Talor Sax of eHealth Ventures on moving to the market you sell into

Talor Sax 00:30

Etgar, great to be here, thank you.

Talor Sax 00:30

Sure, thank you. So, Talor: born and raised in Israel, born in [unclear] in the south. Started my journey in healthtech back in 2001. Before that I had an internet-of-things startup that blew up with the bubble, and then I started working for a company that provided services for Maccabi Healthcare, developing all kinds of solutions that, to be honest, I didn't realize how advanced they were at the time. In 2007 I started working for a US company, and then I realized the gap between the Israeli health system and the American health system, which was 20 years behind in terms of use of technology.

I did that for several years, then a few more years in Europe, which was very good experience, to learn that the world is not the USA and the USA is not the world, there is more to it. So I was able to work in other markets like the UK, Netherlands, Belgium, Scandinavian countries, Australia, and learn about their health care systems. In 2017, together with my partner Steve Shapiro from the US, we founded eHealth Ventures, when I went back to Maccabi, that were my customers, now as partners and anchor investor in our fund, and added others as well. We started as an incubator which invests in super early stage, idea stage, ideation, sometimes we call it, or pre-seed, and we did that for several years. In '22 we raised our second fund and started investing in seed stage, still early stage, but for us it's a little bit more mature.

Talor Sax 02:36

Well, it's hard, because, like I said, we start at a very, very early stage. Most of our companies are idea stage, and the founders are physicians, engineers, in most cases with very limited business experience of any kind, not to mention specific things like marketing, product or sales. We as investors are trying to be very active and supportive, so we try to help each startup with their weak points. Some of them need help at the clinical stage, some need help with technological problems, and many of them need help and direction defining the business model, the segmentation, and so forth. In many cases, after a few early years, we add an additional person alongside the founder, typically more business oriented, to work with them. That's the general path, I would say, of a healthtech startup.

Talor Sax 04:08

Right now it depends, it used to be different. My focus, our focus, it's not only my personal business, I'm working with a team and partners, so our focus moved from the ideation stage to the seed stage, which now I also call pre-commercial. Having the greatest technology is crucial, solving a problem is critical, but both are not enough, because we need to see that this has a value in the market, and I need to see the proof for that in order to invest in a company. The best way you can achieve that is to show initial revenue, that's the best way.

In some cases you can't, but you're still in R&D and don't yet have the regulation ready, so you need to come out with, of course, the basics: deep understanding of the market, deep understanding of the decision process in the market. Remember, we are in healthtech, so the purchasing decision is not simple, there are always multiple bodies here. You have the patient, you have the provider, you have the payer, at least three parties that need to somehow align in order to choose your product and not another. And then show me that you know who to talk to, and that you're already talking to, potential strategic partners that can eventually become the acquirers of your company. There are many ways to give us the confidence that at least you know the way. Maybe not the answers, but you know where to go.

Talor Sax 06:12

I look at it and try to do some kind of reverse engineering. The question is: where do you need to get, where is the point you need to be? We call it your next fundable milestone. What do you need to have in hand in order to be able to raise your next round? This will dictate your strategy. For example, and it's also about what is realistic for you to get: I can always say, show me a million dollars of revenue next year and then you can raise your next round. Nobody says it, because you can't do it, it's not realistic. So in many cases it will be finalizing the clinical trial, or having an initial agreement, or a co-development agreement with a leading health institute in the United States. It could be, if you're going direct to consumer, show me that you have initial engagement with some of them. We will try to see what is possible and realistic to get as a fundable milestone that will help you go to the next level of investor.

Say you're in seed stage, and the next one will be a fund that will want to invest in a round: what can you show them, and this will be the KPI, how you get to that point. Take, for example, a medical device company will need to complete their FDA, and they will need to complete a very deep understanding of the players in the market and the reimbursement in the market. Reimbursement is not as simple as you may think, because having a code, the reimbursement code, is not enough. The code is there, that's good, but is the payer willing to pay for that? How much? That's a lot of questions I'd like to see and get the answer to. We can also talk about competition. How do you read the market, how do you map the competition? In healthtech, in healthcare in general, typically you're dealing with some kind of illness, and this illness is being treated today, somehow, by someone. You may say, I have this new technology that will make the treatment much better, more efficient, and there is no competition because nobody else is doing it this way.

