market prices, otherwise known as the fast follower approach? How does a med tech engineer, physician, or medical device entrepreneur give the attention of Mike and his VC colleagues? what are medical device acquires looking for in pre-revenue startups?

And lastly, how Mike's early experience in sales has helped him throughout his medical device career. But before we dig in, listen to this really brief message. First, to get free email updates when another MedSider episode goes live, simply go to Medsider.com forward slash free. We don't send emails often, but when we do, they're full of valuable content. No spam ever. Just go to Medsider.com forward slash free to sign up. Second, Medsider is on iTunes.

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Hello, hello, everyone. it's Scott Nelson and welcome to another edition of MedSider for those of you who are new to the program. This is a show where I bring on experienced and proven med tech medical device experts and ask as many questions that I can fit in in about 30 minutes. And on today's program, I've got Mike Carrucci, who is the general partner, a general partner and team leader of Lightstone Ventures. He focuses on biopharmaceutical and medical device. investments out of the firm's Palo Alto office. Mike also joined advanced technology ventures in 1998 and serves as a general partner. Some of his representative investments include Altrua Medical, Ardian, which is acquired by Medtronic, endogastric solutions, GI Dynamics, and several others.

Mike was also featured on the 2011 Forbes Midas List of Top Technology Investors. He's, of course, a recognized thought leader in the industry, frequent speaker at healthcare-related conferences. He also serves as faculty member of the Stanford Biodeinerning Entrepreneurs Forum, sits on the Tuck MBA Advisory Board and is an advisory board member of the UCSF Berkeley Venture Innovation Program. That was a lot to squeeze in. I tried to talk as fast as possible, Mike, but without further ado, welcome to the program. Really appreciate you coming on. Well, my pleasure, Scott. It's good to be here.

So let's start out with in doing some research. I think you quoted Warren Buffett recently in stating the best time. to be greedy is when others are fearful. So with that quote of mind, do you sort of feel like the redheaded stepchild in that your firm or your investment thesis prefers early stage med tech device deals? Well, I mean, I do. And in some ways, you know, you've touched on it. But, you know, without a doubt, there is certainly a contraction occurring in the industry

right now. A number of the venture firms are either going away or, you know, you know, in many ways shifting their focus to later stage investments. And, you know, I think there's a strategy that can work there, and, you know, we may be at a point in time when some of those opportunities are interesting. But I think at the end of the day, you know, our belief is that we want to focus in on kind of novel, big opportunities, early stage opportunities that really have the potential to move the dial. And our belief is actually that as the capital in the industry shrinks, the demand, if you will, for our companies will go up because the major players will continue to have a need for innovation.

They're going to be continuing to look for these sorts of opportunities. So we actually think it's an interesting time to be investing in the space, but it's a challenging time as well. Right, no doubt. And I definitely want to ask you about that supply and demand principle here in a second. but maybe the better question is, do you find it difficult to sell your limited partners on the idea of investing in early stage MedTech right now? Well, again, I think there's a recognition

that money can be made here and money has been made here. So, you know, it's a select group of folks who get that, but those that do are supportive and are behind the strategy. Yeah, and I'm sure your pedigree speaks, speaks volume in regards to the concept, but it's one that I definitely has to ask, because I'm always curious as more and more dollars are poured into consumer tech, if some of those LPs are thinking, geez, it's early stage med tech where we want to be. But with that said, let's stick into that supply demand principle, because it would seem that because of the

challenges in MedTech, in the world of MedTech venture right now, especially particularly, to early stage. It seems like if you would fast forward, you know, another seven to 10 years, which is oftentimes, you know, maybe the lifetime of the fund, it would seem like there's going to be a big innovation gap. And can you speak to that, especially in relation to the supply and demand principle you just mentioned? Well, I mean, I think that's right. I mean, I think, look, our view is that in reality, the sector, and not just devices, but biotech and health care in general, was probably overfunded over the past 10 years. And, you know, I think there is a need for the funding to come down from what it was in the mid-2000s, you know,

there are only so many good opportunities out there and only so many interesting ideas. And so, you know, ultimately I think that's healthy. But, you know, what happens is that a number of companies comes down as those number of opportunities come down, then, you know, the strategic players, the COVIDians, the metronics, the habits, they need to compete amongst one another for these interesting and engaging next generation technologies. and, you know, it's kind of eco-101, right? It's supply that goes down and demand goes up.

