Jay is a partner at Wavemaker 360 Health, a healthcare fund with a liberal definition of what a healthcare company is. They do seed investing ($100-$500k first check). Jay is very thoughtful about everything from how he leverages his LPs to the implications of value-based care.
Today we are joined by Jay Goss of wave maker 360 health. We’ve had the great privilege of working with Jay on a couple companies before and we talk all the time. He is our local health tech expert. And welcome Jay. Thank you. Great to be here.
Great. Well we practiced the name a few times. Wavemaker 360 health. I had to write it down.
You guys are seed and Series A investors. seed is our frontline and then we have dabbled a little bit north of seed and a little bit pre seed right.
But staying in the health vertical always. Always in the health vertical, nothing outside of health care period.
Great. And before this you you’ve worked with startups before.
Yes. Lots of lots and lots of work.
I remember this because your interview Pasadena talk was titled something like My Thirty fourth startup fund. So what did you do for those 33 prior companies that you were working with.
Well it started out as being the entrepreneur in the early days or the early days of my startup work. I was the entrepreneur I had the light bulb moment started the idea got it going set it up in my garage with my credit cards had some successes had some failures and then basically kind of developed a brand around myself as a guy. Other startups would bring in when they got to that point where the founders wake up one day and realize I don’t really have what it’s take to get to I don’t really have what it takes to get that company to the next level.
Usually something around the commercial side of it.
Most of what I need now is Jay Goss.
And in some cases it’s a it’s entering and a little bit of a hostile situation where I’ve been brought in by the board or the investors of the entrepreneurs who are dissatisfied with the progress the company is making.
So back when you were starting your own companies in the early days were those focused on health care or is this a new passion well company number one that started the whole thing was a company in the health care arena is what we would now call Zach Doc what we would call online appointment scheduling
We’re one of the first four companies in the country that said wait we can we can transact services on the internet too because a service is fundamentally a unit of time in a physical place called a doctor’s office or a hair salon. And so we see we’ve created a online appointment skin scheduling platform for service providers primarily healthcare so they could put their book of business on the Internet and in empower their patients to sell schedule.
Great. I have about a million questions about health investing too.
Great. Well let’s let’s sort it out right here. My first one though is sort of what is health investing. And I hear people say Oh I do life sciences but not medical devices and how do you define what you do and it just also can you just define the terms. Right.
Well for our fund at least we start out we were a health care fund. Part of part of the answer goes back to that the people that comprise the fund my partners but from the beginning the idea was we were going to be a health care fund we were going to start out with perhaps the most liberal definition of what a health care startup means. The only thing we carve out and don’t choose to do is biotech. So the simplest answer the question is we talk to people is we’re a health care fund minus biotech and that gives people a pretty quick umbrella upon which to put over us and say OK you’re done.
You probably then are doing med medical device and we are we’re doing diagnostics we’re doing digital health wearables we’ll do just about anything in healthcare as long as it’s not biotech. Reason for staying away from biotech for us are in addition to the two obvious reasons sort of the capital intensity that’s required and a fund of our size can’t play in the follow on rounds of typical biotech deal.
And the other obvious answer being or the other obvious reason being San Diego does biotech very very very well Northern California does biotech very very well. Therefore why why copy what is already out there. But the main reason we stay away from biotech but include everything else in her health care is we’re very much a fund that believes that we can and do support the companies that we invest in but we’re mostly business people.
So there’s just not a whole lot of all the great business minds in the world can influence the molecule to beat to behave differently. So there’s not a lot of sense in us investing in this is a more thoughtful answer. The question around biotech there’s not a lot of sense in us investing in biotech just because we can’t we can’t make that molecule to do anything differently and biotech and therapeutics.
There’s a lot of overlap not perfect overlap in those two words.
A lot of a lot of overlap therapeutics generally is therapy. So I think 30 years ago therapeutics equated to life science and biotech. Now I think we use that term at least internally we use that term a lot more generally if it is therapy for if it is helping the human being. It is a therapeutic digital health product could be a therapeutic in some regards. Certainly a medical device could be a therapeutic. There’s a there’s also as you mentioned a little bit of a distinction between inside the body medical device and outside the body medical device.
