Brad McCarty • March 21, 2018

Dr. Arjun “JJ” Desai is the Chief Operations Officer at JLABS and the Center for Device Innovation at the Texas Medical Center. We had the pleasure of hosting JJ during AngelMD’s Alpha Conference in January of 2018. Rather than focusing on a single area for his talk, JJ chose to cover a few different topics, but then show how they all related to the power of human connection with relation to investing and startups.

For JJ, the power of human connection starts with three critical qualities that any startup or investor should have:

  • An appetite for failure
  • A desire for human betterment
  • A higher calling

JJ Desai: Well, I just want to say thank you very much AngelMD, Tobin, Dan, and everybody involved with this for putting together such a dynamic group of both speakers and the audience to spend a really interesting morning, and I hope that we can add to that. I have 20 minutes to speak to you today, so I’m assuming this is my clicker here.

So I wanted to kind of be very focused for this audience. The three lenses I want to look through, and if you want to be interactive, I always encourage it. Our one early stage. So whether it’s investment or technology development, early stage is a bit of an enigma, and it’s something that’s been drained a little bit … We connect, and just get to know you guys a little bit, and hopefully by doing that, we can all have a future together.

And so I’m just going to share a little bit about myself, and I tell my, actually had this conversation with my five year old last night, that every day you should try to do two things. You should try to educate yourself, and you should try to make connections. Because that’s really what life is, and that’s what I think AngelMD is, right? It’s a form for education and connection.

And, this is somewhat anecdotal, but I think it’s an understatement. 75% of investments, especially into early stage investments, are made through what? Through teams, through technologies, tech transfer, universities? What do you guy think? What’s the number one thing that most people invest off of?

Speaker 2: Network relationships.

JJ Desai: Relationships, right? Oh hey, I got a guy that’s really smart, I knew him from my last company right? Or I know this gal, she’s a brilliant PhD and I think she’s on to something. 75% I tell you I think I’m undercutting that. So on top of that, a social economist once told me, if you can learn three genuine things about a person, there’s a statistically significant chance you will interact with that person at some time in your life.

So here are my three genuine things, and I hope that all of us have a chance in some way or another to interact, to better understand early stage. So the first one is a growing yet infallible appetite for failure. So every great success that I’ve had, has been predicated by multiple failures. And as a physician, we’re taught not to fail. We’re taught that failure is the worst, right, failure means you can’t be a dermatologist, failure means you can’t be an orthopedic surgeon. I think it now means you can’t be an anesthesiologist, which is pretty cool.

But you know, that is the exact opposite mentality that you need to have going into investment and or development. You have to fail through every single mechanism possible to understand what success looks like. And so this picture, it was one of my favorite days of my life. This was with Avenger actually, you’ve heard a little bit about Avenger today. And we got to this point where we were launching our clinical trial.

And this was a massive undertaking, massive clinical trial, with a revolutionary catheter, and we had all the bright minds in the room right. Every single top vascular physician that, if they say yea or nay, really drives the market and adoption of this technology. And as we were getting around, and we had human cadaver legs, we had C arms, we had all of our OTC imaging, we were in this beautiful facility, everybody had flown in, we’d done this pre-didactic, and we’re getting ready to put the catheters in the body, and show everybody right.

Everybody’s huddled around, spotlights on, it’s kind of hot, and the catheter fails. Right. But, thankfully, we dealt with failed catheters before hundreds of times. So rather than say holy crap, we have a failed catheter, this is going to be complete misery, we pulled it out, we said oh we forgot to show you the coolest part about the catheter, and we held it up to them as we were swapping out the bad catheter, and as everybody’s looking at it like this, it’s like Billy Cone’s magic tricks right.

Everyone’s looking over here, and then finally, when you come back over here, boom, you have this beautiful catheter image, and we blew it away, we knocked it out of the park. And subsequently enrolled one of the fastest and most successful from a safety and efficacy trial, in the world.