You know, hopefully prices follow and prices go up. And so that's the thesis. You know, I think we've seen that time and time again in the venture space as a whole that the pendulum tends to shift too far in any one direction. You either get the money leading too quickly or you have the money going in, you know, too quickly and too much. And so it always tends to find equilibrium over time.

But, you know, my belief right now is that, you know, we've gone from an industry that was overcapitalized to probably that's one that is undercapitalized. And, again, the belief is that that should create opportunities down the road as strategic players need growth. They tend to look at venture-backed companies as their farm team, and that's where they go. So at least that's, again, historically how this industry has played out, and I don't see any reason why that will be different in the future.

I guess it goes back to the original quote I started out with when you referenced Warren Buffett's, you know, the best time to be greedy is when others are fearful, and that certainly seems like a time that we're in right now. In regards to large strategics and their kind of view of seeing venture-backed startups as the farm system, I really like that analogy, by the way. Do you think there's some sort of a thought or maybe a mandate within the Medtronics, the Boston size, the convenience of the world, that they need to partner perhaps more often right now, especially right now in early stage deals, in order to sort of keep the ecosystem alive?

No, I think it's definitely the case. I was on a panel not long ago at the Minneapolis MedTech Conference and Chad Cordell from Atronic was on the panel, and he basically echoed that point of view. And we've heard it from others. And it's not, you know, I think there's been a tendency to partner by a number of different firms, but the question is when and how.

And so I think what you're seeing is that traditional model is continuing. And the traditional model, some of these firms will invest later. You know, they will come on board in anticipation of potentially buying the company down the road or at least just learning more about the opportunity. But I think you're also seeing all of these players

thinking creatively and trying to partner with the venture community in a creative way. in terms of how do we work together earlier so that we can support one another earlier in the process and in so doing help fill the funding gap and help in many ways direct our projects towards things that they need. So my answer would be, you know, the traditional model of investing or partnering later stage continues, but I think you're also seeing a willingness to think more creatively and to partner up either with companies or venture firms earlier in the process. That's interesting.

Almost a little bit refreshing, honestly, to hear that that large strategics are willing to sort of consider collaborating more often to, you know, to, I guess for the better cause, right? I guess for lack of a better description. Well, I mean, I think it's partly for the better cause, but I think the reality is it's also, you know, selfish self-interest on their part. I mean, they, you know, they do generate obviously, you know, new products, no ideas internally. But again, a lot of the big ideas come external. They still want those products, want those opportunities. And I do think they are concerned that the pipeline of innovation is drying up. You know, again, I would draw parallel to the biotech and pharmaceutical industry.

You know, where candidly I find the pharmaceutical industry has been more creative and more forward-looking in terms of partnering how they do deals and how they approach things. And I think there's a lesson there to be learned from the major MedTech companies to look at that side of the house and get a little bit more creative and partner earlier. And again, I think folks are starting to do that or at least consider it. So playing copycat to the world of farm and biotech. That's interesting. I mean, do you have any sort of example? I mean, is it just a matter of finding creative financing alternatives?

Or what can you provide a little bit of an example that speaks to that? No, I mean, there's different structures that are at least, again, being talked to. about and I don't know that I can point to specific companies yet where it's been done and where they've played through to fruition. But, you know, one model that is certainly being talked about is this kind of build-to-suit model where a venture firm will work, you know, sort of hand in hand with one of the major players, actually trying to get an understanding of what areas are of interest to that player, partner up and maybe actually fund a company where there's almost a pre-structured exit built in

where that major player could have the potential, it's probably going to be structured as an option to buy the company down the road if a certain milestone is met. And it's, again, it's no guarantee, and it's no guarantee of an exit. But at least you know you're doing something that is of high interest to that strategic, player, you're getting some financing along the way, and hopefully, if executed well, you can find your way to an exit. As an investor, I can get the kind of return I need, but doing a time frame that is, you know, reasonable and relevant.

And, you know, I think that's one model that's certainly being explored, and there's, you know, many, many offshoots and variations to that kind of a structure. But, you know, at the end of the day, I think it requires folks who are doing early stage investing to think about, you know, who our customers are. And we always think of our customers as the clinicians or the payers or the patients, obviously. But in many ways, our customers are also metronic COVID-in-Aid and added. Because at the end of the day, you know, there's times when we take our companies public, but more often than not they're required. And so we really want to get an understanding for what those folks want, what they feel they need in the pipeline. and try and direct our efforts as best we can to those interests.

And that's, again, just more of a, you know, helping the ecosystem work better and direct our efforts to things that are worthwhile. Got it. So it almost like that build-to-suit model would be similar to almost like a, would a fair analogy be almost like an exclusive incubator kind of, were that particular strategic? Well, yes, except it would be around, yes, except my, the caveat to that would be, it would be around a specific idea or company.