I’d be the first to say we don’t we’re not running around looking for pacemaker technologies stuff that’s being implanted in the human body to us from a science perspective behaves more from a business model perspective like a drug than it would be a new form of dental floss or a wheelchair or something that you sort of can wrap your brain around without having to understand the underlying science.
I feel like I missed a step between the 33 companies and you being solely focused on health care. How did that decision come about.
That decision came about because John Nalco the other general partner in our fund and I when we got together in late 2016 to in essence Hatch start up number 34 which was the fund we needed to figure out what we wanted to take advantage of.
My background is 20 ish percent health care startup. His background is 100 percent health care. So that decision around what to focus on and take advantage of our natural assets becomes very easy when the guy you’re starting to fund with ran the global health care practice for all of Ernst and Young had 4000 people under him in his portion of the pyramid there and then leaves Ernst and Young and is CEO of Gen X which is now one of the three legs of United’s Optum. So a lifelong career in health care. Combine that brain at the time we were a two person fund to partner fund combined Jon’s brain with my brain and experience with my entrepreneurial background.
We thought we had the first two pieces you needed to evaluate early stage companies that were health care early stage companies.
You have a very interesting set of LP. I think it makes you quite unique. We won’t talk about that.
Yeah that’s our LP base is really are differentiator. That was the other decision that we made in 2016 and it went hand-in-hand with the decision to become a health care fund. We did the health care fund because we did sense some supply and demand in balance especially here in Southern California. Lots of great venture capital funds not lots of great venture capital funds that had the interest in really focusing on health care so that that got us going Jon’s background kept us going. But then along the way we realized who we were going to raise the fund from.
We’re primarily going to be high net worth individuals today we have about 80 L Ps 79 of which are individuals and most of those 79 have big big jobs in the health care system at the United States. If you’re a health care executive guess what all day long you’re getting pitched you’ve been on all day long but really all week long all month long you’re getting pitched in the circles you run in and people are walking up saying hey I want you to grab you in the elevator I want to pitch you my startup idea it’s in health care those now all come to us.
So we get deal flow all over the country because so many of our LP are health care executives. We also leverage our health care executives when it comes to evaluating our companies. So probably without fail every company in our portfolio interacted with one or more of our limited partners to help give us a second opinion. They do a 30 minute call we usually listen in on that call and it questions come out of that that would never have come out of our mind. And then lastly of course the limited partners are fantastic when it comes to supporting the companies once we do make an investment because they have big jobs in payers they have big jobs and providers and skilled nursing facilities and medtech and so they can we can introduce them right into the very companies that they’re wanting to do business with.
How many. Who is their customer.
Most of the time probably they’re from a ranking standpoint most of the time it’s providers.
But then that takes on a whole bunch of different tentacles. We have providers that are big health systems the big sort of famous hospitals. Some of them shy away from that for reasons that you mentioned David. Not only is healthcare a tough customer to sell to but the hospitals that everybody wants to work with here in town the Cedars and UCLA and the USC is in the City of Hope. And then nationally the Mayo’s and the Cleveland Clinics the big shiny logos those folks are really hard to work with. So then we have another group of of portfolio companies that are skipping the big large health systems and instead preferring to work with the 5000 or so what we call community hospitals.
No one’s heard of them. They don’t have six or eight hundred beds they might have 100 or 200 beds they might be in this big city they might be in a small city but they’re a lot easier to get a signed contract with they may or may not be more innovative.
But one thing is for sure true once you get that signed contract you get up and running in those hospitals a lot faster than you can get up and running in the big shiny hospitals. And then we work the other big group that our portfolio companies tend to work with or the payers because more and more of health care is driven by what the what the payers want to do and the and the payers incentive to save money.
Is the current debate. The national debate about health care and who’s who the payer is is that creating any complexity for you. Depending on whose number you go with. We’re spending between 18 or 18 and 20 cents on the dollar on health care in the United States but it’s going up.
