BoneChat Call #5 - Marc Viscogliosi - financing for early stage ortho companies

live. Mark is back due to popular demand, and I've asked him to share his knowledge on raising capital. Very complicated topic. Mark will try to demystify this subject today with 10 slides, probably could be 1,000 slides, and then we'll open it up for Q&A for everybody. Try to stay on mute, raise your hand if you have a question. You can also drop questions into the chat. So take it away, Mark. Hopefully everybody can see his slide, first slide.

Thank you, Tiger. Can everybody hear me okay? Great, great. Well, it's nice to see many friends and familiar faces here on the Bone Chat Zoom call here. I was tasked with what I think is a damn near impossible task, but I'm going to try my best kind of talk through some thoughts around how to raise capital, what different types of capital funding sources exist. I'm going to say at the outset that there are a lot of terms of art here that are specific to raising capital. If I blow through those or don't explain them well, please don't hesitate, stop me, ask questions. Engage along the way. I think one of the things that becomes really important when you think about raising capital is you, you have to think about the environment and dynamic of what you're trying to raise capital to achieve, because that can really influence the pathways that you choose and how you to pull it all together. And, you know, what's interesting about that is it's dynamic and it changes over time because the capital access markets also change over time. So it all kind of is interwoven together. So with that, let me, let me kind of kick things off here with first talking about equity capital. Now, a lot of us have raised equity capital or maybe have even invested in equity capital. Everything that I'm going to talk about, generally speaking, is in the context of private markets. Public markets are entirely a different animal, but there are some common principles that apply. We can explore those and unpack them in the Q&A. Part of the session. From an equity capital perspective, kind of when we first think about who are the earliest investors in companies, these are seed and angel investors. They generally help with first prototype, proof of concepts, initial IP filings. The good news is in the last decade or two, this— a lot of these seed and angel groups have formalized into structured investment groups. This used to be a lot like herding cats, raising friends from— raising money from friends and family. This has really become a lot more of a process management thing. I think the good news about that is it pushes us to hone our ability to tell our stories in a sharper way and at least articulate what we're trying to achieve earlier in the process. Beyond seed and angels, or maybe even concurrently with seed and angels, you'll see high net worth individuals and/or family offices. Generally, these groups can invest in all stages of a company's life cycle, but usually want to see something beyond quote unquote napkin risk and usually want to see end of proof of concept I would say in my experience, this has been the fastest growing part of the private capital markets in the last 5 years. A lot more family offices are investing in alternative asset classes like venture capital, like growth equity and private capital, and directly into companies. Now, that's good and bad. In the sense that you're kind of back to herding cats. But I think one big difference here is these family offices and high net worth individuals of this caliber tend to write bigger checks and can finance through longer-term milestones and sometimes bigger risk scenarios. Now moving on to the institutional side of equity capital, and at least in the private markets, you have traditional venture capital, which will invest in from Series A through whatever, um, and they're investing as early as prototype stage or proof of concept. Um, they're generally financing to, uh, what I would characterize as value inflection points like regulatory submissions or early clinical results or some other mechanism that could potentially ultimately lead to an exit or a return on their investment. You know, what's interesting is that there are a lot of stats around venture capital, but there are a lot of groups that come and go and kind of ride the wave of weather patterns, if you will. If you have the opportunity to work with venture capital, one of the great kind of secrets venture capital, institutional venture capital firms are the ones that have been around a really long time, decades. They've institutionalized the process of thinking about value inflection, risk management. Groups like NEA, which is New Enterprise Associates, Sequoia Capital, there's a few of these groups, Venrock, that have been around for literally, you know, 20, 30, 40 years. I think if you're talking to venture capitalists and you have the ability to get in front of some of these groups which have this long established track record, they have a real competitive advantage over their newer venture capital investing peers. They tend to live through longer, complex economic and innovation cycles. Okay, past VC, you have some corporate VC arms and corporate VC funds. This is generally done as, as a little bit of a ruse to pre-acquisition. Of course, they want to make a return on their investment, but they're strategically oriented. The, the oldest and probably most well-established name in healthcare is JJDC, Johnson Johnson Development Corp. But you see this now in many areas. Medtronic has a venture fund. You know, Intuitive Surgical has a venture fund. They just raised a second one. Pharma companies have many venture funds. So another burgeoning equity investment class. Now, beyond venture capital, now we're moving into what I would characterize as more of commercial stage venture, commercial stage private equity. And there's really two big groups there. There's growth equity and private equity. The distinguishing characteristic to me between those two is profitability. Growth equity tends to invest in revenue-generating, maybe early commercial, maybe potentially high-growth revenue companies that tend to be EBITDA negative. And if you don't know what EBITDA is, it's earnings before interest, taxes, depreciation, and amortization. And then private equity tends to be groups that are investing in revenue-generating, EBITDA-positive generally cash flow positive businesses, very different risk profiles between them, but they tend to also write much bigger checks and work through complex capitalization structures. And then beyond even private equity, there are sovereign wealth funds. And sovereign wealth funds are like the government's treasury investing in massive-scale investments in platforms. Traditionally, when we think of sovereign wealth funds, we tend to think of them as being Middle Eastern, driven from Abu Dhabi or Dubai or Saudi Arabia or Qatar or, you know, Oman, but also other parts of the world too. Malaysia, Temasek from Singapore, China has its own sovereign wealth funds. So these groups tend to really invest in thematic platforms, big, big ideas. Like in healthcare, they're buying entire health systems, they're buying entire, you know, ASC chains. They might do a division carve-out from a Medtronic or J&J that's hundreds of millions or billions of dollars. They're writing big, big equity checks. Mubadala is another great example there from Abu Dhabi. So these are— now there's obviously little deviations and derivations on these themes where people carve out their own niches, their own levels of expertise. But these are examples of the private equity capital.

