Interview with a Medical Device Venture Capitalist, Darshana Zaveri, on Physician Entrepreneurship

Darshana Zaveri of Catalyst Health Ventures

As physicians become increasingly interested in entrepreneurship, it is important that they first understand the different elements of the entrepreneurial ecosystem. Recently, I had the opportunity to sit down with Darshana Zaveri, a partner at Catalyst Health Ventures, a Boston-based fund that invests mainly in medical devices and recently made an investment in the Otolaryngology space. Darshana discussed her firm’s role in the start-up life cycle and was kind enough to offer advice to physician entrepreneurs on approaching venture capitalists for funding and avoiding common pitfalls that physicians often make.

Manan Shah:  Tell me about Catalyst Health Ventures and what types of investments you make. 

Darshana Zaveri:  Catalyst Health Ventures is an early-stage healthcare venture capital fund that focuses on technology solutions that solve large problems in healthcare. We work with lots of physician entrepreneurs, many of whom are surgeons. Our particular interest is mechanical solutions to mechanical problems, so we invest predominantly in medical devices. Our expertise is in assisting to develop the design and engineering of a device. We also will invest in diagnostics, which make up about 20% of our current portfolio, and we sometimes invest in research and development tools for scientists. We have been investing in healthcare for 14 years now through 3 funds, the last of which we just closed last December. Josh Philips and I source and manage all of the deals and opportunities, and we have about $100 million under management.

Manan ShahWhat are your thoughts on physician involvement in healthcare entrepreneurship?

Darshana Zaveri:  I think physicians should absolutely be involved. There is a lot of emphasis on savings and money in the healthcare system today, but at the end of the day, it should be about the patients, and most physicians truly care about and understand their patients. They know what the clinical needs are and should be involved in finding solutions. In fact, whenever we see an area where a physician has jerry-rigged a solution to make a procedure work, it is a sign to us that it would be a great area to invest in. When we are considering a new device investment, a large part of our due diligence is discussing the concept with physicians we know and trust.

Manan Shah:  When is the right time for physician entrepreneurs to approach early angel or venture funds? 

Darshana Zaveri:  There is no easy answer to that, and there’s a lot that rolls into what makes for an attractive investment opportunity. At Catalyst, we are willing to start the dialogue early, and I mean as early as just having a concept and a PowerPoint, as long as the concept is innovative, feasible, and most importantly, it must improve clinical outcomes and reduce cost. In terms of clinical outcomes, it cannot just be that your imaging technology provides two times more clarity than what is out there; in order for us to want to invest, you have to fundamentally change the clinical paradigm. Most physicians are able to articulate this clinical value, but one area where we see a lot of entrepreneurs stumble is articulating the economic value.  You do not need to have an Excel model, but you do have to have a back-of-the-napkin idea of how much your innovation will cost, how much it will save the system, and how many people it will help.

On the other hand, you do not need to have nailed down every part of your business plan, or have all the answers to the FDA regulation, and the right team. Part of our job is to help you put those pieces together. The most important thing is the concept, and the product has to be cost saving and very innovative.

Manan Shah:  What are some other common pitfalls that physician entrepreneurs make?

Darshana Zaveri:  We are based here in Boston, which is a Mecca for doctors, and we are lucky to interact with extremely bright physicians. One common frustration I have is when a brilliant clinician brings on a subpar CEO, or worse yet, brings on a good CEO but does not allow that CEO to direct the company. When we take meetings with them, it is hard for us to determine who is driving the company, and that uncertainty concerns us. Often, entrepreneurs make the mistake of just partnering with a hired gun, or any MBA, because they think they cannot attract someone better at this stage. This isn’t true; in the same way you need to convince investors to provide VC dollars, if the concept is strong enough, you will be able to attract strong teammates, and then you have to let them execute. Sometimes these quick partnerships make things worse; if we find a great clinician with an innovative concept without a team, we can find a strong CEO to partner with, but it is much harder to get rid of somebody than to find somebody else. Partnering with someone in a business, be it a CEO, a technician, or a researcher, is like a marriage, and it is a good idea in business to date a lot before getting married.

Manan Shah:  Do you think physicians should be CEOs of their own companies? Or do you think our training of ‘trusting no one and double-checking everything ourselves’ hinders us?

Darshana Zaveri:  While there are definitely exceptions, I think it is not always the best idea for physicians to be the CEOs, because sometimes that culture of certainty, particularly with surgeons, prevents you from seeing pitfalls. And it isn’t just physicians, in general, being a CEO is a very tough position, and very few people are good at it. It requires a special mix of personality, experience, and a characteristic that I can’t put my finger on, but I know it when I see it.  I think it is far better to make sure you hire the right people, and, once you do, let them do their job effectively.

Manan Shah:  You recently invested in a medical device in the Otolaryngology space, the Lantos Aura 3D digital ear scanner. Could you tell me a little about the device and how it is as an example of what you would consider a strong investment?