And so, had I approached that without having had sort of the tutelage and the mentorship coming through, and failing as many times as possible in the wet lab, and in every other proto typing, we would not have come out as successful from that day as we had. So, an indelible appetite for failure is something you have to have to, for sure to invest in this business, and also to be early alongside the technology.

The second one is human betterment. And so this is something that I did recently, and it came at a point in my life where I kind of realized, man I’ve been doing the same thing for 10 years, I’ve been doing the same like four minutes of plank, you know, some sit ups, go for a swim, but I have been evolving as a person. And so I had to think about it. Now I have three kids, I’m traveling all the time, how do I just spend a few days to better myself?

And so believe it or not, I actually found the time to take three days away from work, from kids, from family, got to go with a dear friend of mine, and we showed up to this things with Laird Hamilton. I don’t know if you guys know who Laird Hamilton is, but he is a beast. And Laird Hamilton has surfed the biggest waves in the world. He has constantly redefined what is imaginable, and he’s married to Gabby Reese, who’s a professional volleyball player.

And the two of them put this clinic on, and it’s about doing everything you do, but underwater. And essentially holding your breath to do it. So I swam, I worked out, I do all these things, so they’re like, yeah let’s just do all of our weight workouts underwater.

I kid you not, within the first 45 minutes, we’re sitting on this pool deck, we’re laying down, we’re on these mats, and we’re doing these breathing exercises. I’ve swam my entire life, played water polo, I’ve never held my breath for more than a minute, and I’ve tried. And we’re doing these breathing exercises, and we’re getting in our zone, and I’m focusing on my third eye, and all of a sudden, he says okay, now go ahead, now all you have to do is just hold.

And he’s kind of talking us through this, and I feel good you know, we’re on this ethereal layer, and all of a sudden he goes, okay, you’re now approaching three minutes. If you want to start exhaling, feel free to do that, if not, go ahead and continue to hold your breath. And I’m like, meanwhile I’m like holy crap I just held my breath for three minutes, but I’m trying to like keep cool because I want to go more than three minutes.

But it was a reminder to me in the first 45 minutes of this three day excursion, that I just broke a bound I’d never even thought possible before. And so, for the next two and a half days we continued to do this, and now, I don’t get to do this every day, but every day I do some small part of this, whether it’s breathing on an airplane or when I wake up in the morning I focus a little bit.

So don’t forget yourself in this, because it’s probably one of the most critical elements of anything we do, and we neglect it. It’s the first thing as physicians, if you’re sick, you show up to work, right? You get no sleep, you eat like crap, it’s just all of these things, don’t forget yourself. And the last one for me is I have a higher calling.

So every day I’m either on the phone or FaceTime or home with this circus of my family, and I think it’s important for people around you to know that you bring your energy back to your family, right, whether it’s good or bad. They feel it, they’re a sponge for you, and they’re going to be reflective of the same nature. So, I have three kids under five who are hilarious, and my wife is way smarter than me, but these are my three genuine points.

So I’m just hoping if at any point we can connect, that you can use these, and we can make something meaningful together moving forward. I would be remiss if on this day and in this room I didn’t talk to you about sort of mentorship.

So for me mentorship has been everything, and I happen to have two of my biggest, if not the biggest mentors in my life in the room at the same time. I remember looking at the agenda and being like, I can’t believe this, that both Billy and John are on this agenda together. So John Simpson and Billy Cone, you know, I’ve had the fortune, there’s no sort of script that I wrote to get in front of these two individuals, it was serendipitous at both points.

But I knew, these are things you know in the first 10 seconds, that you really want to work with these people and you just latch on, seriously. I think at both points, John was kind of like, why are you still here? And Billy at the same time is like, hey, you know, who are you again? So, once you find the right people, latch on, and just try to learn as much from them as you can, because if you’re not constantly surrounding yourself by people way smarter than you, you’re just not trying hard enough. So thank you very much to both John and Billy, because it’s a phenomenal thing you’ve given me.