Mark, have you ever personally worked with a sovereign wealth fund? That one just seems fraught with international risk by definition.

Joe, thanks for the question. Many. And what I would tell you is while it initially seems scary, many of them are supremely sophisticated because they hired Americans who went to American business schools. They've hired entrepreneurs. The entrepreneurs are advising really the, the head of finance or the head of the finance ministry on how to deploy this capital. They've created institutional portfolio management frameworks to help manage their investments. We've worked directly with Let's see here. Zoraya Capital and Khazanah National out of Malaysia, the Oman Investment Authority, which was formerly known as the State General Reserve Fund of the Government of Oman. They've invested directly in our businesses as well as a couple of other smaller sovereign wealth funds that are kind of spinoffs of the parent I will tell you that we've had delightful experiences with them. Many of them want to explore nation building in their mandate. So they want you to try and invest in support, training, manufacturing, education in their country. That's what they want to try and encourage. Some, I would say most, don't require it, but they encourage it.. And so, you know, that becomes part of the discussion as well too. And if what you're doing does that, great. Joe, did that answer your question?

It's much deeper, of course, but for the sake of our hour-long presentation, yes, it certainly does.

Yeah, sorry about that.

It's going to go long.

Let me touch on debt capital. The way I think about debt capital from a from a private standpoint is that there's 4 main groups: commercial banks, senior secured structured credit, mezzanine, and venture debt. From a commercial bank standpoint, they're obviously the most conservative lender. They need predictable cash flow generation, and they're very strict about metrics to leverage ratios, interest coverage, those sorts of things. And you have to be able to demonstrate payback just strictly out of cash flow. If there's any risk to that, I think you're probably not the right partner for them. When we look at senior secured structured credit, usually they're subspecialized in an industry niche. They're an alternative to a commercial bank, if you will. So they do want to see strong cash flow and/or a strong underlying asset base that would be able to cover their principal in the event of a sale of the business. So that's how they protect their risk. That's how they think about risk. Mezzanine lenders, usually this is the next level below the senior debt. Sometimes it's secured, sometimes it's unsecured. They, they tend to always be above equity in the capitalization table waterfall. Generally, they tend to be much more active in a low interest rate environment. Interest rates today are 7.5%, 8% at a base. So senior secured is typically looking for somewhere around 11% to 14%. Mezz debt would target somewhere around 17% to 20%. From an IRR point of view. And then in low interest rates environment, senior securities, they tend to be looking for 7, 8, 9%. Mezz debt tends to fall back into where senior securities currently, 11, 12, 13, 14. So that, that's kind of the economic relationship between the two. And then there's venture debt, which is investing alongside a heavy venture capital equity syndicate. They obviously are willing to take risk, but there's other economic considerations there in the business model of venture debt. Maybe you're partnered with— and Silicon Valley Bank was famous for this. They had a venture debt arm. Maybe that was part of the problem. They had a venture debt arm that would lend money alongside all of the traditional equity investors. And, you know, it wasn't necessarily about cash flow generation because they would assume, you know, an exit of the business through a sale or an IPO or something of that nature. So that's debt capital. Any thoughts, questions before I move on to the next? Let's talk a little bit about non-dilutive funding or maybe minimally dilutive funding. These can exist in the form of grants and/or partnerships. SBIR, the Small Business Innovation Research grant, these tend to be innovation-driven. You can publicly search up who, which groups provide SBIR grants. You can apply for the grant. It's an open process. There are group— there are expert SBIR writers who are very good at knowing how to get SBIR grants effectively. So you'd want to work with someone like that to be able to create, um, non-dilutive funding. Of course, BARDA and Department of Defense are government-sponsored initiatives that usually focus on investing in really newer front-edge leading material sciences. That can ultimately be used in the military or ultimately be used for the benefit of the government. Sometimes they can be leveraged into government customer relationship. Oftentimes, because you're dealing with the bureaucracy of the government, it can be a pretty laborious and long process. So just kind of keep that in mind. SBIC, Small Business Investment Companies. These are private investment groups that are partly subsidized with investment dollars from the government. They tend to have some flexibility with equity and debt structures, but there are some constraints related to having them as co-investors because of programmatic limits in the— framework of the SBIC activities. And then there are foundations, particularly relevant to healthcare unmet needs. There are groups that provide, you know, funding for businesses trying for equity and health equity, equality, or diversity, equality in healthcare. If anything of what you're doing is connected to that, Foundations do provide a, a great source of funding to support that, especially in economic disadvantaged areas. So those are other frames of thinking for grants and partnerships. For other types of non-dilutive financing might be collaboration and rights. And, you know, there are development and R&D rights, and usually these are seen with multi-product, multi-indic— indication platforms, funding in exchange for commercialization of a specific indication. Sometimes you'll see this with a materials technology that can be applied. In the case of orthopedics, let's say there's a materials technology that can be applied to hips and knees and shoulders. You might be able to provide— get development funding for hips and license out the hip, right? But apply that same technology to your knee platform and commercialize your own knee product portfolio. We're seeing a lot of this actually in AI technology where people are applying it for different specific uses— large joints, small joints, spine, that kind of thing. Distribution rights— this is funding in exchange for commercial rights. Geographic considerations here are Europe and Asia and specific countries. You see that a lot more in pharma. Than you do traditionally in devices, but it does exist. And then there's co-promotion customer segmentation platforms where you see, you know, funding provided for in exchange for— let's say you have a product that can be used by sports medicine physicians and pain management physicians, for example, like an OA injection. Some one partner might have the sports medicine physician as a customer that they call on, and then you might have the pain management physician as a customer who might not necessarily be sports medicine. Those are customer segmentation examples that can provide maybe using the same products but also provide a different source of funding. You know what I didn't say in, in I'll say it now as it is occurring to me. Why I'm talking about non-dilutive funding is because it goes back to this concept of equity capital and the maintenance of your own ownership or protecting your investors' ownership in the business over time. If you eventually do want to pay out dividends or sell the business or take it public, that becomes relevant to nondilutive funding. Let's see, vendor partners, great opportunity here for co-investment partners. You have manufacturing and machine shops that are potentially great partners, but you need to make sure the investment is independent of cost of goods. I see this mistake frequently where people try to connect the investment to drive down the COGS. Be careful of that. You really want the COGS of the business to be independent of the investment viability of it for strategic reasons. Later we can talk more about that.

