BoneChat call #22 - How to de-risk your startup (from the Investors' perspective) - Ted Bird

So, so we're live with Ted Byrd and he's going to give us an action-packed information deck of best practices to de-risk your startup from an investor's perspective. This is something that members asked for. So take it away, Ted. I'm giving you the mic.

Okay. Thank you, Tiger Buford. Let me share a screen. I'm going to use a slide deck that I put together to guide me. Let's see. Can you see that? Perfect.

And Ted's going to go fast. There's going to be a lot of information, but raise your hand or interrupt if you have a question.

This is Q&A. Tiger, give me the signal because I'm looking at my full screen, not looking at all the little chat things. So I will do. I suggested this topic about a month ago when the group was suggesting topics and, you know, in my experience in the past few years with startups, with early-stage companies to raise money, to raise capital, and meeting with a number of investors, I thought it would be good. And actually, it's been a lot of fun in the last month since I suggested this topic and put the date on the calendar of doing some additional reading and research. So, try to consolidate it. Just quickly, introduction. Yeah, so myself, Tiger calls me an orthopedic industry insider. Really 4 decades of experience in orthopedics in all segments, really the, you know, sales, marketing, strategic planning, strategy, BD, education, executive operating leadership. More recently, you know, management consulting advisory and board roles. First decade was in, you know, arthroscopy, sports medicine with companies like Dionyx, Richards Medical, now part of Smith Nephew, J&J Orthopedics, pre-DePuy, DePuy Synthes, and circled back to it, you know, more recently with a European startup called Askel Healthcare as non-executive chairman of the board. Got some trauma extremities as well as even soft goods fracture management casting experience while at J&J in the '80s. But really the last 30 years, very focused, very deep domain expertise in spine. Spent the '90s with the Danek, software Danek to Medtronic growth story. Went back to J&J after that, after some about 3 years of consulting for startups, but went back to J&J when it was DePuy Spine. Pre-dipusynthes. Spent 7 years at Blackstone Orthofix just after the Blackstone Medical acquisition, which was really interesting. And then in the last few years, last 10 years, in advisory board roles and/or operating leadership roles in smaller companies, which I really am focused on now and enjoy, like HappyFix out of Israel, Titan Spine, with their sale to Medtronic, and today Dymacron in Utah. So my firm is Berg Medical Group, and you can go to our website, bergmedicalgroup.com. Let's get into it. So the way I'm approaching this is I heard this from a VC who basically said, here's how I evaluate medtech startups. I kind of have buckets of risk, and these, these are— so I kind of thought about that and the people I've talked to and identified 9 buckets that are important to de-risk as a founder or leader of a medtech company. So we're going to cover each one of these 9 categories here that you see on the screen. And essentially investors, they might take a risk, less so in recent months and years, but they might take a risk, more risk with two buckets. But this individual told me a third bucket is probably too much. So you really have to consider all of these categories and have your act together, well thought out, not just, you know, an act like a pitch deck and not be able to go much deeper, but really have thought this through. And have the right people on board to do it. So that really addresses the first bucket, which is people management. And, you know, you often hear, you know, the term investors prioritize most of the time betting on the jockey, not just the horse. So it is very important to show and demonstrate why your team is the one to back you know, and why and how they can pull this off. It's important to build a team, you know, with diverse expertise across the different categories from technical and engineering to regulatory to quality, clinical affairs, clinical surgery, you know, healthcare professionals that are your customers. Reimbursement, finance and legal, and of course commercial go-to-market. There's no— it's impossible to be an expert in all of these areas, but as a founder or leader, it's important that you connect with the right people and do your homework and take your time. Of course, this forum is sponsored by Tiger, Tiger Buford, who does that as kind of a major part of his his time bandwidth is building talent, you know, recruiting and helping especially small startups identify experts. And you don't have to hire a full-time employee for every one of these roles. Use subject matter experts as consultants or advisors, and that's a good way to test out the relationship to see how well you work together, how good they are before you go all in on bringing them on board, which is so important that you stay lean in the early days as a, as a startup, as a medtech startup.

Yeah. Yeah. Let me add a, let me add a note, Ted. So, that's a big mistake startups make. They hire people before they need them and they could use a consultant or they could use a fractional, a fractional leader. I see this, this year is really big in fractional leaders. People need to somebody come in and fix their marketing for 6 months or fix their financials. For 6 months and then disappear. And I see that as, as gaining a lot of momentum this year. Go ahead. Asher's got a question.

What's that point in time where you decide you need to hire someone? Do you wait until it's sort of too late and you're already backlogged? Do you sort of proactively hire them when you know there's a need coming? What sort of threshold?

It's—

I see it's, it's based on pain. When you have your pain level is so great and it's taking too much of the CEO's time. To figure something out. It's, you know, when it's painful. Go ahead, Ted.

Yeah, no, I was going to say, Asher and Tiger, you know, for example, and I agree with the pain point. If you're at a state, a real critical sort of regulatory stage and you've been using a regulatory consultant, but, and you found out that they're really good and a lot of it's also dependent upon your ability to fund. A full-time employee as well. You know, that's critical. But as soon as you are, you know, quality, quality system, for example, so important to get that right and regulatory in your regulatory pathway early on. That, that's something you probably want in-house once you start gaining that momentum. But I wouldn't do it again too early, but keep that in mind. Also, when you're talking to investors, you know, highlight your advisors or your board members or mentors that you have that are well known in medtech. Investors, they're kind of like, you know, sheep that flock towards a certain, you know, tune. And when you get, you know, certain people that— like Fred Mull is a guy that's known for robotics, and he's on so many different boards. And there's a number of names, you know, out there that I don't know how they keep up with all their various board roles once they get over 5 or 6, I can't imagine how you, you manage all that. But, you know, investors do like that. Go ahead, Elizabeth.

