Tips from a Medical Resident/Healthcare Entrepreneur

(Image: Greg Katz MD (right) Co-founder of 2 Armadillo’s and Chief Resident at NYU Internal Medicine, with Jimmy Edgerton, his co-founder)

(This post was originally published on the blog of the Society of Physician Entrepreneurs and Dr. Arlen Meyers was my second author. You may find the original version here: www.sopanet.org/blogs. Below is the full version of my interview which includes more tips for entrepreneurs)

Most of us who are interested in healthcare entrepreneurship are drawn to it because we hope to make a positive impact on the health and wellness of others. Healthcare innovation, however, is not limited to the popular realms of digital health, medical device, biotech, and pharmaceuticals.

Recently, I sat down with a medical resident, who somehow found time during his training to co-found a start-up using his medical knowledge. Greg Katz, M.D. took an outside-the-box approach towards healthcare entrepreneurship: he pursued a less-hyped but more traditional method of improving the health of others. Greg created a healthy snack and co-founded a company to offer consumers healthy and nutritious options to turn to. In the interview below, Greg describes why he feels natural food companies are just as important to improving overall health as other innovations, and along the he way provides pointed insights into the nuances of creating a natural food company.

 

What does 2 Armadillos make?

We consider ourselves a natural food business. We cook a crispy, semi-salty chickpea snack that is roasted in organic olive oil to satisfy the cravings of anyone looking for a healthy option on the go. It is simple, but we are committed to using just a handful of non-processed ingredients to create a healthy snack product. (http://www.2armadillos.com)

 

Why did you get into this?

I am passionate about health. I am a doctor, an avid weight lifter, a hopeful cardiologist, and a former personal trainer. I took a year off during medical school to work for the Dr. Oz show, and during that time, I became obsessed with simple and sustainable ways for people to automate their own healthy lifestyles. After experimenting with natural healthy recipes in my family kitchen, I came up with a chickpea snack that I couldn’t stop eating. I noticed pretty quickly that all of my co-workers kept stealing the chickpeas from me and asking me to bring in more, so I realized I was onto something.

Eating healthy is hard for people who are busy, and even consumers who try to eat well are limited by the options available to them. I joined up with my co-founder, Jimmy Edgerton, and we decided to try to make the world an easier place to eat healthy.

 

How does this company align with your mission as a physician?

As a physician, I have seen firsthand how food and lifestyle choices are some of the biggest determinants of health status. People are catching on and trying to eat better, but the concept of ‘healthy’ has been completely distorted by the food industry. Most ‘healthy’ snacks today are actually filled with cheap soybean oil or packed with hidden simple carbohydrates. People are limited by what is on the shelves of their local stores, and even when people think they are eating well, often they are being fed over processed junk that has been mislabeled as healthy. As a physician, my goal is to improve health in any way I can, and I think by providing consumers with truly healthy and delicious options, I can make a larger impact than I might otherwise when interacting with one patient at a time.

 

How did your medical training help prepare you for entrepreneurship?

Besides providing a strong background in physiology and nutrition, a medical training can both help and hurt you in a business. One of the great benefits is it provides you with a rigorous framework in which to approach problems in a systematic way. The constant ups and downs of an early start-up require you to regularly make snap decisions with limited information, and often on little sleep. Most will agree that medical residency trains you to do just that.

On the other hand, our medical training stresses adhering to rules and protocols and minimizing risk. In business, you need to do just the opposite: take risks and embrace unconventional and imperfect solutions. Initially, my background in medicine made me uncomfortable with this, but I quickly learned to accept these gray areas.

Overall, medical school teaches you the discipline to work harder and longer than you initially thought you were capable of, and this is invaluable when starting your own business.

 

Besides all the typical challenges of starting a company, which are well documented in blogs all over the web, what are some challenges that are specific to starting a natural food company?

First, converting a small-batch recipe to a product produced for the masses is not as simple as adding ingredients in greater proportions. It involves a bit of trial-and-error, chemistry, and a good deal of patience.

Like any industry, there are a number of requirements that in retrospect may seem straight-forward, but if you haven’t done it before, can cause you to stumble. My overarching advice is to speak with everyone you can who has started a similar company. Read the small print on every government website, like the USDA and FDA, that might be associated with your industry. A good place to start is speaking with a lawyer who has knowledge of your industry.

With the natural food market, there are number of certifications to consider, and the process is different for each. First, you need a food handler’s license. Next, for every label you add to your packaging, there are USDA obligations that must be met. For example, there are requirements for calling yourself organic, for using the labels high fiber or low fat, and, in general, for any way you describe the health benefits of your product. It is amazing to me that in spite of these stringent requirements, manufacturers are able to continue to label foods as healthy that are factually not. Next, you must undergo inspections by the health department, and all of your ingredients must be purchased through certain approved suppliers, depending upon the certification superlative a product hopes to achieve.