Marco, I've also seen vendors that trade basically supply for equity.

So yeah, absolutely.

Been some big payoffs with that.

It is. It is. And, you know, especially if they're early in establishing, building your inventory, let's say, you know, your initial inventory builds a few hundred grand and then you don't really want the cash flow of that. You convert that into equity. You've got inventory on the shelf and that can then be used as you sell that inventory out or down. That can be used to finance the business going forward. And it's, it's very, very effective. It's a great point, Tiger. And then, you know, health systems have been investors. Ascension Healthcare has an investment arm. Kaiser has an investment arm. Insurance companies have investment venture groups. Sandbox Ventures traditionally invests for the Blue Cross Blue Shield companies. They won't put themselves in a conflict position with an insurance business, so they won't invest, for example, in device technologies. They will invest, for example, in population health management platforms or digital health platforms. Distributor partners can be a great investor partner for you because they really can be helpful as you think about customer relationships. But it's a double-edged sword because sometimes distributors are focused on what's important to selling effectively to their customers. That might not represent the full universe of customers. So there's always some consideration there about bias that you need to kind of keep in mind. And then physician partners could be great investors alongside you, but, but be warned, they could be excluded from using your products by the health system that they're involved with. And certainly Sunshine Act disclosures impair potentially credibility. So you've got to kind of think through some of that over time. Some things you might want to understand now, having kind of painted the landscape of the different types of investors, let me, let me add some color to the canvas about what you should think about in terms of, as you proceed to talk to investors, what to keep in mind. Investment objectives. So each type of investor, whether it's equity and each of the different types of equity investors, each each of the different types of debt investors. They all have different investment objectives. You really have to have candid conversations around what is their expectation on their investment objectives. What have they promised to their investors, typically their limited partners, that they're going to generate for them? Because you want to make sure that there's consistency in terms of what you're trying to do versus what they're trying to do. Horizon timing. You really want to make sure you have very clear discussions about how much time until a desired exit. Some might be at the end of their fund life, at which point, you know, they might be saying, hey, we gotta, you know, we want to exit in a year or 2 years. That's pretty naive. Most won't do that. But, you know, understanding if something is a 3-year, 5-year, 7-year horizon should really help contextualize how you prioritize your investments that you're making in the business to, to align with your partners. How— oh, this one I really love. How has their fund or group performed to date? And what I'm really saying there is talk to their other investor investments that they've made. Talk to their other CEOs who— that they've made investments in, or their other management team. Ask those groups Hey, what's it like working with this fund or this general partner from this fund or this group? How frequently do you communicate? How often do you talk about issues? How engaged are they? Because I'm going to come back to something that I think is absolute gospel to me in a minute. But you want to get a sense for not just your interactions with them, Or to put in a crude analogy, not just what it's like to date, but what it's like to be married to them and to contextualize, you know, what it's like to live and work with them in that way. And to that point, you know, alignment around expectation, talking about check size, initial and follow-on reserve, that creates a really unique insight into how they think about risk. And really what you're trying to do is unpack how— because investors that have deep pockets can also have short arms. So you want to make sure that you always are thinking about how your investor partners think about risk, because that, that is really important for the follow-on financings that you're going to want to consider. Okay, this is a painful topic. Rights, terms, and conditions. What are their veto rights? What are their control provisions? You know, there's that old adage, 'He who has the gold makes the rules.' Well, you know, I have found really good, sophisticated partners are partners. And, you know, there are investors that want control provisions, they want control rights, and that's important for them and their LPs. But you really want to find partners who are willing to share control and work through conflicts. And that means really understanding veto rights and where they can bring down the hammer on you. If they don't like what's going on. Understanding that really unpacks the psychology of how they will help you or not when the going gets tough. And so you got to kind of contextualize a little bit of that. Uh, that comes down to expectations. While you may have had initial conversations during the dating phase, During the marriage phase, they might be quick to want a divorce if there are issues, or if they want to, they're willing to work through the problems, you think can help contextualize working through the challenges and roll up their sleeves and contribute with their network or relationships or experience. Time availability to commit and what value can they add. Everyone's money is green. But not everyone's money is valued the same. And what I mean by that is there's a lot of ways great investor partners can contribute and help make the business successful. Now, that is a mindset characteristic of an investor that you really want to explore. Are they partners beyond just being a capital source? 'Cause if they are, and it makes sense about what their network is, how they use it, what they do with it, that could be an accelerant to value creation for you in a way that can be meaningful. So you wanna help frame, and it's a difficult topic because many investors think that they can add value. Many of them believe that they can add value. But you've got to really pressure test that and develop those thought processes in a way that uncovers the hidden aspects of the insights of their network, the insights of their experiences to contribute and be able to call upon it. Because you have to have active conversations with them along the way to do that. One or two more slides, I promise, and then we'll open this up. Some hard lessons learned. Painful lessons. Most of it's around debt. That's— if you're traditionally an equity person, that means you're an optimist. If you're traditionally a debt person, that means you're a pessimist. And it's a really interesting psychology that people have to think about and manage to the downside risk because their mandate is to not lose principal. Equity people are investing for the upside. And they're investing to drive to the optimal outcome. So reconciliation of that tension becomes an art and a skill, and you've got to be able to learn how to do that. I would say only take on debt when you're proven and validated. Business model can confidently demonstrate paydown out of cash flow over about 5 years. Don't try to take on debt when you're relying on a sale of your business. Or to say, well, if we do debt now, we can always refi it out later. That's never a great value proposition. It works. It works often. But don't try— try not to index on that. Obviously, if you're EBITDA positive and you're growing with lots of opportunity for margin expansion, that's great because those can be risk mitigators. And with debt, you really want to understand who are their LPs and what are their expectations. There's a concept in the credit world. Are they loan-to-own? So understanding if they are loan-to-own means that they're willing to take the keys of the car from you and take control. You've got to understand if they're that type of investor, not that there's anything wrong with them, but it's a different sort of mindset about how they think about risk. Check size and initial and follow-on returns are, are really important here. I think I've talked a lot about this. I think the logarithmic helping is, is what's important there. Some advice to take with a grain of salt as an operator, you really want to focus on COGS from day one. I believe in that. Some people don't. I think if you integrate COGS into the design process, even before design freeze, it reorients the thinking about the things that you can control. And you can work intently to reduce COGS through simplification of complexity and moving parts and change— take into account the site of service dynamics like David talked about at the ASC, or even medical procedure rooms or office-based procedures. You really wanna focus on scalable and cost-effective physician customer training. I really believe in that. Obsess over a simple value-added sales training process. Now I'm gonna say something that's controversial. I always invest in sales before marketing. Sales training, to me, in my humble experience, is the mo— one of the most underrated investments you can make. Now, I happen to think that succeeding in sales in the future will look very different than it did in the past. There are all these new technologies of how to engage with our customers, talk with them, develop our relationships with them in a way that has upended the traditional model before. So there's opportunity there. I always like to focus on understanding what is the cash conversion cycle from work in process inventory that's kind of developing to finished goods inventory to selling the inventory. How long does it take to sell? And then ultimately the cash collection, because that's where your financing gaps are going to show up and be painful if you're not on top of it. And then I like to Also deeply understand CapEx, and specifically as it relates to devices and orthopedics, set cost is everything. Don't forget the handling of the set, the workflow of the sets, the passes of the instruments. You know, what is the workflow for sterilization and not? How do you move the inventory around?

