Distributed Ventures funds startups in the fintech, healthtech, and insurtech industriesRead more...
Wavemaker 360 invests in healthtech, digital heath, and medical device companies
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh, how times have changed! While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Jay Goss is General Partner of Wavemaker 360.
Prior to launching Wavemaker 360, Goss made a career of operating and growing early stage companies. He has been a four time CEO, two time President, five time COO, one time CFO, two time EVP/SVP, one Managing Director, one time General Partner, one time Board Chairman, and one time Treasurer. In nearly all of these roles, he was responsible for commercialization, fundraising and product development.
VatorNews: Give me the overview of your firm of Wavemaker 360. Tell me what you're all about, what your philosophy is, what your investing methodology is.
Jay Goss: We're probably relatively easy to understand in that our last name is health; so we're formally Wavemaker 360 Health, but the market tends to think of us as Wavemaker 360. We somehow lost our last name, but we haven't ever deviated from our game plan: we only invest in healthcare companies. We only know healthcare, we don't strive to look at any other sectors that venture capital funds are typically enamored with. We're one of those specialty funds, and our specialty just happens to be healthcare. That's all we do all day long. We specifically look at really anything under the sun when it comes to healthcare, except we don't do drug discovery, we leave that to San Diego and Boston and places that are particularly strong in drug discovery, but we'll do healthtech, we'll do digital health, and medical devices. Those are our three main categories that we try to put companies into.
Because we're focused on a singular industry, even though it's a big industry, all of the energy of the fund goes towards that, all of the partners came out of the healthcare industry, all of my partners came out of the healthcare industry, and that extends even to our limited partners. We do not have a rule that says you have to come from the healthcare industry to invest in our fund but, over the course of a couple of years of raising our first fund, about five years ago, and then over the course of about 18 months raising our second fund, which recently closed, we now have about 300 limited partners and the vast, vast, vast majority of them are either healthcare companies or healthcare executives. So, we have a resource that we can bring to bear to the companies that we invest in that most venture funds wouldn't have, namely these men and women who have big, big jobs inside big, big healthcare organizations all over the United States. While they absolutely invested in our fund for financial motivation, they expect the fund to return well, the secondary rationale or reason for investing was they used our fund to get closer to innovation. Most healthcare organizations in America strive to be more innovative, and many of them even state it on their website but, when push comes to shove, they really haven't built up their innovation muscle. Whether you're a hospital or a health system, or you're a payer, or you're on the post acute side, there's a whole bunch of ways you can become more innovative, and one of the ways is to get involved with a company that does nothing but look at and evaluate early stage, innovative healthcare companies, and that's us.
We're really lucky, and what I should say is our portfolio companies are really lucky because they get a $250,000 to $1 million dollar check from us, that's usually the investment range, but probably, for most of them, more important than our dollars, is our network, because we'll bring this network to bear to the benefit of that company we just invested in. Especially when capital is almost a commodity, the most important variable for these early stage companies is being able to have access to a CEO of a health system, or a big executive at UnitedHealth Group or on and on and on; we have 300 of these men and women, so we've got people sprinkled all over the US healthcare system and people sprinkled all over the United States geographically. So, the biggest differentiator for our fund is this healthcare DNA that we have that extends far beyond the eight partners in the fund that do the real work, but the limited partners are really the secret weapon of the fund.
VN: You mentioned there were three areas that you specifically like to invest in. Can you go through each one and tell me what's exciting about each one of those? What's the opportunity that you see right now?
JG: We formally look at seven but, since seven is too much to think through, I boil it down to three: healthtech, digital health, and medical devices. I'm usually asked at this point, "what's the difference between healthtech and digital health?" because, depending on who you're talking to in healthcare, you might find the two terms to be synonymous. We, however, differentiate a healthtech company as a company that's developing technology for the healthcare industry, but the technology is not actually used or touched or interacted with by the patient. So, it's back of house type stuff; like, electronic medical record systems would have been healthtech because the consumer and the patient weren't interacting with it, it was really between the provider and the payer. Digital health, conversely, is also a piece of software, also a digital product, but we think of that as something that the patient or consumer is also interacting with. So, that's where we draw the line between healthtech and digital health. Medical device is typically a physical product although, once in a while now, it is a digital health application but, traditionally, a medical device is a pacemaker or some physical product developed by a medical device manufacturer that’s being regulated by the FDA.