So, I just want to take two seconds for you to focus on this slide. That, the pace of change will never be as slow as it is today. And this is a critical thought process for early companies, and early investors. Literally, between today and tomorrow, millions of people will join the internet. I’m still not on Instagram yet, which I get a lot of flak for, but probably by tomorrow I will be.

And so you just can’t underestimate the power of this and how different it is now than it was 10 years ago. And this leads to my favorite slide in all of innovation, all of investing, is how you have to understand when to bring a product to market. And when having a conversation earlier is that, you know, in early stage investing, people are always talking about the science, and they’re always talking about everything else, but you know, how often are you thinking about how well your commercial product is going to do in the marketplace?

And the one thing I will say is that it’s not the wheelhouse of a lot of early stage scientists or inventors, and it probably shouldn’t be. You should probably really be working on getting everything nailed down to your product. You should be relying on other people to help you understand this, but you can’t neglect it. The wrong thing is to neglect it.
And so, I want to look at the value as the number one takeaway here for you, and this is the difference between a differentiated product and market expectations. And market expectations are always getting harder, right, people always want more, they want it faster, they want it cheaper, they want it better, they want it quicker.

And if your product is at that point, from day one, the decay of your product starts. Because if you’re not constantly thinking about how the market is evolving as you’re building your product, or as an investor supporting that company to get there, then you’re behind the game. And I’ll give you a real world example of this, which is phenomenal to me.

Hepatitis C, right, so, 10 years ago Hepatitis C, we didn’t think it could be cure. We’re almost at a cure for Hepatitis C, it’s a cocktail of medications, and at J&J, we basically got to a point where we could cure 99% of Hepatitis C. The current cure rate is in the low to mid 90s, which is cool, but 99% is way better.

But at that point, several competitors had gained advantage in investing in some commodity products that they were able to bring in the cocktail that dropped the price dramatically where we could never actually foundationally get a program off the ground to get to that 99%. So I think very fortuitously, some of our deliners said, well we can’t do it, so let’s not just keep out heads in the sand and move forward with this product and bring it to market and fail, let’s figure out better ways in the future, scrap it now, and see if we can get to 99% in a different way.

So you have to think about failure at the right time, is a good thing for investing. These are some dynamics I just want to focus on, so not obvious if I don’t have labels on these, but something that’s moving forward right. So something to an investor, or something to physicians in the audience, so 2012, 2016, and then just focusing in on, this is essentially the hospital owned physician groups, right.

So physicians, and I think this is a lot of early innovators that were physicians got to dominate what was being purchased in hospitals, what technologies we could try, how technology is getting brought to patients, that is not the case anymore, right. The conversations gone from the physician saying, I’m just going to take my patient somewhere else, to the physician in a service line saying, okay, well, we’ll own this, to now the CFO and you know, large purchasing groups saying, well we want the cheapest, yet most evidence based product out there. Which is like sort of an enigma in itself. But that’s how people are purchasing now.

So that’s market expectations, and you have to be very cognizant of that. And so, this shifts, essentially, how you bring data to market, right. It used to just be clinical trial comes in new tech and everyone would buy it regardless of the price, then it was, well, can you make my patient grow with the profitable services, now it’s how are you going to increase my contribution margins and cost reductions?

So you have to understand as you’re developing data for these things that you have to speak to all of these, and I put this up here, not to harp on anybody, and I feel as a faculty member at Stanford, I can do this, but this blew my mind. So this came out, and this was a communication from the new president of Stanford Healthcare, and essentially said I jus want to thank everybody you know, for this massive thing that we reduced our ongoing operating expenses.

Like, when did the messaging from Stanford go from best in class service for patients, and the most prolific healthcare system on the world, to great job everyone, you brought down operating costs? It shows you what’s important, and if everybody here is driving the innovation, sort of agenda, we’re missing out. So it’s up to us, and it’s up to you to drive the innovation agenda, hence optimism, stay really encouraged by what’s going on.