We heard, Mark, we heard that loud and clear from David Kay last week. It— you got to make the customer's life easier. You got to reduce their costs. You have to improve their outcomes, or you have no chance.

Streamline the SKUs and the instruments wherever you can, um, I think becomes vital. So that— those are the slides. I know I covered a lot, and, um, but hopefully we can now transition to, um, discussion and, and conversation.

Excellent. There's a lot to unpack there. So everybody, there's a lot of people that are raising money now or going to have to raise money.

Um, we're always doing it.

We're always doing it. Yeah. Somebody jump in with a specific question. Otherwise I've got a couple from email actually. All right. I see a hand from Phil Sales. Take it away, Phil.

Thanks, Mark, for that overview. That was great. And thanks, Tiger, for putting this together. I had a question about the— in an angel round or a first serious, what I'd call OPM, other people's money. One of the struggles we've had is finding— we've got a lot of minnows that want to follow on. Is there anything that we can do outside of creating a really good data vault that would facilitate getting that first investor that's gonna do the diligence? You know, an angel round, you're not looking at a big check. You know, it's big to us, but you know, for, for, for, you know, institutional money, not necessarily big. Or for someone that invests lots of money, not even institutional. Do you have any tips or comments on maybe anything you could do or a company could do to create an easier path to due diligence outside of a great data vault? Is there anything, any tips or tricks?

So 2 questions and a follow-on comment there for you, Phil. When you, when you're talking about angel round here, you're talking about looking for a lead investor in an angel round. That's correct. Yes. Okay. Um, and now just to clarify, are you talking about like a formalized angel group like Koretsu, or are you talking about more of a traditional, um, family office or something like, and more of an institutional thing?

But both, if you could comment on both, that would be great.

Okay, so this is the art, right? A lot of followers will follow a lead investor. So how do you get somebody to become a lead investor? I think a couple of things to really want to pay attention to. You have an enormous amount of pedigree in the well-established brands. It's hard to get their attention, right? So while I said those are typically the best institutional investors, interestingly, the dichotomy is the newer funds, the newer VCs, the newer high-net-worth family offices that want to make a name for themselves. This is their opportunity to be a lead investor. Okay, so I'd look for conversations to start there. And to start with a step in that direction of partnership with some of those groups. And, you know, Phil, I would encourage it's not necessarily the data vault that convinces someone to be a lead investor. What convinces someone, in my humble experience, to be a lead investor is this right here, this connection. Can they relate to what you're trying to do? Can they work with you? Are they willing to invest the time and the capital and the partnership to be with you through that journey? And sure, the opportunity's got to make sense and the Data Vault's got to be good. But ultimately, I think it comes down to, yeah, I want to work with this guy and I see value in partnering with this person in a way that can help drive the business, not just help me with my investment return, but they can help me build my network, my relationships in other ways too. I think that give and take is helpful.

Thanks a lot.

Is that helpful, Phil?

Yeah, that was really helpful. I mean, we've also seen with the family office groups, I think what you've said resonates with me in that they're also invested in causes as well, more than, you know, if they're more philanthropy vectored, if you will.

I would say though, be careful to not make the cause your story. People fall into that mistake. You've got to have a solid business value proposition. Where the cause is an enhanced benefit.

Yeah.

Yep. We, we've sort of focused on that. Great advice. Thank you very much, Mark.

My pleasure, Phil.

All right.

And I look forward to talking, follow on, following up with you some more on SUM-8, Phil.

Okay. We'll, I'll be in communication.