Starting with medical devices, the primary reason we are enthusiastic about medical devices and, frankly, more courageous than most venture funds of our size and flavor, has to do with the fact that one of my partners is ex-FDA. Kwame Ulmer, who works out of our Pasadena office here in Southern California, joined us about three years ago and if I look at how much, for lack of a better term, courage we had to invest in medical device companies before Kwame joined us, and I compare it to today, it's night and day. The reason being, a medical device company is really not different from any other company, with the exception of the FDA regulatory component; those companies are almost always going to go through the FDA and if you don't know the ins and outs, if you don't know the inside baseball of the FDA, it's really uncomfortable being an investor. Investors can evaluate the team and the financial model and the intellectual property, they can evaluate the product market fit, all of that stuff, but then you get to that point of, is the company going to sail through the FDA or are they going to stumble and struggle getting through the FDA? If you haven't been inside the FDA, it's really hard to evaluate that from the outside looking in. So, Kwame joined our fund three years ago, and we really have never looked back. We dabbled in medical devices before he joined, but since then we've become much more active, much more proficient in evaluating medical device companies, because we know, with much more confidence, how the FDA is going to think about that company on its 510(k) Clearance journey. And there's a big difference if you're an investor and the entrepreneur sitting there telling you, “Yeah, we're going to get a rubber stamp from the FDA in three months,” versus the reality is they're not going to get their stamp of approval from the FDA for 18 months. The entrepreneur isn't necessarily lying, the entrepreneur just doesn't know what they don't know. Whereas, we had somebody that was a deputy director and branch chief for 12 years inside the FDA on the medical device side. Kwame has a very good handle on how things work inside a big government bureaucracy like the FDA. So that's a human answer to why we're so much more enthusiastic about medical devices today than when we logged on in 2017. We did a little bit of medical equipment then, but we're far more active today than we were then thanks to the fact that we really have a focus on that because of Kwame.
Healthtech and digital health, it's different today than it would have been five years ago, and it really has a lot to do with the clinician shortage. The mainstream, non-healthcare publications have written a lot about this during the peak of COVID, about how nurses were burning out faster than normal, doctors are burning out faster than normal. Perhaps what people have lost sight of is we were already, as a country, way upside down with all of our clinicians. We don't have enough nurses in this country, we don't have enough doctors, we don't have enough specialists, we don't have enough allied healthcare professionals, those people in between a nurse and a doctor: your physical therapist, your dental hygienist, your nutritionist, or dietitian. You can go to any profession in healthcare and you will find out that we are upside down in terms of demand and supply, thousands or tens of thousands, growing to hundreds of thousands, over the next 10 or 15 years. Then you get this burnout from COVID, which just exacerbated the situation. If you take a step back and you think about any industry, to the extent that industry can get its hands on an abundant labor source, it doesn't have as much pressure to adopt innovative technology because it can throw more labor at it. If you look at fast food service, there's more automation going on in the kitchen now because, for the first time in the history of fast food, they can't get their hands on 16 year olds the way they used to. So, guess what? We're now flipping hamburgers with robots. We could have flipped the hamburger with a robot 20 years ago but we didn't need to because there was this abundant supply of inexpensive labor. Translate that same thinking to the healthcare industry: unless you believe somebody's going to snap their finger and, all of a sudden, we're going to have a few hundred thousand extra people running around looking for nursing jobs and a few hundred thousand people looking for doctor jobs which, by the way, doesn't work because it takes 12 years to build a doctor. So, even if you and I could snap our fingers and say, “let's create a public policy that creates more doctors,” we still have to hold our breath 12 years before we see the fruits of our labor. So, the United States is in this jam and our baby boomer population is still aging, which means we need more healthcare services, not less. So, when you add all that up, although we are in no way, shape, or form, pleased that the industry has this labor shortage, what we are pleased about is the impact that will have on the demand of the decision makers in the industry to experiment with technology that, 20 years ago, even if that technology could have been brought to bear, they wouldn't have because they didn't have the same labor pressure. You're talking about an industry that is famously keeping pagers and fax machines and clipboard companies in business, the healthcare industry is full of antiquated technology. I'm not saying we invest in whoever is the next pager company or the next fax machine technology, but it's a perfect example of there's lots of low hanging fruit in digital health and healthtech that can allow the industry, the people of the industry, all of the clinical people to do their job, at the top of their license.