Elizabeth's got a comment.

Just going to say that I would imagine that, you know, when to bring someone on is going to vary by their, their role, right? So is there a general sort of bullet points like you don't want to bring in, you know, finance before you handle clinical, or I mean that kind of general roadmap.

So, I mean, my last startup at Ellipse, we had a part-time CFO. She came in one day a week. She was unbelievable. And then we, we, we begged her for two days a week when we had more and more transactions going on. And then it was three days a week. And then it finally is like, oh my gosh, you know, she, She, she can't give us 3 or 4 days a week. So then we had to hire— it's the paying question again, you know.

Okay. Yeah, I would agree that, that you get, you know, momentum going and, and, you know, CFO, particularly when you're, um, getting into perhaps a more complex, you know, financing or your momentum's building where you need to raise a lot more money in a B round or a C round or you know, you're further along, you're considering a transaction, maybe, maybe it's licensing or M&A, you know, someone looking to acquire, and you really want to have the depth of financial experience there on your team at that point. Let me move to bucket number 2. So market size, again, investors really, you know, want to know this. Kyle, I think it was you on LinkedIn recently, you did a great post about, you know, going diving down the rabbit hole on how to estimate total available market versus, you know, serviceable available market or serviceable attainable market. But these are things that the VCs and many, you know, sort of educated investors are going to want to know, and you really have to understand it well. Don't just Google search a market research report that's available from India or Pakistan or somewhere that projects your market to be 3 times bigger than it actually is and just kind of, you know, cut and paste that line onto your pitch deck. You know, that's a big mistake. But they're going to The investor wants to know, is, is the target market big enough? Uh, you know, generally they don't get really excited until they, they see that it's potentially a, a billion-dollar opportunity. But does it have to be a billion-dollar opportunity? You have to back yourself coming top-down or bottom-up to get into that? Not necessarily. But, you know, just my message is thoroughly do your research, understand also you know, the local dynamics, customer behaviors, you know, surgeons as well as hospitals, who's buying your product, what the trends are, like movement to ASC versus hospital, and what that does to the market and to the, the, the valuation of the market. And validate your assumptions, you know, early on with surveys or focus groups. You can use expert, you know, groups that are in different areas that can pull together KOLs or experts and do lots of pilots, you know, walk before you run, I mean crawl before you walk, walk, just, you know, a good rule to use obviously in product development engineering is just walk before you run and iterate, iterate, iterate.

Kyle's got a comment, question.

Yeah, that's a great summary. And I think what's really fascinating about this and kind of what I was alluding to with my post last week, you know, I, I saw a bunch of the presentations at LSI, um, we did a virtual attendance just to save on not having to be out there. Plus so much of it was outside of the ortho space, it just didn't make sense. But the slide example that you have here, this snapshot was so commonly shown where it's, you know, total addressable market and the serviceable market and a huge majority of those data points were just gigantic. And I think that's what— I don't want to apply malice to it, but it is at least somewhat misleading. And I think it requires diligence if you're asking for money and you want to have the right level of conviction and data behind you to be able to drill down and explain that you've understood. You know, it'd be really easy for us to say, well, you know, we've got a widget and you can use it on humans and there's 8 billion humans. So we have this amazing market. That's just not how it works. And I guess I was doing something for a diabetes company a year ago and they were doing exactly that. They were saying, well, you know, 25% of the global population has diabetes. So it's this gigantic market and it just, you, you gotta dig in a little bit deeper than that. And I think when you do, you offer, not only better accuracy to what your targets are, that you hone in on areas you're going to potentially focus on, but it also can set your path better for how you hone in on staging market and stages of investment and all of those things.

Well, okay, we got 3 hands raised. So John Patrick and then Dave Saunders, this is going to be interesting.

Yeah, I'll go. I'll go quickly. I just had this debate. I think, yes, the TAM, SAM, and SOM are very, very important. But I think equally important, you kind of have to look at your market analysis in a pincer move. So you have the overview, you know, the total available market, but probably where the rubber meets the road the most, and I think certainly for investors and success, is the bottom-up approach on we know that it's out here. Now specifically, how are we going to execute? What doctors? What hospitals? What regions? What distributors, if you're going to use that road? So, so the bottom up, I think, is really much more vital, but you have to do both. Like, you have to kind of know what you're stepping into and then underneath, uh, how you're going to actually do it. So, um, just wanted to emphasize how important both were.

Okay, Patrick.

Yeah, I spent some years at Stryker and they put everyone, they put everyone through this commercialization training. Any former Stryker people on here will know what I'm talking about. And the almost like the first exercise that they do in this commercialization training is they put you through this fictitious exercise where you're bringing a new coffee to market and you have to sort of start thinking about your market and they start asking these different questions of like, are we in the coffee market? Okay, the coffee market is a certain size and maybe we can, we can convert a certain percentage of the coffee business and then, okay, well maybe it's coffee and tea is our actual market. That's caffeinated beverage.

Okay.

The likelihood of conversion goes down while the market size goes up and then they sort of take it even further and further. Okay, well maybe you're in the, maybe we're just in the beverage business overall. Well, how likely are you to convert people off of bot? You know, someone wants bottled water. That's the beverage business. Coffee is a beverage technically, but how likely are you to start, you know, instead of grabbing coffee, having a bottle of water and it's more of a messaging type of thing to understand the the best target market that you're going after and how to put your sort of product positioning and your product messaging along the right frame. But you do see this to Kyle's point in some of these investor decks of like, well, you know, everyone's knee hurts a little bit or something like that. Therefore our target market is 8 billion people and people just go crazy. And the more sophisticated investor you get, the more they're gonna push right back on this and be like, well, how like, you know, you're not gonna just convert so on and so on and so on. So I think this is a really important point. And I think it's something I see companies get wrong too often is they, they think that their goal is to just prove the biggest imaginable number and think the person on the other end of the conversation is, is a little bit foolish and sort of is uneducated as to what, what they're actually doing.