 

That sounds complex; how did you navigate all of this at first?

I recommend seeking out a shared kitchen space. It is the food analog to a start-up incubator. Small manufacturers use a shared industrial kitchen to help start their business. We started out working in a place called Union Kitchen (http://unionkitchendc.com), and for months that was where we made our snacks. There were lots of resources for us, and we were surrounded by other entrepreneurs who were at different stages with their food start-ups, and everyone was willing to share their advice. The initial network we built and the support we received were extremely helpful to our success.

 

What did all of this cost, and how did you pay for it?

Jimmy and I have each invested money to finance our expansion every step of the way. We have also reinvested every cent we’ve made back into the business without taking any profit or salary.

For entrepreneurs interested in jumping into this space, the costs are pretty variable depending on what you want. However, you can do a lot of it serviceably, if not perfectly, on your own, if you are willing to take the time. For example, to set up our own custom website, it would cost approximately $10-30,000, depending on how much customization we wanted. Instead, we decided to go with Shopify’s business template (shopify.com). They handle all of our transactions, and we pay $158 per month. They take 3% of every sale we have online, but it was an amazing tool for someone, such as me, without the coding background to make a website.

Similarly, in our business, there are consultants for every aspect: marketing, social media, search-engine optimization etc. These consultants can cost around $1,000 per month. We decided to instead learn how to do this ourselves, and we have learned a great deal and have been relatively successful. I recommend reading resources like ‘The 22 Immutable Laws of Marketing’ (http://www.amazon.com/The-22-Immutable-Laws-Marketing/dp/0887306667), the blog of Tim Ferris (http://fourhourworkweek.com/blog/), and Inc. Magazine (inc.com). If you can spend the time yourself, you can be very successful on a lean budget.

Lastly, legal costs are on the order of thousands of dollars, but not tens of thousands. Everything will have a separate cost, such as obtaining trademarks, copyrights, setting up the legal entity of the business (we chose an S-Corporation). In general, my rule of thumb with regards to legal costs is that it takes longer and always costs a little more than you hope and expect.

 

As consumers become more interested in their personal health, the nutrition and wellness market is growing. The organic product market in the U.S. increased to $35.1 billion in 2013, which was an 11.5% increase from 2012. Based on your experience in this market, what areas do you expect will have the most growth?

The nutrition market is definitely growing. People are doing a much better job of taking control of their health and demanding more of the companies they buy food from. The biggest areas are gluten-free and paleo foods. The paleo diet was the most searched-for diet in 2013.

 

What are some of the key differences between a tech-based company and a food company?

The main difference is we have an actual, physical product that we are selling, and you don’t have to imagine where our revenue will come from. That said, in a fast-growing food company, so many variables can change, so it is often difficult to identify inflection points when planning and budgeting. We are constantly growing and changing the scale of the raw materials we are purchasing and are continuously switching our processes to maximize our efficiency and quality. These changing variables often force us to sacrifice short-term profitability in pursuit of growth, which is key for our company to achieve financial sustainability and positive impacts on people’s health.

Another interesting variable is that from a company standpoint, we require a different employee skill set than the traditional tech start-ups. Like many companies, finding and retaining good people is the biggest challenge. For a snack company in particular, many of the jobs require manual labor, such as packaging, cooking, and labeling. On one hand, this has allowed us to employ people who otherwise had difficulty finding jobs in this tough economy. We love this, but it also creates a challenge of learning how to motivate and manage in different ways. Jimmy is amazing with this due to his experience working with all types of people during his construction and development experiences, and it is one area where his background gives him an edge on perhaps your standard MBA student who maybe doesn’t have experience with field/floor jobs and managing a variety of types of teams.

 

From a business standpoint, are there companies similar to yours that have been successful?

            Jimmy and I are absolutely committed to this company and are willing to take it all the way. To us, success is when high-quality oils, such as olive and coconut oil, become the norm and not the exception in snacks, because consumers demand delicious, healthy food that helps them to be happy and productive. From a business standpoint, there are historical precedents of natural food companies with aggressive growth strategies ultimately being acquired, which is one way to measure success. For example, we are trying to follow in the footsteps of Sabra, Honest Tea, and Stacy’s Pita chips.

(*For a comparable, Stacy’s Pita chips began as a company with $100K revenue and reached $65M in 8 years)

 

Before we close, what is one important lesson you can offer to other entrepreneurs in your space?