There's a lot of jobs a nurse does today that don't need to be done by a nurse. Let's have the nurse doing the things during her or his shift at the hospital that we really need a nurse for, and not have a nurse doing a bunch of work that we don't need a nurse for. The example I love to give is, in these 20 minutes we’ve been on this call, I would guess that a few thousand times across America, somebody is on a bed, in a hospital, pushed the call button. The nurse dropped whatever he or she is doing, walked to the patient's bed, only to find out that the patient needed a People magazine. Probably not the best use of that nurse's time, but that's about a three or four minute round trip transaction for the nurse. I think a tablet by the bedside takes care of the nurse having to go back and forth looking for Sports Illustrated and People magazines for patients. It's a super silly example, but it's an example that makes the case of we have to implement more technology into hospitals, health systems, academic medical centers, urgent care, skilled nursing facilities, home health, physical therapy clinics, surgery centers, anywhere where healthcare is performed. We need to implement more technology so that the finite resource that we have in the form of clinicians, from nurses to doctors, and everything in between, is better utilized. Otherwise, the country's healthcare system is going to fall on its face pretty badly in the next 10 years because we're just so upside down with respect to these positions. So, I'm excited about digital health and healthtech, because there's so much coming out and even some of the technologies, which are not even that whiz bang, it's not stuff that couldn't have been brought to market three or four or five years ago, but now there's a willing buyer that maybe wasn't so willing three or four or five years ago when the nursing shortage and the clinician shortage wasn't as egregious as it is today
VN: What's the size of your current fund? How many investments do you make a year?
JG: Our fund is $64 million. We invest at the seed stage, and then we will follow on at the Series A, assuming we're still in love with the company, of course. We've made 15 investments out of this fund going back to Q4 of 2020, and we'll make between 40 and 50 when all is said and done. We do about 45 investments between Fund I and Fund II, so about 45 investments in 45 months, which is not to say we formulaically do one investment a month but, apparently, that's about the pace that we're built to run out, because it's worked out to almost exactly one company a month for close to four years now.
VN: You’re investing early, so do you want companies to have any traction, or is it too early for that? If so, are there specific numbers that you want to see in ARR, or number of customers, or anything like that?
JG: We do invest early; our round is usually the first venture round for these companies. They usually have some friends and family self funding, maybe some angel investors and they might have some grants. But, at the time that we invest, it's early and it's us and other venture funds that are willing to go this early. When it comes to the typical metrics that funds like to see, it goes back to your first question: for medical device companies we, generally speaking, invest pre-revenue because, in order to get in at the seed level, you need to invest pre-revenue. We won’t invest years ahead of revenue, but if it's a medical device company, and we get comfortable with the fact that they can start generating commercial revenue, not pilot revenue but true blue commercial revenue, within six to 12 months, that's okay for us.
For most other companies, while we don't have a specific revenue requirement, we do take as hard a look as possible at their commercial traction. How much product market fit do they have? We don't necessarily care if they have X amount of monthly recurring revenue or Y amount of annual recurring revenue, but any revenue signals to us two things: one, that the market is willing to pay for the thing they have invented and are selling to the market, and, two, it proves that the founding team aren't just good product people, but that one or more of them knows how to put on a suit and tie, knock on a door, do a sales call, and get a customer. That's an important thing for us to evaluate, too. So, for healthtech and digital health companies, we are going to pay more attention to market signals: a company can have 50 cents of revenue, but that 50 cents of revenue could be very symbolic of the fact that they know what they're doing and we'll look hard at that. But they don't have to have $100,000 of monthly recurring revenue or $1 million dollars of annual recurring revenue, we're not that formulaic, as many others in the industry are; we tend to be a little bit more heart science when it comes to revenue requirements.
VN: So it sounds like you don't invest pre-product, or do you?
JG: No, we generally won't invest in the concept; we would call that a pre-seed round and we will let that initial funding get done with friends and family and angels and high net worth individuals. Get it past the point where it's just an idea on a PowerPoint, maybe there's an MVP, or there's about to be an MVP, but something that we can sink our teeth into, and we'll pay the increase in valuation accordingly. But we want to come in at the classic seed stage level as opposed to the pre-seed.