Got it. So you wouldn't partner away the whole incubator, if you will, you wouldn't partner away the whole, you know, fund, all the investments we're making. You would do it deal by deal. Got it. And you would do it one at a time. Again, there are variations to that model. Yes, you could do it, you know, by partnering away a whole incubator, but I don't

know that you'd want to. Got it, got it. And before we move on to talking a little bit more about your investment psychology, For those startups that I like to sometimes refer to them as sort of bloated startups, maybe they were funded in the early to mid-2000s and maybe have raised over $100-plus million. All right, we're back live. I think a slight lost connection there, Mike. But let me finish that question that I was just about to ask you.

For those bloated startups, I like to refer to them as kind of bloated startups that maybe were funded in the early to mid-2000s with perhaps maybe over $100 million. and investment dollars. Are they under a certain amount of pressure right now? Or what do you think happens to those sorts of MedTech startups? Yeah, no, I think it's a great question. Look, I think any existing company right now is under pressure to raise money. It's hard to raise capital right now. And in some ways it doesn't matter if $100 million or $10 million win in.

I think you have to take a step back and ask what happened. And, you know, in some of those companies that raised a lot of capital, you know, there may be a good reason for it. For example, you know, they were progressing, they were making good progress technically, clinically, and for whatever reason they weren't acquired early. And now maybe they're out sort of trying to fight the battle to get reimbursement, you know, to get codes, start to drive revenues, it all takes capital. And so the reality are, is some of these companies are going to take a lot of capital. to ultimately drive revenues of a successful commercial enterprise.

The question becomes, is that product and that idea still a viable one? And then as an investor, I would ask the question, is there an opportunity there? Can you invest in that company at a valuation that's very favorable? It may, in part, recapitalize the company. Some of that money that was invested previously might get washed out. But some of these companies that may be the most opportunity. time to invest if the underlying technology thesis, the problem you were trying to solve, you know, remains intact.

And I think that's where you're just going to have to really pick through the carcasses, be very thoughtful, you know, very careful. There's going to be a lot of dead bodies on the side of the road, but I do think there'll be some nuggets in there as well. Yeah, that's interesting. Picking through the dead carcasses. I like that, I like that sort of picture. But let's, let's, let's, uh, let's transition here into more of your investment psychology.

We learned a little bit more about the idea that you, you actually, you, you and your firm prefer early stage deals, uh, at least pertaining to, to med tech. But, um, in contrast to that, um, you know, we, we've seen like, you know, Fred Krasavi hit, you know, almost more like hit some singles, you know, win, I guess, with some singles and doubles with some of some of those, those recent exits, I think the most recent one was maybe Maya medical to COVIDian.

What is that, is that, I mean, is it, from your standpoint, as a, as an investor, is it possible to win with, with singles and, singles and doubles? Like, almost like a money ball approach to it. Yeah, no, it is. I mean, look, Fred is a great entrepreneur, and he's done very well.

And, you know, we high, the highest regard for Fred, And I think that model can work. You know, part of it depends on who you are as an investor, right? So, you know, if you're an angel investor or you're investing a smaller fund, you know, let's say it's a $20 million or $30 million fund, and, you know, you put a million or two or three to work in a – it's called a product, not a company, and you're able to turn around and sell that product for $15, $20 million, you know, you can do $4 million. very well. As a venture firm, we're putting larger amounts of capital to work and we're looking for bigger ideas and bigger outcomes. And I think, you know, using the Fred example, what's interesting

with May and some of his companies is he's gotten very nice outcomes, you know, $100 million or more, on a modest amount of capital. And that's ultimately the best way to drive, you know, a good multiple is to, you know, get the numerator up and keep the denominator down. And so, you know, our view is, you know, our view is there's multiple ways to make money here, but what we try and do is look to pioneer space, look for things that are highly novel, highly disruptive, with a belief that if we demonstrate that novelty, hopefully through clinical data, not through having to drive revenues, you know, that that company will get taken out early and that we can make a very good return. And I think an Ardian is an example of that.