So, I want to give you some examples that we can all get behind. Fred Moll, I think a lot of people in this audience probably know Fred or have heard of him, the public had no idea of the extent of difference between top surgeons and bad ones. Robots are good at getting where they are supposed to, remembering where they are, and stopping when required. Right, so who thought robots would be outside of Star Trek, would be such a big deal in surgery?

Well Fred obviously did a long time ago, and he thought because of this. And I remember this in med school, the first day of med school, they said, the great part about going to med school and finishing, is that you know, everybody in med school is aiming for the top quartile of the normal distribution curve, right. Everyone wants to be at the top of their class.

But he said, I know there’s a couple of you out there, I don’t know who you are yet, but I will, that are going to be in the bottom quartile. But he said, you know what’s cool for you? You too are also going to be a doctor, right. So I think this is the reality, is that not all doctors are created equally, right. That’s not a good thing or a bad thing, but that there are different skill sets. So it’s the great democratization of how do we make sure that everybody is getting the best service possible?

And thinking about robots is the case. So cheaper, faster, better, right? This is the mantra that every investor or CFO, hospital, wants to do it cheaper. You know, they went through and did all these things and they said, okay, well robots actually cost more, so let’s think about it in a different, gynecological surgeries. They also cost more in these surgeries, so not cheaper.

And then they said, okay, we’ll work faster for sure. And then they published some endoscopic surgeries, actually, you’re about an hour and 10 minutes longer, and they said, okay, so we’re not faster. Well for sure we’re better, right? For sure. And they said actually if you look at outcomes, there’s no significant difference in what’s going on. And so, they said, okay, we’re not better.

And so, okay, so I want you to think about this, this is where you can compare the evolution of medical devices to the platypus. Who has seen a platypus in real life? Okay, right? A couple of people. Now platypuses are a little interesting, right. So they have the tail of a beaver, they have the beak of a duck, they have webbed feet, and they’re kind of like an evolutionary mystery. But they’re wicked fast underwater, and they’re one of the most toxic animals, they can hunt and they’re predators.

But, they just never had a good marketing campaign. So, they’re not in zoos, right, you don’t see them. You’re not hanging out, they’re not in your home, you’re not showing off your platypus. But they’re out there, right. So the robot could’ve been a platypus, it was very close to being a platypus. But, this came out and this was from one of the analysts of Northrod Capital.

Our extensive field checks highlighted a story where aggressive marketing drives the message and true clinical utility seems secondary in nature. Which is mind blowing, but this is reality right. So, what happened? They started putting up billboards. Transforming lives, ladies, we’re on your tea, I’m famous, you should come use my robot, right. And this worked. This worked. Right.

People said, okay, well it’s not faster, it’s not cheaper, it’s not better, but we want to use it. And so they started looking at this and it was a $4 billion market in 2015, with a 20% cap over the next eight years, and I can tell you it’s only going to be bigger. The crazy fact, if you’re an early investor in this company, or if you were looking at the early part of this company and you had cold feet, 75% of the early intuitive workforce had turned over by 2014, 75%.

So failures, there’s a lot of failures that went into this. Even crazier fact, Fred Moll had already started three new robotics companies by 2014, having left Intuitive in 2002, and I can tell you what Fred’s doing is going to probably maybe eclipse what Intuitive’s doing. And so, I just want, you got to look at the first or the second half of this story.

So, the market cap of Intuitive is only half the story, it was founded in 1995, right. So it took 10 years of technological adoption, healthcare investors have to have patience, and they have to be able to ride the wave of the downs to get to the ups. But you need advice and you need to know how to get there. And then in 20 years, it’s going to take market saturation right.
This isn’t investing, you know, in a picture that dissolves after 10 seconds, that you can text to somebody. It’s investing in real solutions for healthcare. And now it’s like you can’t get away from Intuitive, you know, in one market they have 14 different robots, and they’re all across the street from each other.

So, business realities rotate, and you have to be aware of this. And so through corporate strategic partnering, I just want to give you an early entrée into a toolbox you can use, and it’s no longer a scary toolbox. We’re not coming after your IP, we’re not trying to strong arm you, we literally need you. The big large corporates need everybody in external communities to service their pipeline, they can’t do it themselves, and they don’t have the wherewithal to do it.