Great point.

Yeah.

Welcome, David Saunders.

Hey.

Yeah.

Just the, the mention of LSI reminded me of a panelist last year that said that in any market analysis, if you looked at a company like Intuitive Surgical and saw that after almost 25 years they have less than a 10% total penetration into their target market, you would call them an absolute failure. And so this just kind of reinforces what has already been said by the other folks here, is that when you look at the TAM, if you just put a giant number up there, you're not really describing the road that's necessary to get there. There are a lot of reasons why a company like Intuitive is entrenched in the hospitals where it is and why it's not in the hospitals where it's not. And anybody with their product is going to have the same kinds of resistances to certain kinds of sub-markets and easier times with others. And so if you just slam a big TAM number up there, you know, there are going to be certain VCs that are going to clobber you for it and they gossip. Really hard. So, you know, anything that you mess up in front of one VC is going to get around really quickly, and that word can hurt you.

Great point. Yeah, absolutely. And it's my third bullet point there, and all great comments from you guys. You know, understanding the local dynamics, you know, looking at that bottom-up. And I think it's great that Stryker does that for all their commercial, at least commercial people, to go through that because some of the best sort of quota setting, forecasting, you know, that's done is by just thinking about it from a, you know, bottom-up standpoint from your market. You see, you got so many customers that are out there. We've got so many reps or distributors. They're gonna sell so many of our knees or our hips or our spinal, you know, pedicle screws. Let's work that up to, to a realistic forecast. And, yeah, you're just going to delegitimize yourself if you just throw up. And I saw it at LSI too, you know, the companies I was representing, I looked at the competitors that are in the same space and some of them were wildly just general. And it was like, okay, you guys keep doing that, but we're going to drill down and be more legitimate, you know, to a serious investor.

See, I think, I think this is driven by the VCs. VCs are looking for home runs and they're looking for giant markets. And, and my first startup was a humeral, uh, fracture, uh, company. And, and we kept finding the market was $800 million, and the VC said, you got to get it higher. And so we kind of artificially, you know, said, well, convert everything in the world. And it's just, it's a silly exercise, that, that TAM number sometimes.

Yeah, yeah, the key is going from the bottom. Let me get to the next bucket. So we keep, keep moving along here. Let's see. Competition. So that this is important too, and there's different ways to do this, but you really, again, to be respected, you know, to be taken seriously, you just have to really understand who your competitors are and do the analysis on their strengths and weaknesses. You have to, as we discussed last week in the kind of open mic session, you have to clearly be able to define your value proposition and what differentiates you from the competition, because that's going to tell the potential investor that you understand how, you know, you're presenting yourself in the marketplace to be successful getting into the market with the various, you know, value analysis committees in hospital, et cetera. You know, I put up here from, I've got a link to an article I found online, you know, on competitive landscape slides, but there's different ways to do it. The top right, you can see over here, you can do basically, you know, an XY chart, it's called the 2x2, and you use the axes to convey specific advantages, you know, in your business. You know, it might be the business model, it might be data, it might be the, features of the product or something else. But this fairly general way to do it, but main thing is you want to show whatever you're trying to describe that your product or your business is in the best place. The other one is a Venn diagram. You might have, you know, a category where you've got a bunch of, you know, you're addressing a problem and a bunch of it is for biologics approach to it. And you might have approach over here on the blue that has more of a mechanical approach. Let's just call it a low back pain problem. And you're trying to look at today, you know, a lot of activity in, for example, in, you know, nucleus augmentation or disc degeneration. And there's a lot of biological or stem cell approaches. But they used to take time. Then there's a lot of mechanical insertion. But if your startup can come in there and say, we have a biologic you know, that does the regenerative medicine but also has the mechanical, boom, you know, you're, you're showing how you're different and how you're in your own category. And then you've got the feature kind of matrix, you know, which attributes you, all your competitors here and the key attributes and, and how you check off more than everyone else. So there's, there's different ways to slice it. This was a nice article. I, I added that to this slide that we'll get around to the, the group, you know, that you can, you can dig into. As you're putting pitch decks together.

Go ahead, Dave.

All great graphs. And I would just add one more, especially if you're dealing with VCs on the West Coast, Sand Hill, they love the Gartner Magic Quadrant.

Hmm.

So if you can arrange yourself within, you know, that kind of scenario where you've got basically 4 boxes And it's a weird hybrid between an XY chart that you've got there and then each of kind of like the— if you section it into fours, each of those four areas would have a greater weight for particular features. So you can look up the Gartner Magic Quadrant, but there's a lot of variations on that. But I know a lot of VCs in Sand Hill really, really like that. Because it helps them size you up in terms of how you fit in the whole market landscape.

Great comment. That's— and I— David Kaye's not here today, but I would— I'm gonna say what he would say is don't look at your competition today, look at it 2 years out, 5 years out, because that, that's what matters.

And Tiger, don't, don't just think about other companies, but think about other factors, you know, changes in the, the, the general, you know, healthcare the medtech landscape that could impact your solution.

You have something, Dave?

Ted just nailed it. I was just going to say that, you know, I've gotten into some big fights over competition before with other staff members because, you know, I'm of the note that, you know, money is being spent in budgets. And so just because your product might be coming in and you've got white space all around you and you can, you may be able to confidently they say there's no product in the market like me. Well, yeah, but those budgeted dollars are being spent somewhere. And so on some level, you're competing with somebody else's budget, you're competing with money that's going into some other bucket. And so you may not have a direct competitor in your specific space right now, but, but the money's going somewhere and that's where the competition is.