Darshana Zaveri:  I think the hearing aid space is ripe for innovation and currently is dominated by a few key players. We have seen a few companies entering this space; one had to do with disposable hearing aids, another was an online hearing test, and the direct-to-consumer companies are popular now as well. In general, we are leery about technology that leaves the physicians or audiologists out of the loop, because they should be the ones disseminating the technology, and we want them to be our champions.

We were the lead investors in a company called Lantos, which created a device that uses 3D scanning to measure the ear canal and improves the process of creating custom ear buds and fitting hearing aids. As an investment, first off, it completely shifts the paradigm, and the hearing aid field is ripe for innovation. The current technique uses silicon putty placed into the ear to create molds, and many audiologists are hesitant to measure deep in the canal for fear of damaging the tympanic membrane. This technology allows for deeper measurement of the canal, and there is a lot of innovation going on for deep-in-the-canal hearing aids. Also, the silicon putty method takes 10 to 15 minutes to fit, whereas the Lantos technology only takes 30 seconds. More importantly, that computer scan can be sent directly to manufacturers, avoiding the time to mail a mold back, so it decreases the time to production and saves the customer time. Lastly, it improves the function of the product itself because it allows for dynamic measurement. Since the ear canal changes shape with movement, the Lantos technology allows manufacturers to see which areas are constant with movement, allowing for a better-fitting ear bud. Ultimately, this allows you to get increased performance and battery life, since you have less sound loss and require less volume. The technology came out of a group of clinicians working with researchers out of MIT, and all the clinicians we spoke with wanted a digital scanner, which we knew was a strong sign.

What we also liked about Lantos was there was a consumer angle to it. Audiophiles and musicians use custom ear buds, and companies like Logitech and Skull Candy are interested in driving and expanding the custom ear bud space, so we think there are multiple markets that this one technology can address.

Manan Shah:  Thank you very much for sharing your time and for the insightful advice.  If readers have questions for you, is there a way they can contact you? 

Darshana Zaveri:  Sure. They can visit our website and contact me through there.

Learn more about Catalyst Health Ventures and Darshana here:

Suggested Reading: How Design Patents Strengthen a Medical Device IP Portfolio

While the topic of patents is currently controversial in the entrepreneurial community at large, for medical device companies, it is crucial that you utilize patents fully to protect and capture the value of your intellectual property. Filing for utility patents to protect how your device works is obvious, but as this article notes, even the major players do not always understand the potential value of design patents. There is no reason to leave value on the table, and I think the article below is a great read.

(Full disclosure: I am related to one of the authors, but I think it is a great summary of the topic)

How Design Patents Strengthen a Medical Device IP Portfolio

One key point discussed is how the look and feel of a device can subtly drive brand loyalty. The obvious example of this is how many consumers just prefer the user interface of Apple products over Android products, despite the many benefits that android offers. In the medical realm, I can attest that surgeons are creatures of habit; once they are comfortable with the outcomes they can achieve with a device, they will be hesitant to switch, even to a device that is very similar or even better.

Initial Steps for Physician Entrepreneurs

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Originally posted on

Every time I see a GlideScope, I can’t help but lament, “why didn’t I think of that?” To me, the GlideScope exemplifies how physicians can apply their practical knowledge of medicine to create technology that improves patient outcomes.

I had a front-row seat to physician-designed technology prior to my residency, when I worked at an early-stage venture capital fund advising on health care investments. We invested in a number of physician-founded companies, and the physicians I met were both inspiring and visionary.

Unfortunately, despite their medical expertise, most of these physicians had never been educated on the initial steps towards building a concept into a company. Nothing frustrated me more than seeing promising technology, which may have actually helped patients, stall due to simple, avoidable pitfalls. When we met with physicians who hoped to commercialize their innovations, many sought advice on buzzwords like market size, regulatory pathways, or the reimbursement landscape.

Instead, before considering any of these more complex topics, we ensured they could answer four vital questions to confirm that the foundational idea was solid and that all of these other paths were even worth pursuing. I think of it as the Mr. Miyagi approach: get your basics down first. I have listed these four, initial considerations below in hopes of helping others avoid some of the most common pitfalls. I have a surgical bias, so I focus my explanations on medical devices, but these principles can apply to any healthcare innovation.

1. Does it already exist? It seems obvious, but ensure that a comparable device is not already available. Start with a thorough Google search, check catalogs of major companies, exhaust PubMed, and without disclosing your idea, canvas your colleagues, scrub techs, and members of your hospital purchasing committee about similar technologies already available or in trial. Next, use either Google Patents or visit the U.S. Patent and Trademark Office website to assess the novelty of your concept. When searching, try a multitude of different keywords describing not just the device itself, but also outcomes achieved via the device, to see if a similar idea is already patented. Even if you do not understand the legal jargon, scroll through the figures of your search results to gain a sense of what exists. If there are similar devices available, ensure that your device is different enough or better enough to warrant the time and cost of commercialization.