Thanks. Excellent.

All right.

Next question up is John Adleman. Take it away, John. Take, get off mute.

Hey, sorry, sorry. I'm slowly becoming my dad.

Where's the mute button?

Anyway, I apologize for my screen. I'm looking rough. I've got my welding shirt on, so I was like, I don't want to ruin the scene.

Hey, I'm casual here. I've got a beard going, so don't worry about it, Joe.

All right. Awesome. Well, Mark, this is actually extremely helpful, and I love this because it confirms a lot of what I've experienced, but it's also a big chunk of learning. As well. So both really helpful. One of my questions is kind of an overall question is, you know, there's a lot of talk about how tight the capital markets are and certainly we understand interest rates are impacting that greatly. But I wonder if our— a two-part question here. Can you give us a quick understanding of why that is in the VC and med device space? So why is money so tight outside of interest rates? I think I've heard some reasons why, but no one's really been able to tell me. And then 2, are there indications that we could all kind of look at for kind of a loosening of that market, or do you think kind of the tightness will go on for a long time?

A couple of things. First of all, love the questions because I think they hit at a hard truth in a couple of ways. I think the tightness in the medtech VC market is fear, um, not necessarily connected to interest rates, connected to exits. You know, for, for a long time, so much of medtech investing was driven by M&A. Well, when corporate balance sheets become more expensive because of the cost of their capital is rising they can't deploy cash. First of all, investors hate it when they buy things with equity, right? Public investors hate M&A when big companies buy things with equity. They prefer them to use cash. Well, when their weighted average cost of capital is increasing, what happens is they say, you know, we'll, we'll park on the M&A process for 6 months. Well, we'll quiet down for a year. Now, what happens when that happens is that seemingly seems small to us. Well, that really screws up IRRs on these funds, which is what is the big driver for their investment return. They have to sit in these investments another 12, 18 months longer. Their, their time value of money really starts to be impacted. So they're like, until we see an opening in more M&A, which J&J just did a deal last week for a non-revenue-producing company. That was great. Um, you know, I think the more we see that kind of stuff— thanks, Colleen— um, the more we see that kind of stuff, the better we are to, um, see the signals that once M&A starts to loosen and unfurl, we'll start to see more VCs willing to step in and take the risk and and deploy more capital. But I will tell you, John, if VCs are sitting here saying, well, you know, it's interest rates or what, they're selling you a line of baloney because it's really about they are watching their portfolio for M&A exits and they need to concentrate on that before they're willing to loosen the purse strings on some of the newer opportunities.

They need something to hit first.

Yeah, Mark, thank you. That's, that's what I had heard and what I suspected, but I wanted some kind of confirmation that essentially the VC folks are sitting on their portfolio and they need some exits to move into the next phase. So all of us out here who are trying to raise funds are experiencing that tightness because the exits have been slow. Is that, is that fair to say?

100%. Okay, so when— sorry, you were saying something and, and I— it got broken up. Joe, did you have an interest?

I was adding on to what— just summing up that they need a hit first to free up the equity.

And it's not— I would— I wouldn't go quite so far as a hit. I'd go confidence that hits are coming, right? And that really is where They're, they're watching the, the big M&A boys and girls willing to do their work and willing to engage.

So when is the fear— there's a fear and greed cycle, obviously. When does— when is it starting to turn? I've heard late 2024.

No, I think, my opinion, it's going to turn early '24. Really? So, well, there are two things that are kind of jumping out at me there a little bit. One is we're starting to see a little bit of a resurgence in biotech M&A. And while it's not med devices, it's often a good leading indicator that you start to see, because mind you, these, these big M&A BD teams, they're looking at all M&A and BD in all of healthcare. And if they're seeing investor sentiment support M&A transactions, you know, then they'll be more inclined to continue to drive it their way. I think people feel a lot more comfortable that interest rates have stabilized and now start— should start to return down. What— as that starts to happen, you'll see the lowering of the cost of capital on the corporate balance sheets, and, and you'll see greed start to kick in more. And I— my guess is you'll see more of that in 1Q and 2Q, not 4Q. Okay. Now, having said that, I hate presidential elections because moving into a presidential election freezes people. They freeze, they start freezing in like September and they start not doing much until they see who is going to be elected president and start figuring out the business implications of that. Personally, I hate it very— I've, in my opinion, I've seen very little over 5 or 6 presidential cycles, very little real influence on the business dynamics of M&A. There are implications on taxes and economic stability, but, you know, usually M&A tends to be more consistent regardless of who is president. So additional comments, questions.

I think next up is Alyssa, and then David Kay joined us with a question. So take it away, Alyssa.

Thank you, sir. I appreciate it. Apologies, I'm in my car. I have to pick up my son. My question is, when speaking with some executives from very large firms, they— one in particular comment was, are legal team or their legal team can kick out even the best deal based off of some red flag terms in, in contracts and the way the company's set up and so on and so forth. What are some of the red flags that you look for when, when looking at companies to potentially partner with?

So, Alyssa, you bring up a great point. Generally, I will tell you that The BD person who's saying that to you is trying to manage your expectations, but also they can't manage the internal process. Legal— most legal teams have the power to kill deals. The question is whether the company lets them or not. Okay, so it's really important to understand the political dynamics there. I would generally say if you have a really good lawyer, not a contracts lawyer, an M&A lawyer who really understands these stuff. So typically, um, good deal lawyers know to bring in the appropriate contracts lawyer to look at your HR contracts and your policies and your vendor contracts and all that sort of stuff to facilitate deals later. See, what's interesting is people always think, well, I need to get a good corporate lawyer. And while yes, that's true, I would say you learn a hell of a lot more from a great M&A lawyer that's willing to work with you and bring in their partners or other groups to help solve and position you well for M&A deals because they're the ones that see it. Okay, a little— that's a little nugget, I hope, helpfully helpful advice for you. And I would say, Alyssa, the moment a BD person says to you, well, legal can kill my deals, I would say, say in your head, well, then I'm not talking to the right person because that person cannot get the right buy-in from a business standpoint to get a deal done. I will be— I will say something very strongly opinionated here that I want to say respectfully. We bought a business one time that was under indictment. Under indictment. Now, think about that for a minute. If there's any reason to kill a deal, that is it. So you make the lawyers get the deal done regardless of that. Say, I'm not accepting that there isn't an answer here. Let's go find the answer. And they work through and you work and define risk and you segment who You know, pays for what risk, that kind of thing. That's where really good lawyers can make a big impact on it. Okay.