Yeah, David, if the VC is sitting down with you at LSI or somewhere else, or maybe Sandlot Road, you know, they're interested then, hopefully, if they're taking the meeting. So, you know, they're talking to all these competitors and hearing their stories at the same time. So, you know, you better have your act together and, and because these guys do their homework. Okay, next bucket. Ready?

Oh, John's got a question.

Uh, well, just a real quick comment. I think, uh, sometimes an emotional comment is sometimes when you look into these markets in very early stages, when you find competitors, you get kind of that sick feeling in your stomach, like, uh, but I want to tell you, the way I've started looking at it now is that is a validation that this, if I can do it better, it's validating that it's potentially the right market. Now you have to pay attention to all the details, but it is a sign that you're on to something, as opposed to being like a kick to the groin.

That's what Mark Viscoliosi said, uh, a few weeks ago, is you— would you bet on your competitors? If the answer is yes, you're in the right space.

Okay, so number 4, bucket number 4, is the ability to execute. I love this quote, you know, that's out there from Steve Case: in the end, A vision without the ability to execute is probably a hallucination. And, you know, down below that is this great chart that kind of puts it into the, you know, 4 boxes that, you know, the quality of your strategy and then the quality of execution. The top right is you got a great strategy, but combined with great execution means you're in the arena and you're winning. You're getting great results. You know, if basically you've got a great strategy but poor, okay execution, you're leaving money on the table, you know, or should market share on the table, disappointing, failure to launch. If you're in the bottom left, you're dead. Poor strategy, poor execution, lost opportunity. I mean, you might as well just give up. So develop a comprehensive plan. I mean, the point here is as an investor, You want to know that this team can execute. Not only have they done it historically, but that they have a plan with clear milestones and objectives. And it's nice to have kind of a dashboard, you know, develop a dashboard. You don't have to overcomplicate it, but, you know, continuously monitor those key performance indicators, KPIs, and then adapt because things are going to change, but remain agile. And, you know, prioritize, as I said earlier, you know, this is more from a product development standpoint, but from a general startup, medtech startup, prioritize prototyping early and often. Get a minimal viable product out there and test it, fail fast, learn, and refine it. Don't overcomplicate it, avoid feature bloat, you know, which engineers love to, you know, continuing tinkering of things, you know, avoid that. And reinforce with the culture of your company that time is money, that we're all, you know, staying as lean as possible to be able to execute and get to that next milestone on our dashboard, to be able to go back to our board, you know, in a couple weeks, every month to show progress, and then back to the investors. To continue to give them confidence to invest in us and continue to invest in us and attract new investors.

Yeah. The execution is the most important box, I think, and it's the hardest one to measure. You know, every great company is all, they've all almost gone out of business. I mean, Ted Knight talked about Danek. Danek should have gone out of business twice, but nobody remembers that. The factory burned down once, and they almost folded their cards. And then the second, they had a billion-dollar class action lawsuit, and they almost folded their cards. But it was the team that got through both of those.

Some great examples of this, but, you know, you've got to, and you've got to, you got to hold, hold your team accountable. That's another sort of leadership principle is, is, you know, create a great culture and you know, be emotionally intelligent and supporting your team and having them feel, you know, good and, and praise them about what they're doing. But you also have to hold everyone accountable and yourself accountable to execute and get things done, because otherwise you're going to end up in that red box in the bottom left.

Who, who's got stories of great execution or poor execution that they can share as examples? I can't see the—

Asher?

The one I was going to share was I worked at a small spine implant company and we basically intentionally knocked off a company, a big company's product, and then ran a really targeted social media ad campaign at all their distributors basically saying we have the exact same product but we'll pay you more commission. And it was surprisingly effective given the cost of the social media campaign and it's still pretty effective product.

Interesting, interesting strategy.

It's a great, it's a good example of a successful execution plan for a pretty basic generic product.

Right. Okay, Dave, and then Mark.

Sure. You know, my most recent surgical robotics company, we signed a license with Johns Hopkins in second half of 2016, and we immediately went to work on a prototype that was just based on what we knew, right? We weren't experts in it yet. We hadn't really strongly validated it outside, you know, with a lot of surgeons. So we just built a prototype that looked like it was, you know, based on what we'd done so far. We went to a trade show or a conference, academic conference, AAOHSNF in Chicago, September 2017, and we put up a 20 by 20 booth with bare walls completely enclosed. So there was no company, 'cause we were pre-clearance, right? So we weren't sure how edgy we could get and not get clobbered by the FDA. So we just put up 12-foot gray walls, no company logo of any kind. Ed Damerose, the president of the AAO at the time, sent out an email to all the department heads of otolaryngology that were members of the conference and said, "Who wants to try out this new technology from Johns Hopkins?" We had over 80 department heads from the top otolaryngology centers from around the world schedule to come and get hands-on time with the robot. They filled out questionnaires and then they flipped the questionnaires over and actually described the workflow for their ORs and how this robot would fit on the blank pages on the back. Not only that, but because we had this weird sense of mystique, we had surgeons beating on the door pissed off because they hadn't gotten a time slot to come try out the robot. So, you know, it was a great, you know, just, we just planted a flag and said, we're taking a prototype and we just picked the closest conference. But we got in a huge, huge amount of feedback and it was amazing. But I'm a big fan of planting big hairy goals in front of the whole company and just running like hell to make it work.

Great story.

Love it.

Mark Copeland and then Mark Maloney.

My, my story that I was involved with isn't as fun as the Asher and Dave's. Um, a bunch of us ran around with a really, really sexy, cool little product. I'll make up numbers. The product sold for $4, but the reimbursement was $12, and there's no way these orthopedic surgeons won't love it. And then I was the first one to find out that reimbursement in 49 other states was like $5.12, and I was laughed at by the VC and the CEO. And then I pulled out the piece of paper and said, here's what it says in Pennsylvania, and, uh, they're not doing very— they're not in business anymore. So To, uh, Ted's point, they hadn't really done their research and they didn't know the reimbursement, and neither did this idiot and about 8 other people.