But we also are evolving. So I like to take the example of Medtronic. Medtronic was dominating a lot of the early cath lab procedures in large part to many of the things they acquired through Dr. John Simpson, but they keenly realized that there’s a lot going on there that are driving down market pressures and understanding the cost of restructures.

And so they said, hey, not only are we going to sell you a lot of stuff, but we’re going to come in and run all of it for you, we’re going to run your cath lab, we’re going to make you efficient, we’re going to streamline your services and products, and the hospitals were more than willing to say, thanks, we’ll go ahead and do that.

Now, Medtronic’s in a really good position to be able to sit there and pick what they want to, based on this. I’m not sure that’s going to be sustainable for the long run, but it’s an evolution that’s actually served them very well. And you see all of these businesses, you know you hear the largest taxi cab company in the world doesn’t own any taxis, the largest hotel company in the world doesn’t own any hotels. These are things that impact healthcare as well.

And so J&J, a while ago, eight years ago said, man, we have this global organization that’s massive, how do we help people? How do we use all of this, all over the world, all of these things we do, and help people? And so, we put together a toolbox. And I’d like to speak outside of this with people, but you know, we represent JLABS, which is an incubator, it’s literally to get companies through the first two to three years of the valley of death.

I think investors are starting to see the tremendous value in this. And, the one thing that I think is most valuable is no strings attached, in the sense that there is no capped upside. So you can come in, and the best teams in the world never want a capped upside. Investors or entrepreneurs. And so if you come in you only get services and benefits, you get to use what and how much you want.

Now you have to be good, you have to pass a pretty rigorous selection committee, but you get the exposure to all of this, you get to use it, consume it, make sure they’re looking at all of these changing dynamics while you’re focusing on the product, and then you guys can mature together. And so, through a lot of other JJDC, our corporate venture arm, our innovation centers, we’ve put together this massive toolbox where we can research, collaborate, we can license, we can buy, we can invest. All of these things that never were an offering eight years ago when J&J said we can just do everything ourselves.

That is no longer the case. There is an entire optimism within J&J on how do we make earlier, smaller, you know, more hands off bets, just to help people get to the point where they can actually offer a product that we want to buy or get to? So I’m going to spend the next two minutes, or maybe one minute, just talking about, so what’s come of this? What’s actually come in the last five years?

Okay, five years ago we opened up these incubators, we started dropping them around the North America, we just announced one in China that we’ll be opening up next year. And, we said, what if we just let people come here and benefit from our expertise? And see how that progresses.

So after five years we took a look, and I’m happy to say now we have 330 companies just two months after we published this report, but we think that’s a pretty strong number of companies coming across our desk. I would say this is about a fifth of all companies that actually apply to us, so there’s a screen.

And they come from all over the world, right. They want to come to areas where there are investors co-located with area expertise, co-located with a market that is willing to accept their technology. So what does that afford us? It affords us the ability to do things J&J has never done.

So Who Box. There’s a pretty big Houston crew here right, which is amazing. I think Houston is going to be, if not already the powerhouse in medical devices in the future, Who Box is from a little town north of Sao Paolo in Brazil. And J&J got together with 100 open startups, and just asked how are we going to help the aging population? Simple question, how are we going to help the aging population?

And Who Box, PhD in a lab, said, okay, I’ve been working on this really cool technology where I can actually tell people to move their face, and I’ve overlaid a software, and I can move an entire wheelchair like that. So you don’t have to move anything, you don’t have to touch, you don’t have to speak, you can just look left, you can look right, you can raise your eyebrows, you can smile, and everything moves together. And it blew everyone away, right.

Who Box would never have gotten in front of J&J, they would have never had the connection right, none of the three sort of genuine relationships with anybody to get that, but they showed up, which is the number one thing that you have to do as an early stage is just show up. So they showed up, they won this award, and they now have migrated from Sao Paolo to the Texas Medical Center, and to JLABS in Houston, and now they have the entrée to both J&J and all of the facilities in the Texas Medical Center to advance their technology, which is astronomical if you think about that access.