VN: For medical devices, considering it's that early, would they just have a prototype at that point? Or would they have a full working product?
JG: That usually depends on the device itself and the business model, but what they have is they're X percentage of the way through whatever the FDA wants them to do. Some medical devices go sideways on the FDA, or go down a wellness path or something that is going to result in them not being a quote unquote regulated device, but most of what we look at, they're going for the distinction of being a regulated medical device by the time they go to market, which means they need the FDA’s blessing, and they want to make the medical claims associated with that. So, for those companies, their product needs to be done enough; they might not have the packaging and all that bells and whistles, but the product is done enough so that the FDA will give them the green light to do that clinical trial. They may still need three more months to do the clinical trial, they may need up to a year, for our standards, to do the clinical trial, but that's where they need to be. If it's still just a blueprint or a drawing for the medical device then, again, that's too early for us. So, we have a slightly different answer to your question if it's a medical device company compared to if it's healthtech or digital health.
Part of the reason that we have this stance is because we have these limited partners. I say to myself, “I have these 300 men and women all throughout the US healthcare system, all in pretty high level jobs so what is the best use of that asset?" I could invest at the pre-seed, I could also invest at the Series A or the Series B or the Series C. But, part of our strategic thinking on our venture fund was, where do we get the most bang for the buck out of these 300 men and women? We’re convinced that it's at the seed stage; they're not going to roll up their sleeves and help these companies with product development, IP strategy, and pilots. Nor are our investors going to help these early stage companies once they're the Series B and Series C, because they're off to the races at that point, they can always use a little bit more help but once a company has several million dollars of revenue, one of my limited partners coming out of the woodwork to help it get a foot in the door at a big health system, that's not going to change that company's life. But, when you look at the seed stage, these companies are going from zero to one, that's where one break with a Stanford or UCSF or a Berkeley, or one break with a big health system down in Southern California, or one break with a health system in the Midwest or the East Coast, the seed stage is where you create a tremendous amount of value. That's where you go from zero to one; going from eight to nine or nine to 10, it's important, but we don't think of it as dramatic as going from zero to one. And I have 300 men and women who can help these companies go from zero to one, so we stay disciplined and resist the temptation to invest earlier and later because it doesn't harness the intrinsic value of our limited partners as much as it does at the seed stage.
VN: How do you vet product market fit?
JG: Well, revenue is great, and a good percentage of our companies have revenue. So, we certainly will happily look at the financial statements, assuming there are financial statements. The easy answer is they've got X number of months of recurring revenue and the recurring revenue is growing and they're getting more utilization across their early adopter customers. We will oftentimes look at predicate companies that have done something similar; one of the great things about the healthcare industry lagging behind is we, to some extent, have the answer key in other industries. Marketing and media and financial services have adopted technology at a much faster rate than healthcare, so we're able to evaluate product market fit by looking at the answer key from other industries. What did manufacturing do really well in the 2000s? Even though the healthcare industry is behind, the playbook is already there. So, we do look at how things have been adopted in both B2B and B2C business models, if they were done in other industries, and that gives us sometimes more comfort, sometimes less comfort, depending on the evaluation.
A lot of times, it goes back to the secret weapon. I would venture to say that of the 45 companies we've invested into, I don't think we've invested into a single company where we haven't gone back to some of our limited partners and said, “Hey, we're about to invest in company X, here's a quick thumbnail on their business model, give us some feedback, or better yet, would you do a 20 to 30 minute meeting? You run a big health system or you run a big skilled nursing facility, this company has a technology or a product or a service that is marketing itself to a health system or marketing itself to a skilled nursing facility.” How incredible would that be if I had a skilled nursing facility operator do a call? Even though he or she doesn't know anything about investing, they know everything about skilled nursing facilities, and they know what the pain points are in 2022 for skilled nursing facilities, which might be different than the pain points in 2018. They do a call with this company that we're considering investing in and we listen in; we do that all day long. So, one of the ways that we get a chance to evaluate product market fit is by having our LPs be a little bit of an extension of our diligence team. We never ask them, “Hey, do you think we should invest?” because they don't know about valuations, and they don't know about all the other variables that are important to a venture fund, but what they do know is whether or not they, on behalf of their employer, would be a customer of this. We will do it a few times because we don't want to get a false negative, we don't want to get a false positive, so sometimes three or four people that work in three or four different skilled nursing facilities, but these will be big skilled nursing facilities; these won't be a two location skilled nursing facility, this could be a 275 location skilled nursing facility. If they're thinking about a particular medical issue a certain way, it's a pretty good bet that the whole industry is thinking about it that same way. So, one of the things we love to do is reach out, and we won't reach out to every single one of our limited partners for every single investment opportunity that we're looking at, that would be crazy but, selectively, we do that all day long.