I learned.

Great story.

Mark, have a, have a, have a point.

Yeah, go ahead, Mark.

So, um, when we, uh started Remote Image in 1999. It was the first online X-ray image that you could see from your home. And we, it was the easiest sale I ever made. Every orthopedic surgeon who was ever took trauma call wanted it. And we thought we were going to, in one year, just blow it out. Every sale we made was blocked by radiology because we learned the hard way that the first doctor that reads the X-ray gets to bill for it. And we didn't know that. So every, every deal was blocked. So we had to pivot from trauma. We were e-trauma. We had to pivot from that to OfficePACS or the office digital imaging. And our next big screw-up was we sold 3% of our company to Smith Nephew. But we made the deal with marketing. And then when marketing told sales, sales told marketing to screw themselves. And we had to sue Smith and Nephew to get our, to get our, our 3% back. So we almost went under twice there in the first year and a half. And then after that, it was basically make a sale, make payroll, make another sale, make payroll, make a sale, make payroll, until finally Stryker bought us. But so I, I love these stories. Thanks for sharing.

Good stuff.

Really good stuff. I'll keep, I'll keep going here.

Keep going, Ted.

Okay. Bucket number 5, reimbursement. And avoid at your peril. I found this fantastically complicated chart with the FOCUS Ultrasound Foundation out of Charlottesville, Virginia. And they really nail it because it's a complicated process between your regulatory category, you know, perhaps there on the left, if you have, you know, the breakthrough status, you know, there's advantages to it. Understanding the various codes and the coding process, and if you fit, where you fit in that or not, you know, what the payment is like. If you need a new code, what's the process? This, there should be a timeline zone here because this takes a long time. If, if you don't have it to get through. But there are, there are subject matter experts here. Engage them. Consider this early on to see where you fit, just like Mark's story, you know, the folks that didn't do their research. And add, add a reimbursement strategy and plan to investors, you know, in your, in your data room as you're going out in capital fundraising. My big story is I was part of the team that launched the very first lumbar artificial disc, the infamous Charité artificial disc at Johnson Johnson. They spent $350 million to buy this disc from a European company, and the leadership team and the business development team were all high-fiving themselves about how great this was going to be, that they were gonna close that gap between the number one in spine, Medtronic, and DePuy Spine at the time with this, exclusive motion preservation solution. So I was promoted into the team to kind of launch the product and do all the education. I was in the lunchroom and asked a guy, John Argyro, who's the reimbursement director. I said, John, did anyone speak to the, like, the insurance companies about their opinion on this and how they're going to approach this? Because the price point for that disc was set at 3 times the average market price of a single-level fusion, $12,000 a level versus $6,000, $6,500 for a fusion. And that, that killed it. You know, the, the, the Blue Cross Blue Shields, the Ansems, the Uniteds, they all gave them non-coverage decisions. After a year, everything we built up and, and, and sold and, and, and all the people we hired, we had to, we had to break it all down again. And now it's a Northwestern Business School case study about how not to introduce emerging technologies in medtech and a lesson to everyone else about do not forget about reimbursement early on.

So great story. So how, how early can you start? Can you start before you have a prototype, before you have any regulatory clearance?

At the idea stage, you should, I mean, you should at least consider talking to an expert to say, here's what we're thinking about. You know, let's, you know, let, let's investigate where it's gonna fit., you know, in, in the reimbursement scheme. I, I don't think you can start too early.

Well, I have a headache looking at this. And if it's a, if it's a simple Class II device where there's, you know, predicates on the market, do you still have to go through this exercise?

Well, I think you shouldn't ignore it. You should look at it and see if the, the landscape has changed, if there, if, if things are getting downclassified, you know, again, in your competitive scenario where you fit.. But again, this is, this is something investors have been burned on. So it's one of the buckets they look at. So when you're going out to raise money, be prepared to answer questions about this, whether it's a simple 510 Class II or something else.

Yeah, go ahead, Asher.

Yeah, to Ted's point, so the company I'm working at right now, Ted's familiar with, we're developing a Class II motion preservation device and we're actually creating a new spine procedure. So even though it's a Class II device, even though we have a, you know, 510 predicate defining how you can code for this new procedure using existing CPT codes, whether it's, you know, in our case a new procedure, but in many other cases, for example, like there's a posterior disc replacement device that's very similar to the anterior disc replacement devices, there's no CPT code for that type of procedure. So identifying that even before you've submitted has really influenced how we go about making regulatory decisions and a few other business decisions.

And it impacts your clinical strategy as you're collecting data because, you know, the reimbursement, like you said, you've got to get certain data that you've got to get and you've got to get it published in a peer-reviewed journal article if you're going for a new code. And so get involved with clinicians, get involved with professional societies to get support early on. So next, next category. I kind of lumped two together. These could be, you know, addressed separately. They're so critically important, but I just, I put them together. Regulatory and quality, start that process again also early in the product development cycle and make it an absolute top priority. Work, make sure you're working closely with regulatory, quality, and don't forget legal, you know, experts, because from a regulatory standpoint, if you have to consider compliance and the risk associated with, you know, you going about doing things wrong with how you're setting up consulting agreements with surgeons and have that come back and bite you later, which we've all seen in orthopedics. Implement a robust QMS, quality management system, that complies with ISO 13485 and other relevant standards depending on, you know, the global markets you're looking at. And plan for post-market surveillance. That all needs to be part of your budget, because even if you want to, you know, flip and get the product approved and sell it to somebody else, you've got to think about your startup as if you have to stand alone, stand it up and stand alone on your own, and then commercialize it before you can get an exit. And the bottom line is the buck starts at the top, you know, with the CEO. You cannot, you know, just delegate off and say, oh, I don't know anything about our quality management system, that's our quality manager. No, it comes down to, to you being responsible for it. You don't have to be the expert, but you have to be engaged. And I've seen just disasters still today, companies that are putting weak or ineffective managers or people that aren't really qualified in some of these roles. And it, it's a killer. It's a killer from trying to attract investors, and it's a killer for being able to execute successfully.