And so next year it’s 19 and the year after it’s 20 and then in the year after that it’s 21 at some point. We’re spending so much money on health care in the United States that there’s no money left to fix a pothole on the road or whatever else we want to spend the national treasure on. So the market is driving this and the market is driving this at a time that remember we also have you know in our entire adult lives we’ve been hearing about since our 20s the baby boomers retiring baby boomers retiring baby boomers retiring Well now guess what they are retiring and that’s having a huge impact on the health care system in the United States because generally not always but generally become a bigger customer of health care services when you hit that magic number of 65.
But our big thesis which really stems from that question is that here we have a three trillion dollar industry that’s changing the way the cash register works. You know this transition from fee for service to value based health. We’ve had fee for service health care across the United States for our entire adult lives. There was a there was a health care system that’s 40 plus years old. That was that was the predecessor to fee for service but we’ve never known that those of us in this room right now have never known anything other than fee for service health care and fee for service health care is just like Starbucks.
The more people you serve the more services you deliver the more money you make. Over the last 40 years the most profitable hospital in America is the hospital that has the biggest line out the door. But over the next 40 years arguably the most profitable hospitals in America will be the ones where it’s crickets because you’re getting paid per member per month or getting care they’re getting paid to take care of a population in which case you’re better off you’re financially rewarded by not letting those people come into the hospital by keeping them healthy whereas the old health care system licked its chops so to speak when people showed up smoking was a good thing.
If you’re in the health care business there’s so many examples of perverse incentive systems with our health care system that go away with what in California would almost call the Kaiser model where they’re they’re financially incentivized to keep you out of the hospital. They want to keep you healthy so they’re not spending they’re still gonna get their per member per month.
So now it’s about keeping you away from the most expensive health care setting which is called a hospital.
What is the state of value based care. What is the state of it in terms of adoption in the US. And then you asked also about well you were talking about what are the implications then for the business models of selling into those payers right.
Well it’s getting less defined in terms of the adoption. But even from when we first started to talk about the fund which was late 2016 until now just the end of 2019 it’s getting more universally accepted that value based health is here.
But if I go back just for the sake of answering the question I go back to 2016. The sense was those of us on the West Coast were all in on value based health and the percentage of hospitals that had at least a percentage of their revenue coming from at risk contracts where they were getting paid per member or per patient per month to keep that population healthy which case they have they’re taking on risk or taking on the same kind of risk that the insurance companies traditionally took on most of that was happening on the West Coast at least if it was happening in the Midwest and then the East Coast or somewhere in between.
But clearly that those first second third have blurred over the last three years. And while I think it’s probably still true that there’s more at risk provider commerce going on on the west coast and there is the East Coast and the Midwest behind all parts of the country are popping up in doing it it almost doesn’t matter what part of the country you’re talking about it’s being adopted everywhere. It doesn’t mean every hospital does mean it’s being adopted uniformly everywhere. But it’s certainly happening everywhere in the country and bundled payments as a very specific micro example of this where you’re where you’re a physician and you’re getting paid a bundle to do the total knee replacement surgery in the old days.
If you think about it in a very perverse way you do the surgery you replace the knee the surgery goes great great the surgery goes not so great. Still kind of great from the standpoint of the cash register because the patient comes back in the knee surgery was botched. I get a repeat customer in the old days the new days it’s a bundle it’s a payment. And so the the surgeon stays under the bundle and the surgeon he or she is in the black. If that patient comes back if they’re readmitted if another surgery is needed to fix or correct the botched surgery they’re in the red.
And so then there’s incentives driving the cost down not just not pass as a surgery drive the costs down get get the services done even where there’s where they are most able to be there is there was an announcement by CNS just a couple weeks ago about a handful of new surgeries that forever and ever had the requirement or had the commandment a vow shall do these kinds of surgeries in hospitals and hospitals only starting January 1st a handful and this has been happening by the way year in and year out starting January 1st.