You know, I think if you look at Maya, Maya was a fast follower to Ardian. You know, nowhere near the same level of exit in terms of the number that was paid, but an equally attractive multiple because of the amount of capital that went in. And so both made money, both were good exits. It really depends on what your goal is at the end of the day. Right. And I've always, the renal, the whole renal innovation space is, is really interesting. And it seems like we've got a lot of fast followers there. Well, so, yeah, and this is now where I think, you know, so Fred, to his credit, was one of the winners. But look, this is where I come back to, we as an industry keep making the same

mistakes time and time again. And I said that I think the industry was overfunded, you know, over the past 10 years. And when I say that, I think there has been too many incremental ideas that got funded, and as a result, there are things that nobody cares about. And when I say nobody, that's patients, payers, strategic FDA. You know, it's just kind of stuff that is incrementally better, but isn't going to move the needle. I now look at the whole renal denervation space, and, you know,

you keep hearing there's 40, 50, 60 companies. Well, you know, three or four of those are going to succeed, but the other 46 or 47 are going to fail, and I'm not smart enough to figure out which three or four. So I'd rather pick the first one and help pioneer the space, and then, you sort it out from there. I think if I look at that space, my comment would be, you know, everybody thinks they know what's wrong

with the RDenometronic product, but they don't really. I mean, it really hasn't even hit the market yet in a big way. And so you don't know what you're shooting at yet. So our thesis is you can be too late to be a first mover and too early to be a fast follower. And I would ask the question is, is that where that space stands right now? And you actually need to let the first movers take the arrows a bit, find out what works and what doesn't. And then you can see where you can improve on those products. And then when you improve, you can't do it incrementally.

You have to do it in a way that is a leapfrog. And so we'll see how that plays out. As I said, I think, you know, there's been a couple of winners in that space, but I don't think there's going to be 50 winners, and there's going to be, again, a lot of failed companies along the way, and it's going to be unfortunate. Right, and you've got to think, I think Omar Ischrak, the CEO of Medtronic, was recently quoted about kind of their unexpected troubles

in launching already in Europe, primarily because of reimbursement. And I got to think, geez, the other 30 or 40 renal, early stage renal innovation companies are probably thinking, what the hell did we get ourselves into? But with that said, though, I want to look maybe like two examples in regards to this idea of fast followers versus truly disruptive technology, which it seems like over your career, you've really been done an outstanding job of being able to identify. But let's look at like what are your recent investments, maybe not so recent, but hilarious or hilarious? How do you tell you? Yeah, Holera. Holera. And then maybe contrast that with Kona Medical.

Kona Medical is in your portfolio as well, correct? Well, it's in the mortgage-saler portfolio with Hank Plain, so it's not one that I know as well, but I'm certainly familiar with the company. Got it. And I certainly don't want you to speak on behalf of a company that you're not overly involved with. But like KonaMatic, for example, they're using ultrasound to deliver energy to the renal, nerves, you know, would you consider, how do you differentiate that from being a fast follower versus, you know, Holara? And I think you've kind of described Hilaras as, you know, using RF energy and just applying that to a different, you know, disease state, I guess. So

can you maybe speak to that a little bit? Yeah, so, you know, when I mentioned, you could be a fast follower, but then in a disruptive way, right? And I think if you look at Kona, if they're successful. You know, what they're doing is now taking an approach to do renal denervation, but to do it ultimately non-invasively. That's a very different approach and product than, you know, coming up with another catheter-based product that's got, you know, three or four RF baskets or tips on it than one, right? I mean, the latter is incremental. The former, to me, is very disruptive. If ultimately that company can do that, that's a very different way to do renal

denervation. Now, the next question will be, and again, I'm not directly involved with the company, but you would think that that would be a better solution, but you're now potentially going to have a different channel, where are those patients going to be treated, who's the referring doctor, you know, et cetera, et cetera, et cetera. So there will be a lot of go-to-market nuances, I think, around the two approaches, but you can see that they're very different products. Right. But, you know, in the case of Hilara, I'm not going to get into a lot of

details on the company, but yes, it's a, you know, in some ways we've described it as sort of an Ardian-like approach, in this case, going after various pulmonary diseases. So, again, what the novelty there is, is a physiologic, aha, a physiologic breakthrough, and our job is to prove that, in fact, that thesis around that novel physiology will play itself out. And you'll answer that with clinical data. And so as we start to generate clinical data, we'll be able to determine whether or not we're right or wrong in terms of the mechanism of action that we're trying to address. That's a very different approach to device investing because you're not just coming up with a better widget.