Yeah, go ahead, Patrick.

I, I just want to emphasize, I was in a situation, like this with the, with the previous company 10 years ago. This can't be overstated enough how important this, the, the qual— the quality system in particular is. Everyone I think understands the importance of, you know, you can't do much without a regulatory approval, but happy customers does not equal a good quality system. Good clinical results does not equal a good quality system, they're often, they often correlate, but they're not causal. And they, FDA will come around at some point to, to your, your office, to your factory, and it's not the same people that approve the product. So just because you have products on the market does not mean you're good, you're in the good graces of FDA. It's different people that will come around and audit the quality system, and they'll look at everything. They'll look at document management. They'll want to know how you're dealing with CAPA, you know, all of these types of things that particularly anyone who's coming out of like a university-led type of startup or something, you know, things of that nature. The way that universities always document things are not exactly the same way that FDA would prefer they're documented and stuff. And people sort of can— people can get so easily focused on like producing the right product ahead of time and making the product sort of clinically viable and having the customers happy and the patients satisfied with good clinical outcomes. That does not always correlate perfectly into an actual quality system, at least in the eyes of the regulators.

Yep, you've just triggered Dave Saunders.

Uh-oh. This is, this is near and dear to my heart because I, and I, I will agree with 100%, um, universities are not quality management organizations, and the last thing you ever want to happen in your entire life in any parallel universe is to trigger the FDA to actually say that a university you're doing research with is actually part of your quality system because they will include them in the audit and you will fail. And so as a result, the way I mitigated this is my quality management system has phase gates, which I think is probably familiar to most people, but I actually have a phase gate zero that is explicitly for R&D projects And so anything that is being done by any, by university partners is explicitly documented under Phase 0 work, which then by paperwork delineates it from the rest of design controls. But that is, that is such an important issue that you raise because there's so many benefits to university research, but man, if they ever got included in your inspection audit, you're toast. I mean, you might as well just give up. You'll never, you'll never survive it.

Previous company of mine, the CEO, to Ted's point about the buck starts at the top, the CEO sensed that there was some things wrong with the quality system. And in private, I think he may have told the board, but in private he scheduled a mock audit. So nobody was prepared. And one day, you know, a full mock audit team showed up to audit the whole quality system unannounced. You know, obviously it caused some tension within the company, but it caught a million different problems. You know, the CEO knew enough to know that something was off, but he wasn't like, he couldn't, he didn't have a quality background. He couldn't like pinpoint precisely what it, what it was. But there was a million different problems that were found and the company was able to start, you know, addressing those and remunerating them on their own time, not under the, you know, under the scrutiny of a, you know, of a warning letter or something like that.

Great exercise. Proactive.

Yeah. And don't fall, you know, victim to the mindset that, oh, this is, we're a small company, we're nimble, you know, that all that stuff is for big companies, you know, that's— those guys are the department of no, and we're not— it's going to prevent progress. You know, that's fatal, as Dave, you know, pointed out, you know, if it's an academic, you know, spin-out that's still operating as a science project, or you've just got non-real medtech, you know, expert type people that don't understand how important it is. So Get the right people. You don't have to hire them full-time. There's plenty of consultants out there that are experts, and there's some great systems that make it really easy to use, like Greenlight Guru, and all these others have come along and are doing a really nice job of allowing— educating this area as well as providing digital resources to it. So it's just so important, and the smart VCs know that because they've been burned as well. I'll keep moving along if that's just other key questions, Tiger. Good stuff. Okay. The next thing is supply chain and distribution. Again, you got to think all the way through your solution. There's kind of— I found this article and I read it. I thought it was pretty good by this individual actually on LinkedIn, provided a really nice article on the whole supply chain distribution, the 6 key stages from the R&D stage here to, you know, manufacturing, whether or not you're doing it yourself or doing with a contract manufacturer, you know, putting, assembling the packaging, the sterilization, and then the commercial— in the commercialization, go-to-market, you know, how you're distributing it, you know, how you're— what this distribution looks like, you know, between whether it's— we're all orthopedic folks, but in the different areas, you know, what's the best channels to use and how to— what's needed for it. And then post-sale service, you know, training, maintenance, inventory control, just having end-to-end visibility of your whole supply chain is important. And even more so since the pandemic is understanding who's going to make it for you and do you have a backup to that? Are you a small fish, usually like startups are, in a big C, and you're not gonna get the preference and you're gonna get stuck with backorders. You know, understanding you've got different levels of ability to, for your supply chain. And usually sometimes this is all done in different silos within the company. So as the CEO or the leader, you need to pull this together and make sure there's a master plan and convince your investors that you're on top of it. And then in the end, inventory, particularly for orthopedics, is a killer. It's a capital-intensive business. So if you don't have good visibility and ability to control that and you're investing in technology To do that, you're, you're gonna find yourself behind the 8-ball when you're, when you have no idea where your millions of dollars of, of knees, hips, or spinal implants are out there in the marketplace in distributor garages.

That's a good one. It's often overlooked. Supply managing suppliers is really hard for startups 'cause they have no leverage at all and they don't have a lot of choices.