There’s a new handful of surgeries and for the first time are allowed to be done in surgery centers and that same exact surgery in a surgery center can be quite a bit less expensive than that same exact surgery and a big expensive hospital.
So from your perspective back kind of reeling it back to you as an investor what kind of opportunities is this sea change creating what are you seeing.
There’s a bunch of businesses today that while their product or technology or service is nothing new it could have been brought to the market years and in some cases decades earlier. There is no business model that could support the thing it did. Telemedicine is a very sort of classic example of that. We’ve had the phone for I think one hundred and forty four years now.
So it’s been nothing holding us back from the interaction between a patient and a doctor on this thing called a phone. Except there was no way for that all important economic driver that the economic driver wasn’t happening. Meaning the doctor couldn’t get paid for telemedicine. Guess what. We go one hundred and forty three years without it. It’s only been since doctors have gotten to the point where they can get paid either by the patient directly or through the payer.
That guess what. Now we have something like eight hundred funded telemedicine companies in the country all because the economic models are changing and back to Minnie’s question. Some of this is then reinforced with politics and the government side with the state of Texas at three years ago you were you were it was illegal to practice telemedicine in the state of Texas. Pretty big state not allowed to do it economic drivers changed it and then the state of Texas is legislature changed it and now you can practice telemedicine in Texas and it’s getting done all the time.
What does the message control versus what is state control or other people control man.
My own interests are CNS controls.
I mean my view mice probably wildly oversimplification of it controls Medicare and Medicaid. So the United States going back to the principle that when you turn 65 year old or you happen to become a customer of the health system generally speaking and when you turn 65 you happen to go into this thing called Medicare and then Medicaid throughout the throughout the land CNS oversees those two funding sources for health care.
But the answer becomes more profound because as CNS goes so do most of the private insurance companies. So a united or an anthem or a Blue Cross Blue Shield are generally not far out of line with what Medicare and Medicaid are doing so while they don’t necessarily drive the micro decisions that are being made on the private insurance plans they tend to influence it because they’re taking care of.
A big percentage of the population.
Well you and I have both heard pitches where the founder touts a new code. Yes it’s been created by CNS. Yes says unlocking a stream of cash that can yes or service.
And that’s and that’s the fee for service mindset that’s still there.
So you know just to just to go back to that point we do not need our companies to be A.I. fee for service or A.C. PTO code. If they have something that can be reimbursed in today’s world great but if that same something is going to do better in a value based world we really tend to lean in at that point.
I know another one that you love it is sharing your expertise on the FDA just getting this was getting CNS FDA I more three three letter acronyms do get.
But tell me so actually tell me a tiny bit about your team because I know quote me comes from the FDA mistaken. So tell me about what you guys how you look at that risk if you look at that risk receiving FDA approval risk.
Yeah. The thing we did coming out of 2000 and mid 2018 is we started out of the team. So we brought in Eric Martin who gave us some providers side brain power because again so many of our companies do sell to one type of a provider or another. So Eric came to us out of four of the biggest health systems on the west coast and then Cuomo who you just mentioned came to us from the FDA spending 12 years inside the FDA kind of learning and then executing the inside baseball of the FDA all on the MedTech side.
So Medtech would for us and our definition Medtech would be anything the FDA touches except biotech which is convenient for us because we don’t do biotech. So that’s going to include digital health nowadays but more traditionally it’s going to include diagnostics and medical devices. And we have because we have you know quality in essence is a secret weapon. We’re just far more comfortable looking at the kinds of opportunities we looked at prequel me and post quality. It’s night and day. We just have far more courage to look at companies that are one way or another are gonna be in the crosshairs of the FDA generally class one class two devices but they need the FDA is blessing whether that blessing be in the form of an approval or a 5 10 K clearance.
We have somebody that can help us think through that and it’s really at the end of the day it’s not that we have somebody that can predict whether or not the FDA will say yes or no it’s whether or not the FDA will get to that decision point in weeks months or years. We are far harder to get excited about a company if the FDA journey is going to be many years versus if the FDA journey is going to be a couple months we can tolerate that risk. We can’t tolerate a risk or we’re not going to get any market signal for many years that that becomes too much like a biotech company at that point and will stay away from those so safe our non health list health care listeners can you give me the basics of.