VN: You're investing in the seed round and, at that point, the most important thing you hear over and over from investors is the team, because you're investing in entrepreneurs, much more than the later rounds. What are you looking for from that founder, from that team, from that entrepreneur? What do you want to see from them to make you want to invest?
JG: That’s the toughest question ever. Everything you just said is true: we bet on the jockey, not the horse, but every VC says the same thing. So, how do you really get to know the jockey and what are you looking for? The biggest thing that we're looking for is fundability at the next level; it's one thing for some scientists to come out of an academic setting, or for some entrepreneurs to get a healthcare business off the ground in a garage and raise a $2 or $3 or $4 million seed round. I give them all the credit in the world, but we want them to raise again. And, oftentimes we want them to raise again and again. It's a whole different ball game to go and raise a $10 or a $20 or $30 million Series A, sometimes more, than it is to raise a $2 or $3 or $4 million seed. So, we're getting to know these founders, we have to stay in love with their vision and their product, and we will pay attention to that product market fit but we're also imagining them being in a room with a $500 million fund in Silicon Valley 18 months from now. Are they going to have that X factor to be able to excite the big funds to do a Series A leading up to a Series B? So, fundability at the next level is what we try to train ourselves to pay a great deal of attention to.
Part of the beauty of having eight partners in our fund, two are clinical, two are healthcare administrators, one has been in the healthcare industry for a very long time, one was a healthcare venture capitalist for StartUp Health before joining us. The eight partners in the team really are able to look at these founders, we're trying to get to know the whole team and we're just looking for signals. One of our most obvious objective signals is, are they able to recruit? We're convinced that a good CEO or a good founding team needs to be able to raise capital; without that, it doesn't matter how good the idea is. If they don't have capital, they're going to burn out in a couple of years. And, number two, they need to build a recruit. It's a little different now because employment is changing, but in 2021, anybody that you wanted to join your startup was employed someplace else. When you think about the day in and day out life of a CEO of a startup, you've got to hire five or 10 or 15 or 20 or 30 or 40 or 50 people a year, depending on where you are in that stage of development. In times where the unemployment rate was higher, there were always good people unemployed, so it took less to convince them to leave their unemployment status and go join a startup. If you think about how hard that was in Q4 of 2021, when almost all of America that wanted a job had a job, these people had to go and steal people away from a pharmaceutical giant or a McKesson or a big technology companies, big steady paycheck, job security options, all of that, and get them to do the irrational, which is to leave a secure employment situation and go take a leap of faith with a startup. And, yet, somebody, and ideally more than one somebody, has to be good at recruiting people. So, we spend a lot of time looking at the CEO, in particular, his or her proof that they've been able to recruit. They're not going to have a 30 person team but have they recruited five or six or seven people to do that crazy thing of joining a startup? That matters to us a lot. That's on our list of things that we pay a lot of attention to in terms of betting on the jockey, not the horse.
VN: It'd be great to hear where you see valuations now, because obviously, we were riding high for a very long time: digital Health, especially during the pandemic, rose very quickly. But now you've seen it come down quite a bit. And if you look at the public markets, and where those companies are, a lot of them are down quite a bit as well. So, what's causing that, in your opinion? Why are valuations coming down? Why are those companies coming down? And what does that mean for the companies going forward?
JG: There's a lot in that question. I'll start with why it's happening: it's just empirically a fact that the S&P 500, and the other indices, are down in 2022. But, more importantly, companies in the S&P 500 that were venture backed originally are down even more than the average S&P 500. So, there's a general sense that, while all companies in the NASDAQ, Dow, and S&P 500 got inflated, apparently, venture backed companies got extra inflated, and therefore they're taking more of a hit right now. So, the venture capital community, broadly, is responding to that. That's the macro.