2. Is it actually your idea? If you are employed by an academic institution, research facility, or hospital, your contract may include language stating that your employer has rights to any innovations you create within the scope of your employment. Even if you created your technology on your own time, this can become an issue if your employer feels you used their resources to develop it. If your institution claims certain rights to your innovations, this should not discourage you. Most institutions will encourage monetization of employee innovations through licensing in order to profit from them. The key is to speak with the relevant parties early on and to be aware that you may need to involve other entities when moving your product forward. This is also true for inventions created in collaboration with others. One way to clarify ownership in collaborations is to have all inventors assign their rights to a single company. This avoids having co-inventors potentially compete. Either way, figuring out those relationships early on will save you a lot of hassle down the line. I saw more than a few inventors who later realized they did not exclusively own their technology. If you are unsure, many academic centers have technology transfer offices that you can speak with, or you can ask human resources at your workplace to point you in the right direction.

3. Is your idea protectable? In the health care space, often it is the ideas that are valuable, and patents will help to capture the most value from them. Until you protect your innovation, do not publish any information related to your product concept and do not openly discuss it with anyone who is not part of your company. Publishing a manuscript in a journal, discussing the research behind your innovation at a conference, or even brainstorming with a colleague, can constitute what lawyers call a “disclosure” and may jeopardize your ability to protect your innovation. If you decide to pursue your idea, invest in a reputable patent attorney who has experience in the relevant field of technology. With recent changes in U.S. patent law to a “first to file” system, timing is important.

For a device, two types of patents apply. You can file for a utility patent to protect the device itself or a method of using a device, or you can file a design patent to protect the outward appearance of the device. You do not need to initially file a full patent application, but rather, many inventors will file a provisional application first. This protects the date of your invention for one year, but costs less and buys you time to determine whether you will move ahead fully with your technology.

4. Does your product save time, money, or lives? Before committing your time and energy to pursuing a concept, be sure you can easily articulate the economic argument for developing it. This is the most common mistake physician entrepreneurs make. Many physician entrepreneurs are able to define the clinical benefit of their innovation, but cannot explain how they will get paid for it. You do not need to have detailed business plans or Excel spreadsheets, but you must have a general concept of how the device will generate profit. For some products, you may need to consider issues like cost to manufacture and produce the item, or the cost to obtain FDA approval, but before even addressing these issues, you must have a clear clinical and economic argument. Before considering commercialization, ask yourself questions like: does your product save enough time to allow for an extra procedure per day? Is it more cost-effective than your competitor’s technology? Or, does it provide such a meaningful impact on patient outcomes, such as preventing readmissions, that it can command a higher price? In general, with the current environment of decreasing reimbursement and constrained budgets, technologies that provide cost savings will be favored by physicians and purchasing committees alike.

Once you have clear answers for these questions, you can move onto more complex topics like the optimal regulatory pathways, what types of trials may be required, and reimbursement strategies, but addressing these initial questions first will often inform these later considerations.

-Manan Shah MD
-Arlen Meyers is a professor of otolaryngology, University of Colorado, Aurora, CA and founding president and CEO, Society of Physician Entrepreneurs, @ArlenMD

More Recommended Reading

1) Bruce Booth: Ten Tips for Raising Startup Capital in Biotech

Great blog overall, but a solid post and relevant to med tech as well.

2) The Impact of VCs in Seed Rounds in Seven Charts

Worth reading to understand how the landscape for seed investments is changing.

3)Lifting the veil on private biotech valuations | biotechvk

Interesting overview of a complex process. Please note that these are also affected by ‘the phases of the moon, voodoo and the weather’ (to paraphrase Brad Feld).

Interview with Med Device VC

Good read by Shiv Gaglani (@shivgaglani): Investing in Medical Devices: Interview with Venture Capitalist Dave Eichler of Psilos

Dave Eichler mentions a few key points that are worth keeping in mind:

1) Investors in the medical device space are increasingly looking for later-stage deals.

2) Liquidity events for medical device companies are most frequently driven by strategic acquirers, which now tend to wait until companies have meaningful revenue. This makes an FDA inflection point more of a midpoint than a close-to-the-end point.

3) This significantly alters how attractive a medical device company will look to a venture investor’s portfolio, and thus pre-money valuations, especially if the fund looks for returns on the standard 5-8 year cycle.

4) Lastly, he echoes a sentiment I have heard from a number of partners from east-coast life-science funds: “our customers (large hospitals/insurers) cannot afford to worry about tech that is simply better, which worked previously; the new priority is ‘cost effective care.'”

Ultimately, I hope this new paradigm does not adversely affect innovation, which is often cost-ineffective at first before it is able to evolve to produce cost savings (e.g., what we hope will be the case with Tesla).