You get it regulated by the FDA if you’re making a medical claim there is class 1 class to class 3. I don’t exactly know what falls in there. Can you define like a 5 10 K clearance or any of that. Give us the basics. Just educate us.
Yeah I have to channel my inner me on this one the basics around the 510 k and the and the plug it’ll sound like I’m plugging the FDA but the FDA is far my sense and I don’t have 50 years of experience doing this but at least in the last 10 years the FDA is far more aware of trying to not be a slow down entity but trying to accelerate that they know that for the betterment of sort of mankind in health they need to continue to make sure that things are you know safe and effective and play that role but they’re also mindful of not unnecessarily slowing things down we hear about it all the time in the world of drug development and how expensive it is to get a drug from idea through all of the clinical trials and then the market.
The reason our drug prices are ostensibly so expensive is not because that drug cost a lot to develop but it’s all the drugs that failed along the way and if we could make those failures cost millions instead of billions then the once in a blue moon drug that succeeds doesn’t have to be as expensive because it’s not having to pay for all the losers. It’s like on a venture capital fund mentality. The companies that succeed in a venture fund have to pay for all those companies that dances succeed anyway point being is the FDA is mindful of this and the prevalence her popularity the 5 10.
My view is around the fact that they’re trying to make it easier especially around med device for companies to say I’m doing something new in this arena. But it’s pretty much taking advantage of as a starting point a product that you the FDA had approved yesterday or 10 years ago or even even John Oliver jokes about this sometimes the the the predicate the existing device. John Alder has this great routine on this exact topic sometimes the predicate is quite a quite old and yet the new entrepreneur today is going to the FDA and saying see I’m starting with this dental floss that you guys approved all these years ago and I’m making it just a little bit better and then that puts them on a trajectory with a 5 10 K and especially around things that are you know there is there is this range of things that the not counting biotech there is this range of things that the FDA looks at from you know dental floss at one end of the spectrum to pacemaker at the other end the spectrum and maybe the wheelchair is somewhere in between.
We tend to be kind of in the dental floss up to wheelchair end of the spectrum so the lowest risk to the medium risk and then we’ll stay away from the implantable is the things that behave more like biotech.
Oliver floss company listeners are going to be coming to you trying to keep this low health tech high grades.
I only have asked you what size checks you write which is the most important advice in check size.
So all of our checks first check into companies are between 100 and 500 thousand we do. I think we’re at least a a classic seed shop in that regard maybe minus the seed funds that are up north. Our real goal is to get about a million dollars into a company to approximately two hundred and fifty thousand on average for our first bite. Follow the company and more importantly support that company.
Got it. I just had to make sure I hit that but I wanted to ask more interesting questions maybe than you are about just the future of the world and just what are the big picture things that you think are going on.
Do you think Amazon is going to get into health. Do you think peloton is going to know all of my metrics better than my doctor.
I don’t know. What do you think are some of the bigger ideas you see coming down the pipe.
Yes on peloton first for sure yes on Amazon. Not sure about dental floss.
I think our belief in a lot of what’s driven at least a portion of the portfolio is around data. If you think about what’s happened even even non healthcare people have seen one thing happen over the last 15 ish years which is that file cabinet room behind the receptionist at your dental office or your doctor’s office that’s gone paper records are gone. We spent a tremendous amount of energy and time and money getting electronics records getting records from paper to electronic digital electronic medical records electronic health record systems and that became really a foundation for an industry that now that data is digital.
The primary reason the primary driver was to make things easier for billing. That’s what got the whole thing going. Is it now it would be easier and less administratively expensive for the doctor or the patient to submit the claim to the insurance company. The insurance company could evaluate it and then send the money to the doctor or send the money to the patient. If the patient had paid at advance the money to the doctor that’s what got it going. But now that we have everything digital or I think I read a statistic that were about 97 percent digital so for all intents and purposes health care is now digital.