Next bucket is manufacturing. This is obviously a large investment here in CNC machines, but— and today it's, you know, additive manufacturing is big and different ways to do it more efficiently. But generally startups look at contract manufacturers, but really pick your partners carefully. You know, really take the time to do the research just as you would in picking an employee or a strategic consultant. You know, and understand from the investor standpoint, understand your cost of goods, and they understand it's going to be higher when you're smaller, but what does that look like as you project that out, you know, at scale, and can you scale? Is this product that you're providing so complicated that it's kind of difficult to show that you can address that billion-dollar serviceable obtainable market? Because you can't build it. So, I'm interested in any stories or thoughts around this, but this is one of the sort of investor questions that comes up, thinking beyond just what you do initially with your prototype and getting into the market, but how are you going to scale this? Any comments, questions?

I just— I don't have any real insightful comments. I think this is an interesting topic though of when to when to work on your COGS versus, you know, versus the opportunity cost of spending that money elsewhere. That's a— there's no clean answer to that. But that's a— I think that's a— that's maybe that's its own meeting of, you know, of this type of forum one day or something like that. Because that's a— I'm interested in that answer because I don't know what the answer is.

Yeah. Go ahead, Dave.

I'm just— I just figured I'd just add to it. Yeah, I ran an incubator many years ago and one of the things that I would often say is, you know, people often worry about what happens if I don't sell anything. What happens if the customers don't come? And my counter query to that is what happens if you're wildly successful? I mean, right here, you know, how can you scale? People love to say, I hear startup owners say this all the time, oh, that'd be a great problem to have. Well, it could actually be the worst problem you could ever have because if you don't have a scale-up problem, then you've got customers that you can't fill orders to, They're pissed off, they go away, they never come back. And this, this, this manufacturing, this slide right here encapsulates your ability to deliver on what is ultimately your customer experience. And, and if you can't match your market demand, you're not going to get many second chances if you even get one.

Great, great point. It's worst thing in the world is to take a product away from an existing customer.

Oh man.

Yeah, yeah, yeah. I think it's like two categories almost, like ability to scale and sort of like manufacturing capacity. That's, that's one thing. And then like, okay, when do we sort of spend some money to get our COGS down, you know, not manufacturing capacity, but actually, you know, maybe investing in your own machines or, you know, these types of things that are really kind of a sunk cost and almost don't matter if you're going to get, get, get acquired or matter much less, you know, on someone else's kind of manufacturing price line.

Well, Patrick, also it's an important piece of the puzzle, you know, in your business plan on what your margins are. So you might say, okay, they're not great margins, you know, at this level, you know, they're only in the 60s, but we've done some exercises and with our partner, whether it's contract or what we're doing in-house, we believe we can get it to, you know, higher and make it more interesting to the to the Strykers or the J&Js or the Medtronic. And, you know, that's another point I was going to make earlier on quality and regulatory. As a smaller startup, you know, think about, you know, put yourself in the shoes of the Strykers and the Zimmers and these orthopedic companies that have had horrible quality— and Medtronic quality problems and the kind of process that they run to approve vendors. So it's a worthwhile exercise to consider a consultant that is an ex-Striker understands their process and make sure that you got that integrated into your plan, that you're not caught by surprise when you're trying to transition it over to the Striker audit team that's coming in to do the diligence on whether or not they want to buy you.

Yeah, they're not interested in, in spending money. The, certainly, the strategic, the big companies are not interested in spending money to solve someone else's quality problem.

Good point.

John, I was just going to say, this is a— that really ties very much into having your quality system ready, compliant, and dialed in early, even though it's going to be very lean. Because, uh, at the end, right, uh, if you are fortunate enough to be in a position where you might be acquired, all of those things are going to come back. You know, do you— can you scale it? What are the, you know, are your manufacturers compliant with a reasonable quality management system? All of those things. And so that early investment, I think, pays off through a lot of these different points. So anyway, those are my comments.

Last bucket, number 9, is IP. And from an investor's perspective, securing strong IP rights such as patents is essential. And that's important to show and give value to your company. Consult with a patent attorney early to develop a robust strategy. You know, consider trademarks, copyrights, patents can be powerful tools to protect your business. Don't just rely on the fact that we've got the secret sauce. You know, no one else is going to be able to copy the way we manufacture our widget. Invest in technology infrastructure, not just for, you know, electronic infrastructure, which is important too, but infrastructure that supports your business needs and also make sure that it provides robust cybersecurity measures in this day and age, and then regularly update that. So your ERP systems, you know, they seem like big company problems, but if you wait till it's too late, you're still working on Excel spreadsheets and manual systems, it's going to be a whole lot more expensive and painful to get caught up. So look at those options and talk to some of these companies now that provide those technology solutions. And this is, you know, the technology part of the IP, you know, risk, de-risking your company is invest early and look at piloting some things like that for, you know, managing your even your customer management, your intellectual property, and your quality system on a digital scale instead of doing it all by paper.

Yeah, a lot of startups run on spreadsheets too long. Yeah, you know, all their information's in a spreadsheet somewhere. Yeah, Andrea, tremendous options, our IP expert.

Yeah, I would add to this competitor monitoring. You know, check out what your competitors' IP says and put some alerts so you get every time they— something becomes public. Because like, like you mentioned earlier, you don't know where those budgets are going. And part of those budgets are— the IP is going to reflect— going to be reflective of that. And it's already 18 months too late by the time you get to see it. But a lot of times it's earlier than what's out in the market. So it's a good indicator to see what your competitors are up to and what you need to avoid in your product design.

Great comment.

I once got told by a mentor, like, you know, you only get acquired for your IP and your customers. And if you think it's for anything else, you know, you're, despite what the press release might say, you're fooling yourself.