You're actually trying to introduce some level of novel physiology. And that's been a risk that we have been comfortable taking over the years. It doesn't always pan out that you're successful. But when it does, I think you've been, you know, have an opportunity to really create a new category and really own that space. Got it. And so as a follow-up to that question, if there's a, and there's going to be a, you know, a MedTech engineer, a physician perhaps,

that has a, what they would maybe think is a novel idea or potentially disruptive technology. How do they get to the attention of, you know, of Mike Carousy and Lightstone Ventures or ATV? And then on that same note, how do you begin to really think, can this, can this, you know, can this be a big home run, you know, versus a, you know, versus another widget or a single or double? Yeah, well, I mean, in terms of getting the attention, and, you know, you've probably heard this in the past, But, you know, it's best to try and find an introduction or a way into a venture firm. And so, you know, if you're approaching, you know, myself or my partner, Hank Plain, or Jason Letman or others, you know, you can very quickly go on our website, see what deals we've done. You'll get a sense for who we know and who we've interacted with.

And just from doing a little bit of legwork, you know, hopefully you can, you know, make a connection or two. reach out to that individual and say, hey, would you make an introduction on my behalf to Mike or Hank or Jason? And, you know, the reality is a deal that's been introduced to us will get more time and attention than something that comes in over the transom because a big part of what we're investing in in these early stages is the entrepreneur, you know, is the individual. And it's important if we don't know that individual that they come, you know, highly regarded and highly bedded. And so I would always try and find a qualified lead or qualified introduction. So that's kind of number one.

You know, number two is then I think you just start going through the process. And we'll start off with an introductory meeting or a pitch. And, you know, there'll be many meetings and many discussions after that. And again, part of it is us diligently in the idea, but it's also us diligence in the entrepreneur. trying to get a sense for how they think. You know, can we work together because these deals typically take four, five, or six years?

And are they realistic in terms of what they know and what they don't know? Do they have the right expectations on what their role should be now and in the future? And all of that is a process and one that takes time. And I think one that requires the entrepreneur to be patient, thoughtful, and mature

in terms of what it takes to ultimately build out a big company and a successful outcome. Got it. So in regards to that first step, that's just a matter of doing really some fairly basic research, looking at your portfolio companies, potentially trying to get to know maybe some of the founders at your portfolio companies and maybe potentially, you know, if it works out, leveraging that into a referral of some sort to you. And then the second step would be getting that meeting. And that's, I guess to get more specific, you know, Brad Feld, who's a fairly well-known, you know, kind of consumer tech VC often says, or often, it's kind of well-known for saying that he doesn't even like to see a pitch deck in an intro meeting. He prefers to actually see the product. That's a little bit harder to do in MedTech. But what's your take on that? I mean, do someone, in order to even get a meeting with you, do they need to have, you know, do they need to have raised some angel money? Do they need to have a prototype in place? What is that?

What does that look like? Yeah, no. So, no, they don't need to raise the angel money and they don't need a prototype. I do prefer to see a, I don't need to see a full, you know, pros business plan, but I do like to see a pitch stack because, again, you know, I think, you know, what often happens is the entrepreneur will come in and say, well, I've got a better product, but, you know, that's only part of the battle. And so you want to see that they've thought through everything, you know, the market,

reimbursement, who the competition is, what it's going to take to succeed. the product is only one part of it. So I do like to see a pitch deck, at least to start. It's a good way to frame a discussion. And the reality is, you know, I think I've said this before, we'll see 500 or 1,000 business plans over the course of a year. We'll fund four or five. So the bar is very, very high in terms of what we do.

And part of it is, again, through a little bit of legwork, I think if you look at the companies that we as a firm and then even we as individuals are financed, you'll see a theme. You know, we tend to do things that are similar. And that'll give you a sense for whether or not your company is one that might fit with us or not. And, you know, I'm trying to think of an area. For example, we, you know, we do not really do health care IT here. and so if you're a health care IT company,

you know, probably coming to us is not a good use of your time. Trying to find an introduction to us is probably not a good use of your time. So again, I think it's just a little bit of legwork to get a sense for who we are and what we do, and we're pretty transparent about that, and that will help direct your search as an entrepreneur as to who the right groups are to go to. Got it. Got it. Yeah, for sake of time, I think we'll move on to another kind of sub-topic.

I mean, there's certainly a lot more questions I'd like to ask you. But let's move on and focus a little bit more on M&A or mergers and acquisitions, that being probably the most likely exit. In your opinion, are there certain disease states or therapeutic areas that large strategics are looking for, whether it's a COVIDian, a striker, a Boston scientific, a Medtronic, or is it just a matter of, you know, I interviewed Rudy Mazzaki, he was on the program maybe a year ago, and he said that, you know, one of his sort of best practices is to look at it, is to look at a current portfolio at a large strategic and see where they're missing,

where are the large gaps? Do you take on that same sort of mindset, or are there certain disease states that are just more attractive to you and potential acquirers? Yeah, it's a great question. I mentioned earlier about we try and meet with the strategics and get a sense what they're looking for. But if we're doing white spaces, they don't always know. So, for example, if we had met with the strategics, nobody sat there and said, we want a device to treat hypertension.