That means there’s lots of data out there and there’s lots of things that we can start to attack through data that until that had happened there was no fighting chance and that could be related to health management around diabetes brain health. If you think about even what’s going on with the call endoscopy example that that technology is being trained by looking at the digital data of tens of thousands of people that have had call an Oscar piece that’s how the A.I. is is working but that tech not but the data had to be there in digital form in order for the next thing to take place.
And we’ve invested lots of companies for which the thing they’re doing creates data. The thing they’re doing is what’s making the money today.
But the underlying probably the underlying value proposition of the company in the future will be the data we agree.
And I mean it opens up all sorts of questions which is I do think that having spent a decade at Google GOOG everyone is criticizing social media right now for selling data to advertisers. But I worry that health is the next place that we will turn our sights to if we’re not extremely thoughtful there. How do people get access to you know if you’re a startup and I want access to EMR data how do I how do I go about getting access to the data I need to build the A.I. on top of it.
Well if you’re asking a question from the standpoint of building a business around it it’s a really interesting question and 2019. Because as we have explored investigated different companies that are building an A.I. based company around data we have we have learned somewhat the hard way. We have trained ourselves to think about the proprietary ness of the database that the entrepreneur is going after. In other words if anybody can get their hands on the data then doesn’t matter how smart the A.I. team is. If the data set is sort of publicly available and many data sets are publicly available we have to have the discipline to not invest in those because if those at that point if anybody if anybody can get the data their hands on the data and if those anybodies are just smart A.I. scientists at a Stanford or Berkeley or any other M.I.T. any other places where we have these talented individuals then the the barrier to entry is not there.
So we actually spend a lot of time looking for businesses for which getting the hands on the data in order to train the A.I. is a trickier proposition because then if you can pull that off you’ve got that moat. Otherwise you don’t and your business somewhere down the road quickly becomes a commodity.
And how much and what of those investments what percent is L.A. or Southern California.
Today we’re 40 percent so cal and a bout evenly split in the other two buckets that we pay attention to our Northern California and rest of the country and really rest of the world. Remember the the first name and are in our funds name wave maker comes from our joint venture with wave maker here in Santa Monica but they also have a three funds in Singapore they cover Southeast Asia so we’ve also co invested with them now three times where the company may or may not be based in the United States but they’re operating in and around Singapore throughout that belt of Southeast Asia.
So we actually have another statistic for that but basically close to a third a third a third.
But a little bit more heavily weighted on SoCal but I had as L.A. is a two part question but do you think Pasadena is the best place to be to have your office.
I do like our office being invested today. We are pretty awesome. We like the Pasadena is pretty awesome factor and we we like who were associated with in Pasadena.
We had a lot of present company included we we like this the association with Cal Tech we like the association with IDEO lab we like the a little bit more of the story from a health care perspective a little bit more of the seriousness of the entrepreneurship that’s going on in Pasadena and that’s fundamentally what we’re investing and we don’t get the luxury of investing in electric scooters and sort of more Silicon Beach type stuff.
Awesome. Thanks for coming in visit since entering city. Exactly. Anything else.
I have lots that I could ask but I think we’ve taken enough of your time. Thank you so much for coming. You got it My pleasure. Thank you.
Hey. Have you. Have you heard of Pittsburgh. The data they provide.
Yes I have.
The uh the Paul operation pitch book is something that we do use probably every day especially when it comes to the newsletters. They do a good job for us on keeping us up to speed on what’s going on. Getting information about other fundings and they do the health care reports so when they’re doing something that’s at all for us it’s very easy because we’re going to scan through 90 percent of what they are talking about is not relevant to health care entrepreneurship. But the 10 percent that they do focus on health care that’s music my urge every every time I get something from them via email or any other events that I see them out great because that was exactly actually what they had told me that they wanted to promote was the fact that they do all this.
They have an amazing newsletter and their news and events are something they’re really making a push into. So thanks