Now I get the luxury of saying, I don't care how Fintech is doing or climate tech or media or electric scooters or self-driving cars; I don't care about any of that stuff, because I only care about healthcare. So, the question for us is, what is the healthcare industry's likely response to the overall technology industry downturn? We're a lot less bearish on the healthcare industry than most venture funds are on other industries, for a couple of reasons. One, we talked about it before: the baby boomers are still aging, about 11,000 people turned 65 today, the same thing is going to happen tomorrow, and the day after. It's not to say when you turn 65 you automatically become a customer of the healthcare system but, basically, that's about when the human body starts to break down and we need more healthcare. Generally speaking, younger people, up to about that magical age of 65, need less healthcare, and people 65 and up need more healthcare. So, if you're simply looking at it in terms of market size, you have a far bigger market this year than you did last year, you'll have a bigger market in 2023 than you did in 2022, and that keeps happening for quite some time. So, that's one phenomenon that's favorable if you're investing in the healthcare industry.
The second thing is a little bit more nuanced, that is to say, historically, when there's a financial recession across the board in the United States, the healthcare industry is certainly not recession proof, but it's more recession resilient, and it lags the general economy because of COBRA, which means that, for 18 months, you've kept that thing that gives you access to the US healthcare system in the form of your insurance. In fact, if you're going to be unemployed for a long period of time, you might actually accelerate certain medical services during those 18 months, because if you still have your COBRA, and you get to month 16 or 17 or 18, and you start worrying about the day you don't have COBRA, well, guess what? You do that shoulder surgery or you go in and see your dermatologist, the things that are going to be covered. So, our view, and we're playing healthcare economists now, is it has less negative impact on the healthcare industry compared to other industries and there's this 18 month lag in terms of whatever negativity it's going to have, it's going to require the recession to last longer than 18 months. So, consequently, we remain about as bullish on investing today, as we did six months ago. Whereas most funds have pumped the brakes once or pumped the brakes twice or pumped the brakes three times, we haven't pumped the brakes at all.
In terms of valuations, are valuations coming down? If you had asked me what we were seeing in Q4, of 2021, I would have said that the vast majority of the investment opportunities we were looking at were between $15 and $20 million pre-money valuations. Now, we're back to between $5 and $10, and more often between $8 and $12. That wasn't true six months ago, so the market has corrected just in general for seed stage, just like it has for Series A, just like it has for Series B. Of course, we couldn't be happier because now that same amount of investment is going to buy us a bigger percentage of the company because the valuations have, in fact, come down a little bit.
VN: You invest in the seed stage and you're the first investor. But then when they go and take those subsequent rounds, are they taking down rounds? And, if so, what impact does that have on your returns?
JG: Well, we haven't had it yet, we haven't had a company do a down round, but we will. I'm not signaling to you that somehow our crystal ball is that much better than other venture funds, it's just that the whole community is still figuring out what recession we're about to go into. Are we about to go into a big gnarly, multi-year recession? Are we about to go into a mild, short-lived recession? Our fund doesn't have more insight into that than anybody else does.
What we are seeing is if a company raised their Series A or B before March of this year, good for them, they were very fortunate. If they didn't raise their Series A or Series B, then they're raising a slightly smaller Series A or Series B than they otherwise would have; instead of shooting for a $20 million Series A, they're shooting for a $10 or $12 million Series A, or they're doing a bridge and they're going to take a couple million dollars in, under the thesis that that'll buy them another six to nine months of runway and, by then, we'll really know what we're dealing with. Are we dealing with a gnarly recession or a wimpy recession? Smart entrepreneurs are doing that now because if the cost of capital is, in fact, going up then there's an argument that could be made to raise as little as you need right now, weather the storm, and then go back out. If you knew for sure that in mid 2023 that the markets were going to return to some level like they were in Q4, then you’d say to yourself, “let me raise just enough capital to get through mid 2023.” I don't think anybody thinks, however, that we're going to go back to where we were, but we might end up being somewhere in between where we are today and where we were in Q4 of 2021.
VN: Talk to me about a couple of companies you invested in, maybe one or two of them. What was it about that company that made you well that intro entrepreneurs sat across from you? What was it about that company about that person that made you want to invest?
