Invest or Sink – Advice from Jason Calacanis

A few years ago I attended an angel investment conference and a workshop led by a retiring investment banker. He asked the audience who wanted to make money as an angel investor. Everyone raised their hand. He said he was glad to see all the hands because if people were investing without a concern for returns they shouldn’t be investing.

A recent article in The New York Times featured thoughts from well known Silicon Valley investor Jason Calacanis. Jason is one of the more outspoken leaders in Silicon Valley and isn’t afraid to challenge the status quo. He seems to have zero interest in being politically correct — a quality that is rare in the Valley’s echo chamber.

The overarching message of the piece was that technology companies are disrupting the world. They will continue to upend every single traditional industry reliant in analog functions. This isn’t Jason’s vision from some crystal ball, this is the reality, and it’s quite easy to see the examples.

Consider how different factories look today than even twenty years ago. Machines perform almost every process, and humans are only there to oversee the work. The job of the travel agent has been all but eliminated, replaced by sites like Hipmunk, Expedia, and Priceline. Real estate agents aren’t competing with each other these days as much as they’re competing with Redfin, Zillow, and so on.

Then, of course, there’s Amazon. The proverbial category killer, that keeps branching like a hydra into new categories.

Calacanis has a clear message — disruption is happening and will disrupt you. But for the savvy investor, this reality creates opportunity. Invest in this disruption and benefit. The thesis is that simple.

This quote from the NYT sums up his position:

Most of you are screwed,” he writes in “Angel,” arguing that a coming revolution in robotics and artificial intelligence will eliminate millions of jobs and destroy the old ways of getting ahead in America. The world is becoming controlled by the few, powerful, and clever people who know how to create those robots, or how to design the software and the tablet on which you’re reading this.

Like any innovator, Calacanis is not presenting a problem without a solution.

“Mr. Calacanis is peddling a kind of populist movement for investing — he wants doctors, lawyers and other wealthy people, and even some in the middle class, to bet on start-ups, which he says is the best way to prepare financially for tech change.”

As most articles in investing go, the NYT presents the opinion of the naysayers to counterbalance Calacanis’ claims. Traditional “wealth managers” will often say they should be the ones trusted to manage your money. They argue that they are the professionals.

But that argument asks you to ignore the fact that their returns are at best 6-8% before fees…and most don’t even break 5%. It’s important to note that wealth managers are also having to fight hard to keep the money under their management from being transferred to self-directed investing. While their current theories of investment will “balance” a portfolio against downside, most wealth managers won’t even discuss angel investment or early-stage deals as a viable alternative investment method.

According to the best data available, early-stage investors need to know the following:

  • You must invest in 8 to 12 companies to get the volatility to level off.
  • In this range, an investor should expect to earn an IRR in the low 20% range or better.
  • This assumes reasonable effort is being applied to sourcing deals, diligence, etc.

The premise of AngelMD is that we systematize development of a portfolio to earn those returns. Further, historical data tells us that these numbers can be even better with 3 additions:

  • A consistent, large flow of deals
  • Systemic analysis leveraging expertise of physicians and other industry insiders
  • Post investment support by the same experts – make winners, don’t predict them

The best investors are ones who take data points from all sides, perform due diligence, and then act accordingly. I like Jason Calacanis. His views are honest, challenging, and come with a solution for those paying attention and willing to wrestle with new ideas. Like anyone, take his views with a grain of salt, but don’t dismiss them.

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Friday roundup – October 6

The Friday Roundup is a collection of five stories that you need to know about each week. From policy, to innovations, look to us to keep you up to date on what’s happening in the healthcare industry.

Americans Awarded Nobel Prize in Medicine

Jeffrey C. Hall, Michael Rosbash, and Michael W. Young won the prize for their work about the molecular functions behind the circadian rhythm, a powerful element of our biological clocks.

 

Using fruit flies, the trio isolated a gene which encoded a protein that gathers in cells at night, but degrades during the daytime. This degradation of the protein corresponds with the insect’s sleep-wake cycle. The honorees also discovered other contributors in their research which has led to a better understanding of our body clocks and what impacts them.

Do Let it Get Under your Skin

Last week, I wrote about the FDA’s approval of the first prick-free continuous glucose monitor. This week, MIT Technology Review profiled a team of University of Chicago researchers who a working to turn YOU into a continuous glucose monitor.

 

The team has genetically engineering mice skin cells to detect glucose, which can be grafted on the animal and monitor levels 24/7 with no battery or other upkeep. The process definitely needs to be refined, as currently the sensor can only be read using a laser and microscope. So, how’d they do it? CRISPR, of course.

CDC Links US Cancer Diagnoses to Obesity

The Center for Disease Control found that 40 percent of all cancer diagnoses in America are for those affiliated with obesity and being overweight. There are 13 different types of cancer that patients who are overweight are at an increased risk for.