And so there's an element of understanding these companies, but also bringing them something that they don't know they needed. And I think Ardian, again, is a good example where what's interesting about it is it was a novel, is a novel, device for hypertension, a new market, huge market, a market that has not been historically targeted by devices. But if you look at that area, where it was a good fit with the strategics was the approach that we came up with fit within the existing interventional cardiology businesses. And we know that those are huge franchises for all the major players. So that was very appealing, the fact that this actually slotted into the interventional cardiologist and into that business. If you look at technology, it was catheter-based, it was RF-based. Again, technology and a product that these groups understood.

So in many ways it was a good strategic fit, even though it was a novel kind of white space type of product. And I think there's probably other examples, you know, like that. So that's one approach. The other approach is a little bit more, as you pointed out, blocking and tackling, where you just kind of look at a company, you look at their franchise, and you say, what are they missing, you know, and do they want to get into AAA or do they want to get into the peripheral? And then you're starting to get into probably a better mousetrap sort of product,

and that starts to, that may or may not be what we ultimately do, but you could take that approach as well. So, you know, I don't know if there's any right answer to your question. I think, again, it's through a conversation with the strategics and trying to get a sense for what moves the needle through acquisition. Different companies in different spaces have different thresholds, cardiology, at least historically, those acquisitions are often driven by strong clinical data or early revenue uptake somewhere. you know, if you look at orthopedics, sometimes, you know, you need more sizable revenues before those companies are acquired. And so that's also part of the calculus in terms of what are the triggers for acquisition. And it does vary by therapeutic area and by the

nature of what you're doing. No, that's interesting, especially your point about the different therapeutic areas and what those strategies are possibly looking for in terms of clinical data versus commercialization or revenue. Let's talk a little bit more of that, you know, the idea of clinical evidence versus reimbursement versus having an actual approval of some sort, whether it's an FDA approval or a CE mark or something along those lines.

You mentioned clinical evidence early, earlier in the interview, I should say. Is that the most important sort of metric that in your mind, when looking at a potential exit, or is it all three, how do you sort of differentiate between those three? So in my mind, it is the clinical data. Now, again, a lot of what we're doing is very novel from maybe a physiologic point of view, so that, you know, you might also look at it and say that's the biggest risk.

You know, will it really GI dynamics, right? will that really affect HBA1C and diabetes? And, you know, there was a physiologic unknown there. When you show that it is, that answers a big question. Now, there's lots of other questions. Can you get reimbursement? What will the market adoption look like, et cetera, et cetera? But you've got to answer that first fundamental question first.

And then, you know, I think the strength of that data is what then starts to feed some of those other things. So if you've got a really compelling therapy that is really moving the needle on HBA1C or on blood pressure, then, you know, there's a presumption that you're going to get reimbursement. There's a presumption that the doctors and the patients are going to use it. If on the other hand, you're kind of hitting your butt on the hurdle and you're just showing an improvement, you know, then you can start to look at that and say, it's going to be harder to get reimbursement. I might have to show other things. I might need more data.

And so, you know, at the end of the day, I think what's changed most in our business over the past 10 years is the demand for data and the demand for compelling data has gone up by an order of magnitude. And it's gone up from payers. It's gone up from clinicians. It's even gone up from patients. It's gone up from the FDA.

And so I think our job and job one is to generate that kind of data and do it right. And that starts to answer a lot of questions in terms of the value of our product. Got it. Does that mean we'll get acquired on that data? Well, you know, a lot of times the hope is yes, but the reality is it doesn't always work that way. And I think you earlier commented, you know, about these companies that have, you know,

100 million in. Well, sometimes those are the companies that, for whatever reason, they didn't get acquired early. Again, it doesn't mean it's a bad idea. investment thesis may break down a little bit if it doesn't get acquired early, but it doesn't mean that you can't make money and it doesn't mean that it isn't going to be a good product. And that may be an opportunity for that late-stage investor to sort of come in and ride that next wave of value creation.