That's a very wrong way of looking at the market, because there is always competition. Someone is making a living out of this treatment today, and when you come with this new technology you're basically trying to kick them out, and you cannot expect them not to fight over their living. So you need to be super sophisticated, and perhaps find a way to collaborate with those who are already active in the market in order to penetrate it, because we need to remember, and this is more about healthcare economics than marketing: let's say I now want to get into treating a kid with a speech impairment. This kid was diagnosed and needs treatment, so imagine a bubble above the head of this kid saying, this is worth $1,000 to the system. Okay, but someone is taking this $1,000, and you want to come in with your new technology and take a bite of this $1,000, and why should they let you get in? Many of us expect that because we have this new technology the system will be willing to pay more, so the $1,000 will become $1,200. No, that's not realistic, it will not happen. But perhaps, if you know who's taking $500 of this $1,000, and you know that their cost to generate this $500 is $400, and you say, with my technology the cost is going to be $100, let's split the $300, then you may have something interesting.

Talor Sax 10:26

To be fully honest, in the stages we step in, we typically focus on the founder and the CEO, in many cases it's the same person, in some other cases it's not, maybe two people, maybe three people that will be our focus. In most cases there is no marketing team, maybe one person, maybe someone on fractional, so we will probably ask most of the business questions to the CEO rather than the marketing team, if there is any.

Talor Sax 10:56

Yeah, I think, pre-revenue companies, they sell, right, they have an Excel that will show the hockey stick, the classic one, everyone billionaires on the spreadsheet. I love to get into the details of this financial model, because it basically holds all the assumptions and all the planning of the company. By diving deep into it, it tells me a lot, first of all and most importantly, about how they think. I actually wrote an article about the treasures that I find in these Excel sheets. When you go into this detail and sit with the CEO, first of all you see how they build the story, it's a marketing story in an Excel. A good example will be, the first sheet on the Excel will be assumptions: I assume this and that, this is my market, this is the size, this is the pricing, this is the optimistic scenario, this is the bad scenario, and so forth.

If you start by that, to me it tells me someone is thinking in a systematic way. Then you go into expenses and income and outcome, and you see how it flows, and you can get into the thinking process of how they count expenses, for example. I had this one example when I saw, on the Excel, someone running a very nice increase in revenue, but profitability doesn't change. Say, how come? And they tell me, because someone told us we have to have the R&D team grow 80% of revenue all the time. Why? This is very naive thinking, and it tells me a lot about the one I'm sitting across from, not against. Another example will be, how do you count your users? In many cases you see that they count the users twice, and it's not realistic. Or, how do you count your pricing, and what's your model? So I assume that I save a customer $400, and then I can charge $350. Not realistic, again.

After doing that, in many cases I would like to go and talk to the customer. In our due diligence we try, as much as possible, to go to the customer or potential customer and check with them. I have this example, we see it many times: we have this new startup, and they have the founder, and they're able to get into a pilot with a leading health institute in the United States, and they build a business model saying, go back to the last example, we save $400 to the hospital on every visit, so we can charge $350, and the proof is that they're working with us, and they're willing to work with us on this pilot study.

So I asked to talk to the one who manages the pilot study, and it's a physician who loves the technology, loves the idea, thinks it will make him a much better physician. Then I asked this physician, what do you think about this pricing model? I never heard about it, I don't know, is it true that it saves the hospital $400? He didn't have a clue about the expense of the hospital. He doesn't know, all he cares about is the technology. So even if you show me that you have a pilot study with a hospital, we need to go deeper and see that someone there actually understood, or even asked a question about, the real value of it to the hospital.

Talor Sax 15:33

On the business aspect, it has very little value. Health systems around the world are different. You start with the same illness, you'll finish with the same treatment, but all the way in between is completely different: the cost is different, the decision-making is different, and the stakeholders are different. So you cannot compare Israel to the United States by any means. They don't have HMOs like we have, which is a very efficient organization that knows how to manage your health in a very good way, compared to the broken American system, which is completely private and serves different interests, not necessarily yours. Having a product run in Israel as a pilot says very little about the business value of it in your target market, could it be Europe, the US, wherever.

It does give us a lot of good understanding of the clinical value of the product, if it's a clinical product, not always clinical, sometimes it's about the operations of the hospital. But even if you sell in Israel, you actually sell, and you have revenue in Israel, then I would say two things: one, it's not the same, and the sales cycle is completely different, and the decisions are different, and the barriers are different. But if you're able to sell in Israel and give enough value to be profitable here, there's a very good chance you'll be able to do it in other markets, because Israel is a super efficient healthcare system, so if they're willing to spend money on you, others may as well. But you still need to find out how, it's not the same way.