 

Though overall cancer diagnoses in the U.S. have decreased since the ’90s, between 2005 and 2014 rates of cancer linked to obesity rose seven percent. Researchers are not yet sure why obesity is a factor in certain cancers or why the risk associated is not equal across all 13 cancers.

Sharing is Caring

Unless you are an EMR, that is. According to a recent study, only one of three hospitals in the US can send, receive, and find EMRs for patients that receive care elsewhere.

 

There was only about a five percent gain in interoperability between 2014 and 2015, which is slow growth for something that is supposedly going to revolutionize a patient’s care experience. This puts the burden on the patient, as they then need to print out and bring records with them from hospital to hospital.

Gene Therapy Still Debated

In a JAMA study, a child with ALD, a disease which causes nerves in the brain to die, was successfully treated with gene therapy. The typical treatment for ALD is a bone marrow transplant, but at a 20 percent mortality rate, it’s incredibly risky and often difficult to find a donor.

 

The news complicates the narrative surrounding gene therapy, which has been historically negative since the death of Jesse Gelsinger due to an experimental treatment in 1999. A recent death in a CAR-T trial also caused concern, however the FDA’s approval of the gene therapy shows progress.

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Investor Spotlight: Dr. J. Michael Bennett

For this week’s Investor Spotlight, I spoke to Dr. J. Michael Bennett, an orthopedic surgeon with years of experience serving the Houston community.

Aside from the potential returns, what made you decide to get started with investing?

Over the years I’ve learned that it is best to diversify as opposed to putting all your eggs in one basket. I’ve always looked at and been involved with a number of different investing opportunities. I’ve been looking at startup healthcare companies for over five years and that’s how I found out about AngelMD.

I got involved with AngelMD two years ago before anyone else in my local region (Houston). I started researching a company named VICIS when I stumbled on AngelMD. I went to the website and learned about the company. I ended up reaching out to AngelMD and talking to CEO Tobin Arthur. I was impressed, so I started introducing physicians to the platform.

Looking back, what have you learned and what would you have done differently?

I don’t have any regrets. I always look forward and learn from my mistakes. If anything, it would have been nice to find out about AngelMD a little earlier. I think that an opportunity like AngelMD to invest in healthcare startups would have been nice to have ten years ago.

What gets you excited about a potential deal?

It has to be something that I think will be a game changer. It has to either benefit the patient or streamline services. It has to be something that’s novel, and something that can be scaled. The company has to have a solid base and team. You can have an okay idea, but if you have a rock-solid team with an exit strategy, then I’m interested.

What warning signs do you look for?

I look for a few things. I look for how long the company has been trying to get funding and how long they have been in existence. Some warnings signs are if the company doesn’t have a reliable timeline and if they don’t have a good exit strategy. I look to see the backgrounds of the team members and the CEO, including how many and the results of the companies they have been involved with.

How much of a role does healthcare play in your portfolio? Do you see that changing?

I try to diversify, but essentially most of what I’m dealing with right now is healthcare related. It all comes down to our motto “Invest in what you know,” and as a healthcare provider, this is what I know.

What attributes do you look for in an entrepreneur?

The first thing I look for is the ability to listen. They need to be adaptable and listen to their staff and advisors. I like it when they are passionate and have a vision, but they need to be able to pivot. The industry can change and you have to have a plan A, B, C and D.

Is there other advice you could offer people who are looking to invest?

Invest in what you know. It’s our motto for a reason. I recommend that everyone do their due diligence when it comes to investments. The more knowledge that you have about trends in the healthcare sector, long-term outlook in the company – the more knowledge you have, the better.

It can be exciting, but you have to be willing to ride out the ups and the downs. It’s never a sure thing, but you can hedge your investment with information and knowledge, and I believe that is what AngelMD is the best at.

What are 3 things you’re really excited about right now?

First, I’m excited about regenerative medicine. There is a lot promise in regards to cartilage regeneration and using biological scaffolds. It’s very early still but I think it is the future of orthopedics.

I’m also very excited in regards to virtual and augmented reality in healthcare. I think the next phase of training surgeons new techniques is through augmented reality and virtual reality.

The third thing is the current interest in artificial intelligence. With big players like Apple and Amazon producing new technologies, it is setting up the infrastructure of a healthcare artificial intelligence database. I can see that being the next big thing in medical management and disease prevention.

What was the last book you recommended to someone?

It’s called Ready Player One. It’s a science fiction novel about a dystopian future where there is no transportation due to a massive oil crisis. The only way people escape their daily realities is through an alternate universe via virtual reality called “The Oasis”. It exemplifies a very scary reality of what could happen if we replace human interaction with technology, something that is not too far fetched. I also recommend “Talk Like TED” which highlights some of the best TED (Technology/Entertainment/Design) talks and looks into why those talks are so profound and how each speaker utilized some key characteristics to take a talk from “great to unforgettable”.