And they may ultimately do better than your early-stage investors, and that may be the best time to invest. And that's why I think multiple strategies work in this market. But, again, you're picking for it. through a lot of those other companies that failed for other reasons, like their product wasn't very good, like it was too incremental, et cetera. So you really have to just pick through all the companies that are out there and find those rare gems. Got it. Yeah. And I guess going back to your point, the idea that you prefer clinical evidence

probably it's that way because it fits into your overall thesis and that you prefer early stage, really novel, disruptive technologies. Maybe if you were more of a late stage and investor reimbursement and regulatory approval and then corresponding reimbursement would potentially be a little bit more important to you? Well, yes and no. Although, again, I think even there, I think we've all sort of been a part of and we've seen over the past 10 years. And again, there's been a change.

Those companies that got 510K approval maybe without a lot of clinical data, they went out and started to try and commercialize their products. And ultimately, either didn't have enough data for market adoption. or didn't have enough data for reimbursement. And, you know, given that, I think even in those kinds of situations where you can get an FDA approval with less clinical data, it doesn't mean that you don't need the clinical data for commercialization. So I just think, again, that the need for clinical data has gone up

in any kind of product that we pursue. And having that is what lays the foundation for growth. And if you don't have that, you know, that may make growth harder. So even as a late stage investor, I think you want to make sure at least that that foundation is in place. Got it. And on the topic of reimbursement, in doing some research, I think I read something along the lines of where you mentioned something about dealing with some of the medical societies that in effect control reimbursement. Can you speak briefly to your experiences in dealing with some of those maybe conservative, maybe that's a good way to put it, societies? that they do in fact act as gatekeepers for kind of the reimbursement arena?

Yeah, and again, they each have their own personality. So sometimes it may be conservative, sometimes it may be conflicted. You know, I mean, there's a challenge to that system. And I think, you know, I met, I forget who it was, but I was meeting with a congressman or a woman who said, why don't you just come up with devices that take half the time? Well, on the surface, that sounds good. But, you know, what's the advantage of half the time?

Well, half the time ultimately means it's going to save money and it's going to save money because the doctor gets paid half the price. But doctors don't like to get paid half the price. And so, you know, there are, that plays into the psyche of these societies. It shouldn't, but it does. And so, again, I think as we, as venture capitalists, deal with more and learn the reimbursement process more, you know, we're becoming more aware of this process.

of what it takes to get the societies on board with these new technologies. We need to do a better job of working with them earlier, you know, educating them earlier, thinking of them as a customer, just like I mentioned, Strategics as a customer. And, you know, ultimately I do think those products that are better, however you define that, will win. But, again, it just requires a level of sophistication in your team and how you approach the market

that our companies probably have not had historically and they're learning that they need to have that. Got it. So it goes with societies, it goes with everybody that we touch. Yeah. I love the fact that you brought up that piece because it would seem fairly,

I guess fairly small in nature, that bit of information about the fact that a device may, you know, may, it would seem that it would be, good that it would take half the time, but yet in fact, you know, the, the answer would be, well, it's half the time. It should, you know, it should be half the cost, and hence, physicians are going to get paid, you know, half the reimbursement. But that's interesting that you bring that up. One more question on this topic. In coaching some of your portfolio

companies for potential, you know, conversations with acquirers, are there certain best practices or maybe the better way to ask that question is, are there really pitfalls to avoid in some of those conversations with the choirs? Yeah, it's a good question. I think, you know, the days of showing up with a banker and saying you've got 60 days to buy the company or decide if you want to buy the company, I think those days are gone.

I think it's a game of building relationships at all levels, you know, venture capitalists with the strategic, CEO with the strategic, other board members with the strategics. And so there has to be a willingness to engage earlier and educate folks along the way and build that relationship and build that credibility. The challenge with that and the pitfall is that you're opening up yourself to the strategic seeing

all the sausage making, and it's not always pretty, you know, you don't always hit the timelines that you thought you were going to hit. there will be setbacks along the way. And so there's a balance that you need to strike between, you know, it's the old adage of, you know, under promise and over-deliver. And that's true in these discussions. You want to, you know, you want to show enough so that you get folks interested and engaged,

but you don't want to make too many promises that you fall on your face because you'll lose credibility. And if you lose credibility, it's very hard to get it back. So, you know, I think it requires a certain level. of transparency, honesty, integrity. Don't oversell because the strategics are very good at sniffing that out, just as are the venture capitalists. It's what we do. And so, you know, I think you want to be honest and direct and forthright. And at the end of the day, what it takes is a product that is truly differentiated and better to get the attention

