#14 - An inside look at a successful startup – Ellipse Technologies (17 mins)

Brought to you by Tiger Buford. Hello, orthopedic entrepreneurs. Welcome to Inside Orthopedics. My name is Tiger. I'm an orthopedic industry insider and retained recruiter for early-stage orthopedic companies. Thanks for listening. This is episode number 14, titled An Inside Look at a Successful Startup: Ellipse Technologies. Here we go. So everyone in orthopedics has heard of the remarkable acquisition of Ellipse Technologies by NuVasive in 2016 for $410 million, including earnouts. But most of my orthopedic friends do not know the inside story of how Ellipse started from scratch with just a concept for a spine and orthopedic device and became an irresistible takeover target just 8 years later. This acquisition was a big one for our industry— 10 times sales, a good benchmark for all growing startups. So people have asked me to talk about the Ellipse success. Not everything was rosy at Ellipse. It was a tough place to work, but in hindsight, we did a lot of things right. So let me give you a firsthand glimpse into the startup and the culture that created this success. In 2012, I joined the Ellipse team to lead R&D as employee number 18. In my mind, Ellipse was a startup with great potential because it ticked all of my boxes: an excellent management team, a great financing runway, game-changing products with high margins, Class 2 pathways, and a great can-do culture. Basically, it was set up for success in 2012. But there were still many, many challenges in front of us to execute. The next 4 years, the company executed remarkably to solve problems, move forward, create value quickly by doubling the business each year. As I look back, I can see 10 specific cultural qualities that were in Ellipse's DNA. These cultural qualities enabled Ellipse to execute and grow. So I think future startups can learn from these 10, so let me go over them one at a time. Cultural quality number 1: don't be afraid of the pivot. Most people do not know that Ellipse's success was a result of a brilliant pivot by Mike Henson, the chairman of the board. Mike Henson at MedFocus was on the board and the chairman. Don't be afraid of the pivot. Most people do not know that Ellipse's success was a result of a brilliant pivot by Mike Henson. Mike Henson at MedFocus was the chairman of the board. Mike has funded over 20 med device startups and has nuanced successful exits for many. Many of Mike's startups included pivot moves somewhere in their timeline. I consider Mike the LeBron James of pivoting in medical device startups. A little background: Ellipse Technologies was founded as a spin-off from MyCardia. MyCardia was developing shape memory Nitinol technology for non-invasively and minimally invasive adjusting annuloplasty rings for the heart. In 2005, the goal for Ellipse Technologies was to develop shape memory implants to allow the non-invasive adjustment of both endoscopically implanted and laparoscopically implanted devices for GERD and for gastric restriction for obesity control. From 2005 to 2007, 4 Ellipse engineers developed this technology. In 2007, Mike Henson called a timeout because he didn't like the changing bariatrics market, primarily emerging competition and a probable PMA regulatory pathway. He left behind one sole employee, Blair Walker, to research new potential clinical applications that could benefit from a non-invasive adjustment with spinning magnet technology. Blair proposed early onset scoliosis and limb lengthening. And Mike Henson reassembled the 4-person team in January 2008. Exactly 23 months later, the first spine device was implanted. A brilliant pivot. All right, number 2, cultural quality number 2: take a moonshot. Ellipse chose a game-changing clinical problem and took a moonshot in solving it. Ellipse did not choose to make an implant with a slightly different coating or feature or color, as many startups are guilty of these days. Ellipse chose to solve orthopedic and spine problems that could make a remarkable improvement in the quality of life of patients. Nobody had tried to do this before with remote control magnet technology. They took a moonshot. The lesson here is that startups can build value quicker with game-changing plays than with a slow incremental approach. Find an unsolved clinical problem, then take a bold new approach to solving that problem. All right, number 3, cultural quality number 3: focus, focus, focus. Ed Roshak, a first-time CEO, created a culture of a laser-like focus with key milestones that drove valuation. The focus was Technology first, everything else later. Get the product right before investing in other areas. Don't worry about regulatory, IP, quality, sales and distribution, marketing, surgeon training, reimbursement, etc. Just focus on getting Gen 1 product working ASAP. This intense ellipse focus helped to avoid distraction pitfalls that other startups encounter, such as continual fundraising, silly press releases, fancy office environments, in-house manufacturing to lower COGS, fancy websites, regularly scheduled meetings, etc. As Paul Graham from Y Combinator wisely says, though the immediate cause of death in a startup tends to be running out of money, The underlying cause is usually lack of focus. All right, number 4, cultural quality number 4, win with speed. Ellipse simply outran its competition. Every time the competition checked in on Ellipse, we had extended the lead. It's hard to really exaggerate how fast we moved at Ellipse. There was speed in decisions and product design, product testing, implementing systems, regulatory approvals, hiring, project shifting, regulatory filings, clinical studies, org changes, office moves. Ellipse did more in 1 month than most other companies in 3 months. I remember the surgeons and the board members were always amazed at the speed of innovation at Ellipse. Even though we felt like we were slow based on internal expectations. The Ellipse culture and mindset was built on rapid iterations. New ideas for implants, instruments, packaging, fixtures, manufacturing