Yeah. So I talk to startups all the time and they're, they get teased by the business development teams in the big companies because they, they just get stuck in the cycle of meetings and they don't know if they're one on the list or number 37 on the list. They have no idea. And I get a feeling a lot of the BD teams just need, they need projects to work on, but they have no intent of ever funding or acquiring the company. How do you, what's the tell? What's the tell? Yeah.

It is scary to me when a BD person has been a lifelong BD person at that company.

Yeah.

Because all they really are is a process manager.

Process manager. They're not the decision maker.

Yeah. They're not the decision makers.

So what you Really, I try to advocate whenever our portfolio companies are getting ready to go sell or get acquired or whatever, the relationship isn't with the BD person. The relationship is with whoever's going to own the P&L of the deal. It's some division president, some, you know, division general manager, somebody that has P&L accountability. To the transaction post-deal. And that is not a BD person. That is someone— and they have to believe in the opportunity because they're signing up for the expense charges, amortization charges. It's hitting their performance bonuses that they're accountable to.

But the small company may not have access to that P&L owner a lot of times.

I— so I hear you on that, Tiger. It's your job.

You—

if you can raise money and you can recruit a team, you can sell your vision. Sell that BD person to get you in front of the P&L owner.

Got it, got it.

Gotta push that. Well, that was—

thing was that comment came from, uh, an owner, a P&L owner, so Um, and he said legal person can kill the deal.

Yes. Then I don't trust the, then you're probably talking to the wrong, the, the wrong level of credibility there.

And he, well, and he, he specifically said, um, based off of shareholders, he goes, he likes to help. He wanted to help bridge the gap between, uh, to soften the impact of How much legal can kick the deal back? So he wanted us in, in that sense.

I hear you. I think, you know, I think he's being polite, Alyssa. I don't think he— I would not waste your time. I would just say, listen, when you're— you know what we're doing. I'm not going to push when you're ready to talk and learn more. Then I'm here for you, but I'm going to go execute my thing.

Play hard to get.

It— yeah. Okay, next.

That's my read.

I don't know enough. If you told me the— and I'm not asking you— if we talked about who the company was, who the person was, and if I knew a better sense of the dynamics, I probably could give you hopefully more precise advice. But those are kind of my instincts there. Sorry, that's one of the puppies. Um, next to me.

All right, next, next hand up is David K. I'm glad he got out of his board meeting.

Yeah.

Yeah.

Hi there. Hi. We were talking about commercialization. I like all that. Um, and controlling our COGS and, you know, right now we're just finishing up for FDA submission. So yeah, we've, we've been thinking about this for a long, long time with Resuvant, which is the, uh, uh, atromatic skin closure system. Um, so yesterday I actually did two different interviews and I invoked your name on one of them, Mark. Uh-oh.

Yeah. Hopefully they didn't attack you.

No, no, no. This was the JOI, which is orthopedic surgeons who want to do things, right? Uh, one—

I'm a Christian bomb.

Yeah. Yeah. So, so one kept saying, I have ideas, I have ideas. I said, well, I look at it as problems and then solving the problem. With that idea. Not, not that. Then there's this huge focus on patenting. Patent, patent, patent, patent. And that's when I invoked your name and I said, okay, first off, let's talk patents. There's design patents. They're great on a wall. That's about it. And then, you know, utility and method. And I said, oh, by the way, there's also trade secrets. So you have to have a very clear strategy when it comes time to protect it. But this is not your sole thing. Never got around to talking about the costs involved to create a successfully commercial operation. That never came up. They don't understand.

It's a bit scary because that means that they're not thinking about what the customer needs are that are important that they're solving. They're more thinking about these obtuse value creation concepts, which are good and important, but they're not primary.

So whether it's they want to do that on their own or they come to you and say, hey, Mark, I've got this great spine idea, can't you get it done? Not understanding the level of commitment you have to make to do something that seems superficially so simple. So I think there's definitely a lot of room to continue to pursue this. And I think the take-home for those, you know, on this call is the people who were on the one last evening are those KOLs that you all go to. And when I had OrthoHelix, one of my primary missions was to very clearly inform all of my friends, the KOLs, this is how the process— this is what we're going through right now. This is the timeline. This is the cost associated with it. I wanted to educate everybody so they understood. Because the better they understood, the better the team was. But I invoke—

You're bringing up— wait, you're bringing up a brilliant point. I think part of where things break down so frequently is because people don't have that understanding. And if you're saying, hey, here are the problems. And by the way, here are the rationales for why we made the decisions we did. They're helping you solve that stuff looking forward in a great way. That's a great point, David.

Yeah, but, but again, I just think about what you just presented now, what wasn't presented last night that they needed to hear. If, if whether they choose to work with a company, present their solution to a problem, not the idea, the solution to the problem, or do it on their own, the, the lack of understanding that they had was a little bit scary. Now, I finished up saying, look, that we are in you know, the tipping point. I've said this before, and that presents massive opportunities if you can leverage it properly. And that's not going to be an easy thing. You know, it's one of those easy things to say and very difficult to do. But we are in it, whether it's the ASC switch, the lack of funds, lack of manpower, you know, insurance issues. Take your choice, you know, as far as where to go. But we're in it, and that presents a lot of opportunities. For some and, you know, death to others, basically. So, so, you know, your comment there, you know, you're talking about just the capital funds needed to, to proceed and how that's changing and how difficult that is right now. So, you know, all real, real important. But like I said, I wanted to let you know I invoked your name last night.