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Startup Spotlight: Minimus Spine

For this week’s #StartupSpotlight, we take a look at Minimus Spine. Minimus Spine offers a bridge between epidural steroid injections and discectomy. We spoke with CEO David Hooper, to learn about Minimus Spine. To find out more about Minimus Spine, check out their angelMD profile.

Please provide a short overview of your company and the specific need in the market you are currently fulfilling.

A disc herniation can cause intense leg and back pain. While many of these herniations will resolve on their own, the process can take 6-12 months or even longer. Many patients need some help. If you haven’t improved in 4-6 weeks, the treatments are largely epidural steroid injections or surgery. The steroids have limited effectiveness and are often repeated two or three times. They simply buy time.

 

We estimate that in the U.S., about 1.2 million patients go this route every year. Surgery to remove the herniation is effective 80-90% of the time, but it involves short and long terms risks, a significant recovery period, and is expensive. Still, about 300,000 U.S. patients opt for surgery each year.

 

Our Triojection product uses ozone gas to reduce the size of the herniation, with the aim of a single injection to the herniated disc giving 70-80% of patients lasting relief.

Why did you start your company?

I had been working in the spinal implant industry, which has become a very crowded space. Everyone wants to develop products that are less invasive and cost less.

 

In 2006, I started coming across reports of physicians using ozone to reduce the size of a disc herniation through oxidation. A neurosurgeon colleague and I spent a week with physicians that were performing this treatment in Europe. We liked what we saw and more data was coming out in the literature.

 

While attending these cases, we realized that the equipment used to produce ozone was lacking sophistication, mainly on sterility and control. Doctors were making some ozone in a generator that was not sterile, using a random syringe to collect it directly from the generator, and then taking it to the patient. There was no control on the sterility, little consistency on concentration or volume of ozone injected, no control on the selection of a syringe or consideration of how ozone would react with that syringe. Our feeling was that such systems would never go mainstream. What was lacking was a purpose-designed product that conformed to current expectations of a proper medical device. Triojection is just that.

What have you accomplished so far?

We have already hit many milestones. We successfully developed and validated our product. We have built our own quality system and had it certified to ISO. Triojection has CE Mark, giving us the ability to sell it across the European Union. We have now enrolled 40 patients in a multi-center, randomized study in Europe. I’m particularly proud of the fact that we have done all this on less than $4M.

What are the economics of Triojection?

Our aim is to price Triojection such it is roughly equivalent to a series of steroid injections and less than surgery. The average patient receives 2.5 steroid injections ranging from $500-$3,000 each. Discectomy is about $9,000 if you pay cash- but it can be much higher. These are US costs but even in Europe, we expect to be able to save money for the system.

 

Many patients will happily pay for an opportunity to avoid surgery. Importantly, the cost to produce the disposable syringe cartridge is sufficiently low that they will be able to pay. These facts mitigate our immediate reimbursement risk. We plan to focus on private clinics initially, but we expect the data from our study against surgery will help us secure wider reimbursement coverage.

How are you trying to differentiate yourself from your competitors?

We designed Triojection to include a sterile, disposable syringe cartridge that is processed by our console. That is unique. This approach to making ozone gives the physician certainty over sterility and the concentration injected into the herniated disc. Our most direct competitors in Europe are the companies selling an ozone generator for general medical use.

 

We are differentiating ourselves by being the only system that is specifically designed to create ozone for a sterile injection, specifically in the spine. An infection in the disc is a big deal and there are several reports of serious infection after an ozone injection. One cannot simply rely on ozone disinfectant properties to justify the use of a non-sterile product. Particularly, if a sterile product is available.

The console and sterile syringe cartridge work together to produce and measure ozone within the sterile syringe. The syringe is then removed from the protective case and passed into the sterile field.

 

Triojection is not only sterile but the system is unique in its ability to measure and control the concentration of the ozone while it’s in the syringe. It is supported by volumes of testing, as you would expect of a medical device, including sterilization, biocompatibility, validation of the measurement etc. Now we are sponsoring a post-market clinical study.

 

We know first-hand that there are physicians who have been following the ozone literature with interest, but never considered using the systems available. In fact, the investigators participating in our randomized study all come from this way of thinking.

 

Relative to other more traditional options, steroids only address inflammation. Triojection does that, but it also reduces the size of the herniation through oxidation. The gas flows through the herniation, we believe breaking down the herniated disc material and facilitating natural resorption. That should translate to fewer injections. Relative to surgery, Triojection is faster, less expensive, less invasive, and avoids post-operative recovery.

 

Caption: Intraoperative images showing needle placement and delivery of ozone to the center of the disc. Gas flows through the herniation and into the epidural space, oxidizing the herniated material.