JG: It’s always the last company, because the last company is the one that's really in my heart and brain the most because we just got through diligence. The last company we invested in happened to be our first company that we co-invested with Idealab here in Pasadena, a famous incubator founded by Bill Gross. A lot of internet companies were born there and Bill Gross had his fingerprint on a lot of those and, for whatever reason, we have not co-invested with Idealab, despite the fact that we have Pasadena in common, up until now. Idealab doesn’t focus on healthcare.
This most recent company called Camino Robotics is very, very easy to explain: if we live long enough, we're all going to need assistance walking, so we're going go walking with a cane to a to a walker or rollator. Nobody's looking forward to it, no one goes to doctors offices and says, “God, I hope the doctor tells me it's finally time for a walker.” Yet, in your lifetime, my lifetime, there's been no innovation to walkers; the only innovation I've seen in my lifetime is we started cutting tennis balls in half and we put a ton of support on the front posts, which is not exactly innovation. So, this company, Camino Robotics, which is led by a Disney executive with really good consumer product development experience, which I contend is really needed in this particular area, had the thesis, along with Idealab, that the main reason there hasn't been any innovation in the walker market, and why we don't we have the Tesla of walkers, is battery power. You and I could have come up with the Tesla of walkers 10 years ago, but the battery source that we would have had to have attached to that walker would have been the size of a breadbasket and it probably would have weighed 40 or 50 pounds. Fast forward to today, these guys didn't invent modern day batteries, but they took advantage of the fact that batteries are smaller and more lightweight and faster to recharge than they used to be.
Now, if you take the exact same form factor, called a walker, and you can throw power at it, you can do at least three very compelling things: one, you can put cameras facing forward and do fall detection, not too different from what a Tesla's doing in terms of detecting what's around it. You and I go for a walk on the sidewalk and we come across a one millimeter crack in the sidewalk, your brain knows how to handle it, you just adjust your steps. If you're 96 years old, and there's a one millimeter crack in the sidewalk, that might put you down on your side, that's a broken hip and that might be game over. So, forward looking cameras are very interesting for cracks, curves, mailboxes, a bus, whatever it is that it's looking for, all because we have the battery. As long as we have the battery, let’s also have backward looking cameras that are monitoring the gait. Is grandpa or grandma starting to shuffle their feet more? Is their gait starting to reduce? Are they getting wobbly? That is a prediction of fall. Or a monitoring of that person's strides that tells us they're not getting enough walking time. So, we have fall detection, plus gait analysis. And then, last but not least, you could throw power to the walker, throw power to the wheels. For a senior on a walker, a 1% or 2% incline is the difference between going on a walk and not going on a walk, so now if the walker could detect a little incline in the sidewalk, throw a little bit of power to the wheels and almost pull you up, not in a ski chairlift way, but just a little bit of power to the wheels to help you get up that ramp now, all of a sudden, you'll walk more. Our whole belief is that if we could get seniors less stigmatized by walking by using a walker, and, therefore, be more active, their health would be better. One of the reasons seniors get so bad is they live in that La-Z-Boy chair, they don't get off of that. That's because they don't feel confident walking around their neighborhood or going to the mall and walking around the mall or going to the grocery store. If you can start to change that psychology in hundreds of thousands, or millions, of Americans, you're going to instantly improve health just because they're staying active and mobile. Fewer hours watching TV, more hours being out and about; they're not going to run a marathon, I'm asking them to go around the block and maybe this device gives them just enough of a confidence boost to go on and walk around the block once or twice a day.
Then, on top of all that, they've also made it a lot cooler looking. So, it's the Tesla of walkers: they've added all this technical functionality to it but they've also made it look a lot less clunky. Let’s use my dad as an example: if my dad gets to the point where he needs a walker, he's gonna very stubbornly resist it if it’s a clunky walker. That's the Ferrari of walkers, okay, now we can have a conversation.
VN: What are some of the lessons that you've learned as a VC? Obviously, you've been doing this for a while,sSo let's say somebody else comes to you and says, “I want to get into venture capitalism. I want to be a VC.” What would be the advice that you would give them? What are the lessons that you've learned?