processes, org changes, and all processes were prototyped and tested within days, and then the improvement was prototyped and tested in days, and so on. For me, the most impressive area at Ellipse was the speed of decisions. The management team made big decisions daily and usually with only 80% of the available information. It's funny how you can make better decisions with less data and analysis. An often overlooked advantage to speed is it helps to manage cash. If a new product can be launched 3 months earlier, then the resulting sales come in without the additional burden of 3 months of payroll expenses. Create a culture of rapid iterations and use speed as an offensive tactic. Number 5, cultural quality number 5, aggressive regulatory. John McIntyre, the regulatory head, was a miracle worker winning clearances. John's team outran the rest of the company. He often received clearances on new indications before the company was ready to commercialize the product. In 2014, he shocked the spine industry when he obtained Magic approval in the U.S. with a 510 clearance. And surprisingly, John did not interfere with product development process. He always said to make the best product first Then we'll figure out how to get it cleared. So the take-home here is hire an aggressive and creative regulatory leader. Number 6, cultural quality number 6, incentives tied to valuation. Ed Roshak, the CEO, created incentives that drove enterprise value. 100% of the employees received stock options. And perhaps an even more effective short-term incentive was that 100% of the employees were paid annual cash bonuses for hitting key company milestones. For instance, a regulatory clearance, a first-in-man surgery, a completion of a key product design, completion of a clinical trial enrollment, hitting a new sales goal, etc. We had about 12 of these company milestones to shoot for each year. These key milestones were designed to move the company's valuation needle. Many were stretch goals, but some were reasonable goals. But in the end, the company usually received 80 to 90% of these goals. It worked. Whatever goals were written on that sheet of paper, you knew the employees would move heaven and earth to accomplish them. Everything else took a backseat. So match employee incentives to accomplishments that raise valuation for your startup. All right, number 7, cultural quality number 7: get clinical experience early. New product evaluations can be a chicken and egg issue for many startups. In order to go out and get clinical experience, you need a refined implant. In order to have a refined implant, you need clinical experience. Ellipse's technology was to get the clinical experience as soon as the implant system was safe, but well before the implant system was ready for commercial launch. Ellipse did its first-in-man surgeries with early adopters in faraway lands. While the new product clinical outcomes were good, there's still room for improvement. We had the chance to work out the bugs before launching in the US or Europe. These early clinical evaluations were worth gold. Go find surgeon evangelists in the world who want to be the first and get the clinical experience early, even if the surgeon is not in your target market. Number 8, cultural quality number 8: Think international early. Ellipse targeted 2 very specific customer niches: pediatric spine surgeons who treat EOS and pediatric orthopedic surgeons who treat leg length discrepancies. These customers were easy to find, but they were also spread out. Ellipse did the early regulatory work to sell where the customers were. Ellipse sold products to these targeted customers in 20 countries very early in the company history. Go where your loyal customers are, even if it's not in your favorite market. Number 9, cultural quality number 9, smart hiring. Ellipse stayed flat as long as possible with just 2 layers, vice presidents and professionals. And the VPs were really hands-on working department managers. Ellipse also did a great job of hiring late. The only people— they only added people when the need became very painful. The daily work was very challenging, so Ellipse preferred to test new hires in key positions with a trial period. Most management was brought into the company with a short-term consulting contract. I started with a 3-month contract. At the end of the period, if it was a mutual yes, then the consultant became an employee. Ellipse also did a great job of deliberately hiring outside the usual orthopedics and spine companies. The hiring philosophy of reaching outside the industry brought in people with some fresh ways of thinking that proved to be very special. So how many career orthopedic engineers that you know would have the guts to design a 45-piece IM nail with an internal micromotor driven by a spinning magnet? This is outside the box. So looking back on my R&D experience, it was difficult to get A-players to move to Southern California before anyone knew who Ellipse was, so I hired locally. In 2012, Ellipse was unknown, unproven, high-risk, but at least the new hires got a meaningful amount of stock options. Later in 2014-2015, Everyone wanted to come to Ellipse. The risk had been reduced, but these latecomers received much lower amount of stock options. So hire— so the advice is hire late, stay flat, look outside your industry for fresh thinking, and use trial periods for key positions. And finally, number 10, cultural quality number 10. Ellipse was well aligned. Alignment. The investors, the board, and the executive management team had the same goals for the company. They all had the same exit strategy on day 1. It's much easier to reach a successful exit when all of the shareholders are rowing in the same direction. I have seen misaligned startups with internal conflict that sabotage an otherwise successful outcome. Make sure that the stockholders are in the same boat and rowing the same direction. And that's it. That's all 10. I hope you enjoyed the insight. Don't forget to subscribe. You can always follow me at tigerbuford.com. Be safe out there.