So we're getting to the top of the hour. So the bottom line, you know, as I was putting this together, it's these buckets of risk, that how do you successfully— what are the key success factors to de-risk, you know, these key 9 areas. But picture yourself on the other side of the table. What would you want to know as an investor? You know, what, what are some of the key questions that you're going to ask, you know, and want to know? You know, what, what's the problem your company's solving? You know, how unique or proprietary is it? How large is the market? Like we talked about, and who absolutely needs to have it. What's the competitive landscape? Who's your real competition? You know, what's your business model? Can your team pull it off? And then, you know, the nuances like what are you looking for in an investor? How— what's the fit, the chemistry like between you and the type of investor you want to bring in? How are you going to use my money? You know, how are you going to use your investor funds? There's you know, a list which I'll— Tiger, I'll provide to you. I found a nice list of about 15 to 20 common questions that VCs will ask that Silicon Valley Bank, when they were still around, published, and I thought it was a great list.

Yeah, put that up on Slack for everybody.

I'll send that around, but that's it. So thank you. It's been fun to kind of dive into this myself, and I think it's food for a lot of additional conversation for this this lively group of bone chatters.

That was as advertised, action-packed, full of great stuff. So yeah, Ted, can you upload your slides to the Slack for the members? Okay, great. Excellent topic. We can even, we can do a round 2 if in the future, but any comments? Anybody? Did we cover everything?

Okay. I've got a question if you have a minute, Ted.

Far, yeah, far away. Yeah.

I think it was on your first slide you mentioned like these, these 9 buckets of risk and investors being willing to tolerate some risk of, you know, 1 or 2, but maybe not 3 of something like that. Do you yourself or does anyone else have like a mental model for how to think about what counts as risk? Because like if you wanted to be really scrutinous, all of those things could always be improved somehow. But like, how do you delineate between like this counts as risk and this sort of doesn't count as risk? Maybe there's no answer to that or no easy answer to that, but what are your thoughts?

Let me pull that slide back up.

Great question.

Up here, 9 buckets.

Yeah.

Yeah. What do you guys think?

Execution, I think, is the highest risk, but it's hardest to measure.

Well, I think people is important too. I mean, they really, you know, can't, they take the time to really understand and they do their homework and they gossip and rumor with each other about, you know, who's good and who's not. But, you know, all these metrics you come up with to validate your plan over here, but, you know, like quality, regulatory, you know, ability to have the right people involved with manufacturing and IP, but it comes down to the jockey, you know, and the strategy they're using on that horse or in that vehicle, the driver in that vehicle to make it all happen successfully.

Yeah.

Hey, Patrick, let me say one thing and then we got 3 people in line. You can power, you can power rank your risk. And we used to do that at startups I worked in. And there, there's some risks that are existential that'll literally kill the company and those rise to the top really fast. But go ahead, Dave, John, and then Lawrence.

Oh yeah. I was gonna say, you know, a lot of these, these 9 boxes are really reflected or really do reflect your ability to execute. You go in front of a VC and you start talking about your analysis for market size, competition, reimbursement right there, you're already giving a litmus test on your ability to execute just your basic homework. And so that's critical from that standpoint. In a more kind of philosophical kind of realm, if you think about like a a risk analysis being the likeliness of it to happen, and on the other axis, the impact to the company, you know, an asteroid may be extremely unlikely, but if it does hit, and it's not a matter of if, it's when, when that asteroid does come beelining for the Earth, the impact is going to be catastrophic. And so if you've got that kind of risk out there, you act as though it's going to happen. You begin to immediately take action to figure out what to do. And look at, sure enough, the nations on the planet are actually working. There was a recent successful experiment that actually demonstrated that we know how to deflect an asteroid, and it worked successfully. So you begin to work as though you know that risk is going to happen. If it's more of a moderate risk, you know, this is going to really clobber us and it's a good— there's a good chance it can happen, you know, kind of that mid-level risk. You work on your mitigation. Part of your execution plan should be at least a basic mitigation strategy for what happens if that risk is triggered. And I think being able to identify those things is a particular— it may not be something that comes up in seed or A stage, but definitely when you get to your commercialization rounds, you know, Bs and Cs and things like that, that's going to be scrutinized more and you're going to get nailed with that by the analysts during due diligence. So those are really important things to identify. But it starts here.

Yeah, go ahead, John, and then Lawrence.

Yeah, just a quick comment. I think all of these pose different depending on the project, different varying levels of risk, but they all produce risk and they all can raise their head at various times and be very impactful at any moment. And I think for me, Tiger, I agree with you that likely the best way to mitigate that risk is through the management team and your ability to execute. Because when you have the ability to execute, you're able to execute in all of these basically risk mitigation and all of these buckets. You have the right people, right team and the know-how to do that. And I think, um, for me, then if there was one, one magic piece of this, it's the management and their ability to execute, to manage the risk through all the other buckets. But they can all pop up at any time anyway, and they do.

Go ahead, Lawrence.

Now I was going to say, I think it's, it's interesting if somebody from an investor standpoint, if somebody presented all these areas and said, you know, we've de-risked all of them and there's no risk here whatsoever. I mean, I'd be a little skeptical for one. But I would also think that it's either a fully established market and there's not much opportunity. So I kind of want to see some areas that are risky because sort of risk would be my potential reward. Like if I'm an investor willing to go into a space that has some risk, I think that means there's some opportunity there too.

Good point.

Yeah, it's a— yeah, if it's a— if it's an edgy startup, you're embracing risk and you're going to be rewarded for that risk.

The key these days is finding that needle in today's haystack, you know. The VC community, the word venture doesn't seem to belong in the name anymore. Talk to them, it's like, nope, nope, you're too early, too risky, No, we're, we're, we're a growth capital fund. Okay.

I don't, yeah, I don't think they're serious about, you know, investing right now. I think they're just kicking tires, but it'll come back. Well, that's, wow, that's been a great hour and 7 minutes. Well, thanks everybody. So notes will be on the Slack channel and next week Vinay is going to walk us through through how do you build a clinical study that actually drives enrollment, which will be fascinating. All right, thanks, Scott.

Wrap.

Thanks, Ted.

Good evening.

Thanks.

Great job, Ted.