Where are you? Where are you with your fundraising right now?

What So, so again, which one?

Um, yeah, the, the, the, uh, I guess the infection, the skin.

So this atraumatic skin closure, we're going to be doing basically a Series A-2, and that's a very relatively small round. And then we plan on, um, towards the end of '24, a true Series B for, for a broader commercialization. Um, but we want to get You know, we've got our— we have our metrics that we're looking at that will create, number one, value for the investors, and number two, actually enhance our valuation with very measurable metrics. I mean, things that you can say, wow, they did all this, this, and this, you know, they're bringing value, and that justifies that valuation now. Um, so, you know, we want to be very careful how we structure our fundraising, uh, with the, uh, with the little surgical robot. And, and again, uh, Mark, this is not what's on the market, and I agree with you with what's on the market. Uh, this is very different. We're waiting for our lead investor. We're really, really close, really close, and we've got a whole bunch of people that will finish up the round. But boy, whether it's the end of the year or some other things, but, um, it's, it's, uh, that's been the challenge for us too.

Bill was talking earlier, I think before you had the chance to join, about How do you go about the process of getting a lead investor? Because that really is where the art is. And ultimately, in my experience, aside from the investor having an interest, I think the personal dynamic— do, do they want to partner with you? Do they feel like they can work with you? Can you help them in some other positive way? I think those things that resonate Those aren't hard and fast things, but they're, you know, feeling of, yeah, this is one that I want to take an active role in. I want to own and be a part of this journey. And that, you know, those aren't the established guys. Those aren't the guys who've been doing it for 30 years because they want to do less of that. It's the ones who want to make their name. They're the up-and-comers. And they want to differentiate and create winnable stories for their LPs that invest in them. And so if the more you can get to that level of connection to a potential lead investor, the better.

Yeah, I agree. And I would put it this way, it's creating an internal culture of trust. And whether it's trust with investors, whether it's trust with users, trust with the entire organization, there has to be trust.

One of the great books, if you ever get a chance, is called The Speed of Trust. Yeah, and Brian, I mean, that's such a good book. We lose, we lose sight of, and you know, the pandemic screwed all that up, right? Because so much of trust is in the relationships that we build and the personal interaction. Um, but yeah, that, that totally agree with you, David.

Yeah, yeah. So I'm sorry I missed the first part. I'll catch it on the, uh, YouTube.

Yeah, watch it, watch it in a couple days. Uh, so Lisa has a question.

Uh, yes, that's really fast question. Um, I wanted to ask, um, like, in your experience, what are the most common reasons why VCs would cancel and decide not to proceed after soft commitment? Specifically with angels.

That's, that's a, that's a great question, Lisa. I would say I try not to make those commitments unless I'm certain. You really, you really, I, I try to be fast to a no or fast to not, it not being a good fit. Because I know, and, and you know how actually, if I were pitching me, if I were pitching me, the thing that I would really want to understand about myself is I would put the pressure on me to see how I can help make the other version of me better. And that's a very dangerous sort of thing to do, is to be able to pressure test whether the investor is worthy of you. But that's kind of the concept. You want the investor to feel like, you know, the entrepreneur believes in their mission. I believe in their mission. I want to help, but can I help? And then that becomes sort of an interesting thing. Then, then I start thinking about ways, okay, here's how I think I can help here, here, here. And then I want to do that, right? And that's, that gets fully baked into the commitment, right? Because if all it's really about is the investment transaction, It's easier to say no, but if it's about all the other intangibles— this is a really— I got to think more about this, but if it's about all of the other intangibles that are there, that gets me more excited to want to commit because I know I'll only do a few of those. I gotta unpack that more for myself personally.

So there you go. You're looking for a deeper connection than just, just investment.

Yeah. And Lisa, does that answer your question about how do you, how do you get over that hump and into a deeper commitment state?

I would say yes. I just, um, for me, only not clear, like, a timeline. So, um, you mentioned that you had to be like, you should be like in an active conversation. And if like in our recent project we understand how to deal with an angel and what is like a time frame from soft commitment to the check, let's say. So, uh, for VCs is still unclear for me personally because it's vary so much, and I don't see a pattern here. So I was curious if there is a pattern, and I just like— a pattern, and I just don't see it.

I mean, more specifically, if they're formalized angel groups, they absolutely have timeline processes that— because they, they're managing massive, you know, constituencies. So like Koretsu will say, you have this, and it's a 30-day evaluation process. You present to a panel, and it's So for the formalized angels, absolutely there is a process dynamic. I would say for VC, the fastest I've ever seen really good VCs do something in a lead role is 3 months. Generally it's 6. And the reason is, is because in that part of that early dialogue, they're kind of getting comfortable. With the opportunity, but more importantly, they're getting comfortable with the team. And that is not a spot decision that is made, I think, in a meeting unless you're pulling together a syndicate and you already have a lead. If you already have a lead and you have a term sheet and now you're saying, okay, we're looking for— we've got $5 million we're raising, we've got $3 million from a lead investor, we're looking for two $1 million investors. To fill it out. That's a different sort of thing. But I hope that maybe— I hope that was more helpful, Lisa.

Yes, thank you.

Thanks.

More valuable than a straight webinar, just being able to ask you questions, Mark. Thank you.

You can ask anything you want.