to these folks. Got it. Got it. I want to ask you. you about your, I wanted to get your take on the, on the 2.3% excise tax as well as the, as well as the kind of the FDA and the, in the long runway, but I really don't want to end this conversation on a sour note or on a downer. I'd rather ask you to kind of conclude a little bit more about your background. And certainly I would encourage everyone, you know, just do Google search for Mike Cruz. You will, of course, link up to your bio in kind of the show notes. But, But I'm curious, your first gig, correct me if I'm wrong, but your first job out of college

or post- undergrad was in sales, right? And I'm curious, because I'm kind of a sales marketing guy by nature, I'm curious how that's impacted. You know, you've had a tremendously successful career. You know, 2011, you're on the Midas list. I mean, that's like, you know, I'm not sure what your take on the Midas list is, but nonetheless, it's a nice list to be on. How has sales impacted your career thus far?

Yeah, no, it's a great comment. You know, so I'm a mechanical engineer by training, and then, yeah, I went from engineering into a sales role. You know, I mean, in the day, I think if you're not selling it or you're not making it, you're probably not adding a ton of value. So, I mean, I think you look at our companies, that's, those are ultimately the key roles. And I think everything that we do is sales, we're always selling. and so I think there's an element of that that's very important to the business.

You know, I think you kind of want to marry that, you know, from sales after business school, I went into consulting because I wanted to sort of try and develop the other side of my brain so that I wasn't just selling, but I also had that sort of strategic piece and that marketing piece, the big M, you know, along with the big S. And I think marrying those two skill sets, sales and marketing, strategic along with that execution piece, that starts to differentiate you from a lot of other folks in the field. It's a unique combination, and it's something I tried to develop. You know, I don't know if I was successful at it, but it's certainly something I tried to develop.

And, you know, it's kind of trying to figure out where you're strong, but also where you're weak and then go work on both. Got it. That's good stuff. And before I ask my last question here, if anyone's listening to this and wants like a good, they're kind of thinking, oh, sales, I don't know about that. You heard it here first, you know,

and a tremendously successful MedTech VC says that selling is involved in almost every process of the game. But a good book to start out with is actually Dan Pink's recent book to sell as human. And that's a great, a great, a little bit of a different take on sales. But anyway, that's a side note. Last question I have for you, Mike. What, is there one thing that stands out that you now know that you wish you knew, you know, 20 years ago or earlier on in your investment career?

Oh, that's a great question. Yes, everything will take more time and more money. Patience then, I guess, right? Maybe. It is patience. I think, you know, I was talking to somebody. today about, you know, Elon Musk and Tesla, and what differentiates Elon and why he's been able to succeed on these big, big projects. And I never had the pleasure of meeting him.

But I guess, my guess is that he is extraordinarily persistent, just has an incredible amount of perseverance, believes, tenacity, doesn't give up, and when things are sort of looking bleak, and they always do in a startup, you always go through a downtime. He powers through it and he does it with such force of personality that he brings the team, his investors, his customers, everybody along with him. And I think it's a credit to his success in doing these, you know, very difficult projects like a Tesla. And I think it's true of all successful entrepreneurs. Again, these things don't go on a straight line.

And perseverance is probably, in my mind, at least, the most important. attribute of a very good entrepreneur. My job as a VC is sometimes to take those that just don't want to give up, and there is a time to give up, and sometimes these things don't always work, but you don't always necessarily want your CEO, or at least the entrepreneur, to be the one to say that. And perseverance is probably critical to anything we do, and certainly in this business. You brought up Elon. I'm glad you brought that up, because if anyone is not familiar, with Tesla or Elon Musk, I mean, certainly do some research there. It's an amazing, amazing story.

In fact, I think while he was building out both SpaceX and Tesla, I think he personally almost like was not technically bankrupted, but he almost bankrupted himself personally, you know, ramping those two companies up. And now you look at, you know, Tesla is, you know, incredible, incredible company and the barriers that they're breaking in that world is incredible. That's good stuff. So persistence is the one thing that you point out. Awesome. Thanks a ton, Mike, for your willingness to come on the program and allow me to kind of pick your brain.

I'm certainly hoping that everyone listening this far has gained a ton of insights from your experiences. So thanks a ton for your willingness to do it. No, I appreciate it. I think it's great what you're doing. I appreciate being able to contribute. Yeah, absolutely. I'll, of course, link up to your bio in the show notes, but is that the best way for people to kind of learn more about you

is to just check out Lightstone Ventures or ATV? Yeah, that work. Got it. I'll have you hold on the line here real quick. But thanks, everyone, for your listening and attention. Until the next episode of MedSider, everyone, take care.