Where do you see the biggest potential for growth in your industry?

I believe that growth in the spine industry will come from less invasive technologies and that spine treatments will move towards interventional radiologists and pain physicians. Injectables, lasers and medications will play an increasing role in the management of these patients. There are a number of these less invasive technologies percolating and big companies will acquire these technologies as they prove their worth.

 

I’m intrigued by the idea of large private equity players bringing a collection of these less invasive technologies under a single umbrella, creating a company dedicated to building a suite of products for spine interventionalists.

Over the past 10 years what has been the biggest technological innovation that has shaped your industry?

The traditional spine market hasn’t seen much true innovation in that time, it has been more about evolution of existing products. Industry has tried every conceivable spinal implant. In most cases, outcomes haven’t been improved and costs haven’t come down. Artificial discs are having some success, particularly in the neck. Stem cell treatments are gaining some traction as a possible treatment for degenerated discs and back pain, because they are less invasive and low risk, but they remain controversial and protocols are not well standardized. It’s a bit ‘Wild West.’

What about the FDA?

The FDA is the biggest obstacle to innovation in the US. We have had preliminary conversations with FDA. Right now, like many companies with novel therapeutics, we have decided to focus outside the US. It’s a big world and we can build value outside the US, then make decisions about selling the company, raising money to accelerate the US study, or entering a strategic partnership for the US market.

What is your vision and of the strategy for your company for the future?

Minimus is poised to launch in Europe and my immediate vision is to grow Minimus to break-even on the strength of sales outside the US. We expect to demonstrate commercial traction in Europe while we continue to collect rigorous clinical data. I see us launching in Europe, expanding our footprint there, and then getting into other countries expressing interest in Triojection. Clinical data is important to the Triojection brand. We need to complete our current study and be smart about future studies.

 

Ozone is not a panacea, but it likely has other applications. We are starting with lumbar disc herniation but Triojection could easily be applied to cervical disc herniations. Discogenic back pain may be another application.

 

I recently came across an interesting study using ozone in osteoarthritic knees. Triojection has the potential to be like Botox. Like ozone, Botox has been around for decades. Over the years, the brand continued to grow as new indications were discovered. ‘Wrinkles’ is the big indication that everyone knows- but it wasn’t the first nor the last. The lumbar disc herniation market alone is large enough to be a great opportunity for Minimus, but Minimus has the potential to be much more than that.

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Healthcare Innovation Is Not for the Faint of Heart

The statistics are clear: fewer than 1 in 10 startups will succeed. Healthcare is even more complex; so that number is likely even lower. While innovation in any industry is challenging, healthcare holds a unique set of traits that demand a particular type of team to overcome. For the winners, the outcomes can be significant.

Facing the Giants

In addition to the normal hurdles to starting and growing a successful business, healthcare adds a lot of regulatory hurdles and comes with immense inertia. For those prepared to take the journey, it plays out as follows:

It starts with finding a unique idea. Is there a disruptive market opportunity? Can the status quo be replaced? Will the solution require overcoming regulatory hurdles? If so, this could lead to years of work and millions of dollars spent before the product ever hits the market. Who is going to finance these efforts, with the understanding that every step could kill the idea, and every day could change the window of opportunity?

It’s no surprise that securing funding for healthcare innovation is very difficult. Funding is difficult in any sector, but it can be managed.

Investing in Opportunity

Friends and family rounds often make up the early funding of a company. These folks know you. At this stage, they are betting more on the people than the idea. But beyond this stage, things get tougher and competition for capital is fierce.

At AngelMD, we know the marketplace for both investors and startups is inefficient. We knew we could build something better. Raising capital should not be an easy task, but it can be managed more systematically and efficiently than we see across the industry.

In order to meet those goals, we built AngelMD around the premise of “invest in what you know.” We have gathered physicians, scientists and other subject matter experts from every field of healthcare to help evaluate the companies in the network. We add seasoned investors to the mix to augment the entire process. The resulting formula mitigates risk for all. Then we organize investors into syndicates. There is power in numbers and syndicates are far more efficient for both startup and investor in the near and long-term.

For startups, we provide tools to help them tell their story and to generate interest. Once connected, potential investors will be kept up to date with every piece of information that the company adds to their profile. But that’s just the start. We believe firmly that savvy investors don’t predict winners, they create winners. To this end, the AngelMD is positioned to advise and support its portfolio companies all the way to exit. In fact, we work to help expedite those exits.

It takes a specific kind of person willing to take on the risk of building a company with no certainty of a positive outcome. Yet we work with thousands of entrepreneurs who are taking their shots. By improving the funding cycle, fostering open communication, and allowing experts to evaluate, invest and advise, AngelMD is improving outcomes and speeding up the process of getting the technology to market. And this ultimately serves the patient.

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