If you are the founder of a fledgling business, there are many things that are under your control, but also some that are not.
For instance, entrepreneurs working to develop tools to help hospitals get reimbursed for providing care have likely monitored political news more closely since November. One of the reasons is that following Donald Trump’s victory in the U.S. presidential election, he nominated Tom Price to be Health and Human Services secretary.
Price, whom the U.S. Senate confirmed earlier this month, had previously spoken out against mandatory payment models, including those for “bundled payments” that the Centers for Medicare and Medicaid Services recently approved. With bundled payments, Medicare and other payers establish target prices for procedures such as knee and hip replacements. In theory, this creates an incentive for healthcare providers to keep costs down.
“A lot of these bundled payment companies that were pitching us—we were very interested in them” before the election, says Shobhan Thakkar, a partner at the Madison, WI-based VC firm HealthX Ventures. “Now, we’re holding off on them. A lot of hospitals are saying, ‘We have to wait … for Trump’s policies to start falling [into place].’”
Thakkar was one of four participants in a panel discussion titled “Things That Surprise Founders” on Wednesday in Madison. They addressed a range of topics, like the importance of focusing on the needs of current and potential customers; pros and cons of taking money from VCs and angel investors; and why, in certain industries, it’s better to err on the side of obsession when it comes to documenting information and keeping key paperwork on file.
Another panelist, Shawn Guse, is co-founder and CEO of Intuitive Biosciences, a Middleton, WI-based company that sells reagents, slides, and other products to a customer base that includes organizations developing human and veterinary diagnostics. He had insights to share from his current and previous companies.
Before he helped launch Intuitive Biosciences, Guse, who has a law degree, worked as a vice president and general counsel at Madison-based TomoTherapy. That company, which manufactures radiation oncology machines, went public in 2007 before being acquired four years later by Sunnyvale, CA-based Accuray (NASDAQ: ARAY).
Guse says the timing of the IPO, the largest ever by a Wisconsin company, was fortuitous. Many of TomoTherapy’s executives and investors were able to cash out before the 2008 financial crisis.
“We raised about half a billion dollars between money that came into the company [as part of the IPO] and the money that went back to investors through a primary and secondary offering,” he says. “Those offerings were in June and October of 2007. Good timing, right?”
But unlike presidential elections and economic downturns, Guse says there are lots of factors over which leaders of businesses exercise direct control.
He says the notion that a company should always strive to create the best product possible sounds nice, but in practice is not realistic. Guse says he has had to push back against scientists at Intuitive Biosciences who wanted to make the company’s platform for diagnostics more sensitive.
“We may be more correct by building a better test, but we will put [customers’] business in the toilet,” he says. “You have to build the product that the customer wants, not the best product that the science dictates you can build. Betamax versus VHS is the classic example—the best technology doesn’t always win.”
It’s also critical that founders keep a close watch on what’s happening internally with their companies, says Mary Jo Gordon, another member of Wednesday’s panel. She has decades of experience in the medtech industry. Currently, she does consulting work for a variety of companies, including startups developing medical devices and drug delivery systems.
Gordon says that a number of companies have had to shut down because they made claims about their products for which they did not have clearance from the FDA and other regulatory bodies. She says the number one reason the FDA sends “Form 483” warning letters, which the agency uses to communicate concerns after inspecting a device, for instance, has to do with improper documentation.
“It’s more paperwork than it is actual problems with the product,” Gordon says. “And that’s a big surprise to founders who have been really pushing a product down the road, but haven’t … documented what they’re doing.”
She cites Palo Alto, CA-based Theranos as an example of an “arrogant” company that did not pay close enough attention to meeting FDA and CMS requirements, or other controls Theranos needed to have in place.
Theranos has raised more than $686 million from investors since the company was formed in 2003. That fundraising total is high, even by Silicon Valley standards (and practically unheard of in Wisconsin). Several startups headquartered in the Badger State have raised eight-figure rounds. But for very early-stage companies, it can be hard to get on the radar of VCs.
Some of these nascent businesses may instead opt to raise money from angel, or individual, investors. One advantage of doing this is that angels are often willing to give startups more friendly deal terms than VCs, says Andy Walker, co-founder and partner at Rock River Capital Partners. Walker, who participated in Wednesday’s panel, says raising a funding round from angel investors can be a good way to go, but only up to a certain point.
“I would say that if you’re asking for $1 million or more … the only way to do that is to start duct-taping together a bunch of angels, basically,” he says. “And that’s when things start getting really complicated with structures and terms.”
Thakkar points out that unlike VCs, most angels are not focused on investing in startups full-time. That means venture groups such as HealthX are able to offer more than just money, he says.
“We’ve helped [our portfolio] companies meet downstream VCs—not only from Wisconsin, but across the country,” Thakkar says. “Those are the connections that we build, because that’s our job. I do think the VC money allows companies to grow faster.”