Talor Sax 17:35

Well, for me, first of all, it's about the time, it takes longer than I hoped when I started investing at these stages. From idea to exit, in most cases, when you're talking about healthtech, you need 10 years, not two, not three, 10 years. Be ready for the journey.

Talor Sax 18:05

It's going to be a cliche, I'm sorry, but it's all about people. Always. All about people.

Talor Sax 18:05

Maybe the question is, should you even start a healthtech startup in Israel?

Talor Sax 18:37

So, should you even start a healthtech startup in Israel? I think yes, the answer is yes, but the answer needs to be sophisticated and sensitive to the environment. I met with many funds in Europe in the last year, none of them is willing to invest in Israel right now, at least for now, because of everything that's going on. They give different excuses why: because we only invest in German-speaking countries, we only invest in Scandinavia, because they don't want to invest in Israel, but they want to invest in Israelis. They still see us as the Startup Nation. I was sitting with a fund in the Netherlands that manages 750 million euros, 10 times our size, and the managing partner there tells me, I envy you, let's replace places, I'll give you some missiles and problems and I'll do fine in Amsterdam.

Why do you envy me? And he says, because you have the right entrepreneurs, they know how to sell, and you generally know how to sell to the US, where with us in the Netherlands we only have engineers that don't know how to sell, nothing, to anyone. So I said, okay, come and invest in our companies. And he said, we can't, but if you take this company and do the flip earlier rather than later, because eventually a company that goes to an exit will do the flip, if you do the flip earlier than later, and try to do it with our portfolio, then you'll be able to work with all these funds that look up to Israeli startups. So my answer is: yes, do it, but be sophisticated in how you package yourself to be more appealing to potential investors outside of Israel.

Talor Sax 20:39

I recommend that the CEO of the company will be located at the market. If your market is in the US, you need to be there. You need to go, even in early stages, in the pre-sale, even in the clinical trial phases. Clinical trial, the first two years, that's okay. But as soon as you go to become a pre-commercial company, early commercial, you want to get to, even working with the FDA, when you sit here and work with the FDA by email, that's one thing. If you go there and you're able to generate meetings with the FDA, you'll save two years in your process, and lots of money.

When I was working in the US, I was sitting in offices of physicians all day, just looking, observing how they work, understanding what they cannot sell me, because they don't always know what's broken, they're used to it, that's normal. But when you come and sit there, you see things they cannot see, and they can't tell you over Zoom meetings, and you create the personal relationship, so you can get to early revenue. I see it all the time: when the CEO is there, things happen much quicker than remotely. You can always tell me it's possible, yes, but the chances are much stronger if you're there. So, absolutely, be there. In terms of where to be registered, typically it will be the same place, so if your market is 100% US, no question, register in the US. If you have market in Europe, you can register in Europe, where the company is registered doesn't matter, but you have to be where your market is.

Talor Sax 22:42

It depends on specifically what you're doing, but in Germany there are some nice opportunities around what they call DiGA, it's about the digital therapeutics area. Many European countries will be willing to give you grants, in addition to the EU grants, local grants, just to attract you. It will typically be the second tier of countries where you'll see much better grant opportunities, in Poland, than in Greece, rather than in the Netherlands. But it's there, and you can look for it, and many Israelis don't look at Europe, we skip that, we go directly to the US, because this is what investors are expecting us to do. And I say, no, check Europe as well, and find your best market, because in the US, although it's much larger and there are more investors, the competition is much higher. You cannot do anything quietly, under the radar, it's impossible. If you go to a hospital and put your product there, and by chance you're annoying Epic, which is the giant of the industry, you're dead.

Talor Sax 24:13

It depends, each one of us has its own experience. My experience was, I had good business in the UK, good business in the Netherlands, in Belgium, I think the Netherlands is the highest paying health system in Europe, and I had good business in Germany, which is one of the lowest. You cross the border between the Netherlands and Germany and the prices fall by half, but it's a much larger market. I didn't, by myself, do a lot of business in France or Spain. I did some in Italy. So, be open-minded.

Talor Sax 24:46

Thank you, Etgar. Been a pleasure. Bye bye.