We have brought together a tremendous amount of people, right, so we’re really focused on the network. So 848 networking events, 33 different cities around the world, half a million people show up, 1,260 investor meetings with our companies. Companies just don’t get this kind of access. And this isn’t just like hey you’re an investor, you’re a company, this is hey you’re an investor, you have a tailored thesis, you’re looking at this stage, we have a company that fits in that at that stage, why don’t you guys get together?

And I think it takes that relationships to make that happen. We are really strong in diversity, so we think a diversified portfolio makes a lot of sense, diversified you know, investors and early stage start ups make a lot of sense too, it’s just that many different perceptions and shots on goal.

So whereas the industry is less than 1% women led and 8%, we have a very healthy portfolio of all sorts of folks running companies within JLABS. Typically, they start just where every early stage starts, right. 30% with less than a million, 45% come in with one to two people, so on this, I want to focus on one of my favorite companies, and maybe just a little bit of bias in being an anesthesiologist here, but. David Zaple, the guy in the middle here, is the son of Warren Zaple.

Warren Zaple is one of the early pioneers and founder of nitric oxide. So nitric oxide, you know, it’s used essentially in pediatrics, but has been worldwide use for pulmonary hypertension, right. And so, nitric oxide, you have to have big trucks that ship in all of this, you know, and it’s piped into OR’s, and they use it, and it’s this massive infrastructure play, and Warren said that’s really cool, but we’ve been doing that for 10, 15, 20 years, I think there’s a better way of doing that.

And so they put together this little box right, this platypus. And they put it together, and they said, what if we could take air, we could bring it in a tube, we can electrically convert it into nitric oxide, and in the same box we could exit it? And that’s what they did, which is mind blowing. So this box right here takes air in and pushes out nitric oxide, and you can wear it around your neck as a necklace and walk around in sub Saharan Africa and treat kids with pulmonary hypertension.

I mean, mind blowing stuff, right. So, that necessarily doesn’t get off the ground, but they went into open pitch startup, they went into M2D2, one of our sponsorship labs in Boston, just outside of Boston, and that picture on the right is David Zaple sitting with his box, talking to the world wide head of research and development for Acteleon, which is one of the largest therapeutic makers and inventors of pulmonary hypertension therapies.

And so, it’s just J&J being like hey, why don’t we put these people together without any vested interest, and see where things happen. I think that’s the magic of what we are looking to do. $10 billion has been raised by our companies in five years, we think that’s pretty impressive. And J&J just naturally, we’re not doing it just, you know, complete beneficiate, we think that if we get the best people in the area, and we just get to work with them, that all of a sudden, we’ll start to see things earlier than we ever have.

And so, as a virtue of this about 20% of the companies we’ve gone into confidential partnerships with. This is the biggest number. So usually it’s a low teen number of companies that are in survival after five year. And a heavy portion of our portfolio is therapeutics, and that device and tech and everything we’re growing, about a third to about half in total. But 80% are alive and thriving, and being invested in it, and hitting milestones.

I think this is just because it’s the simple formula of letting a lot of other really smart people just watch out for you while you’re sitting there focused on making sure that you’re getting these things done, these critical milestones advanced in the two to three years that make the most sense for you as an inventor, and your investors to retain their values, so you’re not getting drowned out in series D, E, F right, as you’re going along the way.

Our companies grow, right, they start out low, they come up high. And, just as an example, it’s changed J&J, so this isn’t going away. Every strategic is going to have a plan like this. But, these are companies literally that came off the street, we brought them in and we just hung out with them, we tried to give them good advice, we thought wow this is really interesting, and they’re pivotal platforms for J&J now moving forward right. Investing a lot of money into them.

So with that, I would just like to say thank you very much AngelMD, and everyone here, and I look forward to following up with all of you in the room. Thank you very much.


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