One important lesson that I learned is if you have a big rush of publicity and it gives you a one-time boost in orders, you don’t need to change everything about your business. We were fortunate enough to go on NBC’s Today Show in Q1 of 2014 and ultimately won their ‘Start Up to Success’ challenge, which featured Marcus Lemonis of CNBC’s ‘The Profit.’ It provided lots of publicity, and it gave us a large boost in orders. We were tempted to change everything in our business to capitalize on that demand, and I think we expanded production more quickly than we should have. In retrospect, we should have expanded based on our consistent volume, and not just on a one-time boost. I’ve learned that we could have instead communicated with our customers to let them know we were experiencing a rush of orders and that it might take us more time that normal for our product to reach their doors. We may have lost some customers, but it would have kept our growth stable, which would have been better in the long term. Expanding too fast can hurt just as much as not growing, because you take on increased financial risk.

 

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?

Sure. They can visit our website and contact me through there (http://www.2Armadillos.com).

Learn more about Greg Katz, M.D. and 2Armadillos Snack Company and be on the lookout for their new certified USDA Organic line of snacks!

http://www.2Armadillos.com

and

http://www.WatUSeeFoods.com

 

Medical Device Venture Investment Spikes; Trends in 2015

Medical device, diagnostic venture investment at $2.7B, highest since 2008

See article above: Excited to see that medical device venture investment is picking up. It has been a big month for the space after the end of the JP Morgan Healthcare Conference and a number of new Lifescience investments have been announced (ex: Obalon Therapeutics $20M, Apama Medical $11M; and of course Moderna Therapeutics’ historic $450M financing).

One area that I think is exciting is the neuromodulator space. It has been growing, and in my time in VC, I saw a company working on a diaphragmatic stimulator for ALS, just last year the FDA approved the Inspire device for stimulating the hypoglossal nerve for sleep apnea, and recently the FDA approved a neurostimulator device for obesity, the Maestro system.

What is interesting to me is the market and physicians are willing to utilize implants for increasingly less dangerous diseases. No one batted an eye at pacemakers because they are a life-saving device. When the lap-band debuted there was market hesitation because it was an implant for a purely lifestyle disease, but it gained acceptance quickly, and I think part of what sold consumers is that it is an easy to understand mechanical device that works by limiting gastric expansion. What is different about the Inspire hypoglossal nerve stimulator device for sleep apnea, and the recently approved Maestro obesity neuromodulator device, is that they act electronically on significant nerves and alter neurophysiology in complex and not fully understood ways. Also, this is for diseases that can otherwise typically be cured by lifestyle modifications. This suggests that device makers assume consumers are interested in tech implants that don’t just save their life, but make it better, and I think this is related to the trend towards wearables.

The development of these devices signals that the technology for biologically compatible electrodes/sensors is rapidly improving. A clear example are electrodes in the cochlear implant space; where we could once only fit a handfull of implants into the tiny human cochlea, now we can fit in 20 and a 50 electrode model is in the works

The implications of this are twofold: 1) entrepreneurs are increasingly less limited by technology, and instead can focus more on finding/solving significant clinical needs 2) the lines between tech innovation, wearables, and medical device innovation are increasingly blurred. Entrepreneurs will need to diversify their teams accordingly, and more and more software and hardware backgrounds are relevant to life sciences and this is supported by Google X making large inroads into medical device.

NYT Covers VC returns to Science Start-ups; Ignores Life-Sci

The NYT ran a cover story today that posited that VC’s are ‘returning’ to science-based start-up’s, but there was nearly no mention of life-science or biotech companies. Regardless, it was nice to see a headline about venture that didn’t include the words ‘tech’ or ‘social.’ Truthfully, VC’s never stopped investing in science-based start-up’s in the biotech/life-sci space, albeit they have had a smaller appetite of late.

The one stat that hit home was 2014 investment in biotech rose 26% to $2.93B, which is great, but that tech attracted $11.2B. Ultimately, this shows there is a growing interest in the space, which should be encouraging. Link to article below:

Venture Capitalists Return to Backing Science Start-Ups

Suggested Reading: Why you are having trouble testing your health app

Linked below is a concise but strong post that addresses key issues HealthIT entrepreneurs face when trying to validate their innovation.

Because many health apps incorporate HIPAA protected data, it makes even basic studies tedious. The incredibly slow pace of IRB committees further complicates this. Finally, the specter of the FDA studies scares even the most passionate founders away.

Ultimately, until there is some type of reform or alternate pathway for more technology oriented healthcare innovation, we will continue to see major companies avoiding the healthcare space. We saw this recently with the Google co-founders mentioning that they are not interested in healthcare, and disappointingly, yesterday as we saw Apple, after much hype, shy away from any significant healthcare foray with its watch reveal. Until then, we have to keep fighting the good/painful fight knowing that despite these hurdles, affecting patient health is worth it.

Why you are having trouble testing your health app

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

Screen Shot 2015-08-11 at 10.51.08 PM

Originally posted on Kevinmd.com

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).