Well, I hope my answers are helpful. I hope they're— I mean, I don't have all the answers here, obviously, but what I'm trying to do and achieve is stimulate your thinking, right? Just to explore, research more, think more differently about some of the problem sets that you might have, and then, you know, work to develop those a little bit more deeply.

For you Mark fans, he's graciously accepted my invitation to be a presenter at my live event in California in May. And for you, okay, fans, he's going to be my guest a week from tomorrow on MDG Premium, uh, for my constituents. So thank you both and Tiger Buford for helping me learn about these gentlemen.

Yeah, so I know, Anthony, you've been kind of quiet. I know you're in the stealth mode, but what— where is your funding right now? What where are you? It's way early, pre-everything.

Yeah, no, no, it's way early. You know, we've looked, you know, just from previous experience with a United Kingdom startup, you know, we've had some connections there, you know, through some international ventures. But, you know, right now it's vetting friends and family. Right now, um, just to get some small things in, just to pick the project back up because it's been kind of buried for 3 or 4 years. Um, it's well, well patented and, and such, but you know, it's just, you know, getting that first stab at it just so that we can go and we're not, you know, very early, early stage. And that's what's turning people off is, you know, getting that, that lead person to jump.. And then, like you said, Mark, earlier, the followers to follow on from that.

I love, by the way, I love those kinds of stories, Anthony, where, where there's some history with something and you're, you're polishing the facets of a diamond, if you will, or turning coal into diamond. Those are always great stories. So I look forward to hearing from you about, about it.

No, absolutely. But one thing to be wary of is, you know, might as well, this is a good forum to introduce this, you know, I've got a lot of global experience and we were introduced through somebody that had a Middle East family in Kuwait that had, you know, the money we needed at a 3% interest, 10-year period. 3% interest, all this stuff. And, you know, me off the bat, I was like, this smells bad, that's a scam.

Those groups that provide project funding from finders who, hey, we'll introduce you to Middle Eastern sovereign wealth fund money— don't, don't do that. I, I could do a, a whole teaching on the how to detect credibility in some of those groups because there are very pretty easy telltale signs of that, and that's one of them.

Yeah. So just, just not that, not that we got very far. It was just, you know, it was too good to be true and discounted it pretty quickly. But there's, there's a bunch of those scammers out there.

Yeah.

Yeah. Uh, we're gonna keep this going cuz it's so interesting. John's got another follow-up question.

Yeah, thanks, Tiger. So one, I've been noticing a lot of discussions about, and I'm really curious to hear your opinion of this, Mark, but the kind of the way to raise money in terms of how much and how fast. And so I followed Tiger's advice when I raised funding for Endeavor Orthopedics. It was very successful. I called it the lily pad. I raised just enough to get to the next valuation uptick and then raise enough to get And in doing so, I think we protected equity and we reduced risk. But I've been seeing some discussions on LinkedIn from others that people that— not people that I know like Tiger, that are saying take all the money you can as fast as you can. And if— and my impression is it may be a reflection of how tight the market is. So there's this knee-jerk reaction like money's hard to get, take as much as they'll give you. My intuition is I agree with Tiger because it worked for us. And I wonder, Mark, what your opinion is of that.

So I love that question because it really gets to a source of tension that exists in the market. I will tell you my bias is 100% Tiger's school of philosophy. I love the lily pad idea and concept. And I would tell you that in my experience, even in the worst capital access markets— sorry, this, guys, this is—

here comes a puppy.

This is Buddy. Hey, Buddy! Part corgi, part Australian shepherd. So he's pretty vocal about that. So sorry about that. I was saying, even in the tightest, most difficult capital markets, Good businesses always get funding. Now, what you have to have is, is this idea of flexible runway. So those are the relationships you have with your vendors, your employees, how you manage your payables, all that sort of stuff. And that's, that's not easy. To have those relationships. But the lily pad financing works time and time again. It really does. This idea of take as much money as you can, you know, eventually that's going to come home to roost because, you know, I just think—

well, I think people, people that take too much money think they've succeeded already. And so they start, they start building out a big company.

They think capital raising is the success. It's not. It's not because you've now got commitments that you've got to deliver on to your investors and to your employees and to your partners every step of the way there. And, and the mistake that people have around this arrogance of And I've been there. I've been there where I've raised hundreds of millions of dollars and how wrong I was about that being successful in some sort of surrogate way is sickening to me. So I, you know, I really am an advocate and believer in incrementally staged financing.

I think it definitely, in my experience from a guy who didn't know what he was doing, who did it in that manner, it worked and it preserved equity. The other thing is, I think human nature— Mark, tell me what you think about this— human nature is if you raise $30,000,000, $40,000,000, if you raise a very large amount of money, maybe beyond what you need, human nature spends that money because it's accessible and, you know, And my guess is it's not put to the most vital need.

The discipline, the discipline to manage cash, to underspend to a budget. I mean, that's, that to me is an incredibly hard discipline. Very few people. I'm not capable of it. I'm not capable of it clearly. So, you know, to me it will, cuz you, you start to think about creativity. Oh, well, if we could, now we can do this, we can do this microexperiment, we can do that thing, we can do something else. You know, there is powerful tension when you're slightly underfunded. It forces that, that pressure to Now it doesn't always work, but it— that pressure is, is mostly helpful in my experience.

It creates focus, right?

Focus.

Exactly. Go to what— this is the, this is the most important thing that I can do with my time and money to build this business. Yeah. Thank you.

Thank you. Very helpful.

Well, this is great. If there's, if there's no other hand raisings, I think we're gonna stop It's been great. Thanks for coming, everybody. Mark's fabulous. See you next Thursday. We don't know who the speaker is yet, but it'll announce it. So everybody have a great day and go Bone Chatters.

Have a good day, everyone.

Thank you. Thank you, gentlemen.

Thank you.

Goodbye.