JG: The biggest lesson we've learned is the well roundedness of the partner group. In almost every venture fund, regardless of who is formally the investment committee, the partners, informally, make the decision on what to invest in and what not to. When we started the fund, it was myself and the founder of the fund, John Nackel, and we were, categorically, the right two-men team to run this fund. If you could only have two people, a guy with his background, he had run the global healthcare practice for all of Ernst & Young, spent 25 years there, and then had gone to be CEO of what is now Optum at UnitedHealth Group. I had spent my whole career doing nothing but entrepreneurial startup after entrepreneurial startup after entrepreneurial startup, most of which were venture backed or needed outside capital. I knew this world from the other side of the coin, inside and out, but we were still only two people. Then we added a healthcare administrator, then we added the guy from the FDA, and fast forward through three or four months ago when we added our eighth partner, who's a physician at one of the big health systems here in Los Angeles. A venture capital fund is in the decision making business, they're making a tough decision with imperfect information, so having eight diversified brains, the wisdom of the crowd, to look at every investment we make, two of whom are clinical, two of whom are ex healthcare administrators, the FDA guy, on and on, I just believe that the biggest lesson we learned is, I love the feeling we have coming out of an investment committee meeting today, because the conversation is so much more robust. The companies are giving us the same amount of information to make a decision on whether we should invest or not invest but now eight healthcare brains are looking at that data instead of two or three or four. I know there's a lot of funds that do it with sometimes a single GP, sometimes a couple of general partners, and nobody else. I suppose you can do it but you have to be a lot sharper every single day than if you can rely on a team of eight. We do that now and we've fallen into this rhythm of having eight people contribute from a brain brain power standpoint to every investment decision we make. That's been the biggest lesson learned for us.
VN: What's the part of the job that you really love the most? When you go to work every day, what really motivates you to be a venture capitalist?
JG: It's got to be the healthcare side of things. If you're a generalist venture capitalist, meaning you're in a generalist fund and you invest in FinTech on Monday and self driving cars on Tuesday and Snapchat on Wednesday, if you’re that kind of a venture capitalist, you probably see a lot of bad business ideas. In healthcare, I don't know how many thousands of companies we've looked at over the last five years, but whatever it is, if you followed me around, you’d probably have the same sensation that I have: I wish we funded them all. We end up funding a very small percentage of them but it's not because they aren't great ideas. You would want the world to have every one of these new technologies that we look at, because it's related to healthcare. It's making mankind better when you invest in a new medical device or a new digital health.
I'm not here to rip on whatever is the flavor of the month but, as Bill Gates came out and said recently, "are we going to look back and say the world is really a better place because we have more NFTs?" I don't think so. I don't think we're going to look back in 10 years and say, “that was the thing that really got civilization to the next level.” Conversely, some of the stuff that these healthcare entrepreneurs are working on, arguably, almost all of them are really profound innovations that make the healthcare industry more clinically effective, or more cost efficient, or both, and that's a good thing, especially for a country that struggles with its health system. We have a very complicated, very expensive, very fragmented healthcare industry here. It takes a little extra energy to keep it at the level that it's at and all we get to do is meet with and get to know these really interesting healthcare entrepreneurs, many, many, many of whom, I'm sure far more than half, they started the company to do something in oncology technology because they had an experience with cancer, or something in dementia because they had a family member that suffered from Alzheimer's. It usually has a direct connection back to themselves or somebody in their family. Those people are, frankly, more motivated, all things equal, than somebody that decided to start the eighth electric scooter company because, apparently, we needed eight electric scooter companies instead of seven. I'm not saying that that entrepreneur isn’t motivated to get that electric scooter company off the ground but, all day long. I'm going to back one of my entrepreneurs because it's a little bit more personal.
I hear entrepreneurs tell me all the time, they really believe that they were put on the planet Earth to solve some problem, and you're not going to get that with entrepreneurs in other industries as often as you get it in healthcare, but so many of our founders are convinced that God himself put them on this planet to solve dementia or solve transportation mobility issues with seniors, like the Camino Robotics guy is doing. These are deep, personal stories and you talked about how important the founder is, well, are they going to give up in two or three years? Our founders are not giving up in two or three years, they're still much more committed to the cause that they dropped everything to pursue. Not to say they're all going to succeed but, when it comes to commitment and dedication and running through walls, a healthcare entrepreneur is the best entrepreneur to invest in.
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