Special Edition CEO Podcast: SXSW | Spinning Out: What It Takes to Build a University Startup

Mike Psarouthoukis (University of MIchigan): I'm Mike Psarouthoukis, Executive Director of Impact Investments and Strategic Alliances at the University of Michigan Innovation Partnerships. Joining me today on the stage is really an amazing panel of two founders who I've known for a long time, as well as a great investment partner at the University of Michigan.

Dr. Charlie Childs, who is the CEO and co-founder of Intero Biosystems. And I'll let her talk about that a little bit, about what that is.

In the second, Ramses Alcaide from Nurable, CEO and co-founder.

And then Jim Adox, the managing partner at Venture Investors Health Fund.

So why don't you guys give a brief background of who you are, what you're doing here, and a little bit of your journey on how you got started. And Jim, why don't we start with you, just since you're the big venture fund in the room.

Jim Adox (Venture Investers Health Fund): Good afternoon. I'm Jim Adox, managing partner at Venture Investors Health Fund. And we are a venture capital firm that invests in early-stage healthcare companies. We have offices located next to a number of large Midwest universities. So that's a key part of our strategy. We have offices in Ann Arbor, Michigan, where I'm located, Madison, Wisconsin, and Milwaukee, Wisconsin. And we are the catalyst in turning scientific breakthroughs and healthcare innovations into life-changing patient outcomes. And we do that by bringing our capital, our council, and our operational rigor to these startups. And we've been major investors and played key roles in companies such as Third Wave technologies, Tomotherapy, New Wave Medical, IntraLase, LenzX and VLAs, all ophthalmology companies that have their origins at the University of Michigan, and most recently HistoSonics. Thank you.

Charlie Childs (Intero Biosystems): Hi, everyone. I'm Charlie Chiles. I'm co-founder and CEO of Intero Biosystems. We make miniature human organs to replace animals in animal testing. So think of cosmetics or animal trials before we go into clinical trials. Imagine if you could test those drugs on a miniature human organ rather than sacrificing an animal to do so. You get better results, hopefully fail drugs faster, and find your blockbuster drugs sooner.

I did my PhD at the University of Michigan. We spun the company out of my PhD a year ago. I'm super excited to be here with these guys. They're all wonderful and we're going to have a great discussion. Thank you.

Ramses Alcaide (Neurable): All right. Just to kind of kick things off, a quick question. How many of you have a wearable device with you? Just raise your hand, like an Apple Watch, a Fitbit. All right. So the powerful thing about these devices is that they help you track the body in a way that's never before been possible. Not even clinical trials have been able to capture the body at scale, so millions of people at a time in real time, so you can see how the actions that you do in your life impact you directly, and then longitudinally over days, weeks, and months. But the thing that we're not tracking is our brains. Our brains are the most powerful organ in our body, and they get impacted by the most amount of diseases, Alzheimer's, Parkinson's, neurodevice conditions like ADHD. And so essentially what our company does is we enable what used to take a laboratory setting to track brain health and bring it down into an every device.

So these headphones that I have around my neck are actually from one of our partner companies. And on the inside, they have these silver bands that record your brain activity. And with this, not only can you use it to track neurodiverse conditions and other things that are going, but it's essentially like a Fitbit or a Whoop for the most important organ in your body. And so we license this technology across multiple domains. This is our first partner. We just announced a relationship with HP. So gaming headphones the next year are going to have this technology built into it. And then we also work with the Department of Defense where we can track things like traumatic brain injuries or neurodegeneration that happens in soldiers, which leads to suicide, depression, et cetera, in the future. And so you can imagine a future where everyday devices, like your headphones, earbuds, AR, glasses, or even helmets become a vector for you to better understand your mind.

And the company's called Neurable, by the way.

Mike: So just for full transparency, I have the good fortune of running a pre-seed venture fund called the Accelerate Blue Fund that invests in startups that are spinning out of the university's research enterprise. And both of these companies are portfolio companies. So I wanted to make sure that that was known as well. Very excited about both opportunities.

And I think the overall theme of this panel is to have an investor who has had great success, have an earlier stage company like Intero has been around just about a year. And then Nurable has been around, I don't know how many years has it been, but we've known each other for like a decade. And actually, Nurable was kind of the founding story of why we launched Accelerate Blue, because it's very hard to raise funding for early-stage companies in the state. And we want our startups to be successful no matter where they are, but we also like to have an impact on the state and the region with our research enterprise and growing the economy and attracting entrepreneurially-minded faculty and students.

So with that, since you've all worked with universities or within universities, and I'll start with Charlie and Ramses first, can you talk a little bit about the process of, you were both PhDs, you were doing research, and then how you transitioned from that work to decide to take the entrepreneurial path and spin out of the university in the early days.

Charlie: I'll let Ramses go first because I copied him.

Ramses: I mean, for me, I've always been kind of driven by what the mission is versus what the path is. So at least my passion really started when I was about eight years old. I had a family member get into a trucking accident and lose both his legs. So I wanted to build prosthetics. I've always wanted to build neurotechnology. I ended up going to the University of Washington, studying electrical engineering there. Then I went to the University of Michigan and got my PhD in neuroscience to create brain-controlled prosthetics. And that's where I saw kind of this bigger issue in neuroscience, which is like the standard of care for Alzheimer's or Parkinson's is 10 years into the disease. That's nuts. And so when we built this initial technology at the university to help solve some of these problems, we took it to the tech transfer office, and we basically said like, "Hey, what do we do now? We have this awesome tech. When does it change the world?" And they're like, "Well, we're going to pitch it. We're going to do this." And I was like, "I don't think that's the right plan." And they kind of jokingly said, "Well, you can make a startup." And so, at least what I would say is I never planned to be an engineer or a neuroscientist or an entrepreneur, so I wear so many hats at the company, too. And it's one of these things that's like whatever the mission needs me to do is what I do. And sometimes that's be a salesman, sometimes that's be the PR person, which is why I'm here. And sometimes it's being a scientist with the team.

But what I would say is that Michigan created a great incubator for really educating me on what that mission is going to be and a supportive group of people who really believed in me and to the point that they sometimes put their career on the line and you should share that story at some point in time. Not up here, no. With the drinks after drinks, yeah.

Mike: Yeah. We do have a reception afterwards since you're giving it a plug. We invite everyone to stay: free food and adult beverages right out in the hallway. So please stop by and say hello afterwards.

Charlie: Yeah. I grew up right here in Austin, Texas. It's great being back. I rowed in high school and I got recruited to Wisconsin to row. Many of you might not know this, but the water does not freeze here, and it does freeze in Wisconsin. So you can't really row when the water is frozen. So after the first year, I was like, "This isn't for me." So all of a sudden I had 40 hours a week on my hands that I no longer was working out. And I was like, "What should I do with this?" Wisconsin's very similar to Michigan, big research enterprise. I joined a lab and learned all about how cool stem cells were. And I was like, "Holy shit, we have this cell type that can turn into anything in the body. This is amazing. I want to do my PhD on it."

So fast forward, I end up at Michigan. My thesis project is figuring out how to make these miniature human intestines actually function like the intestine. And everyone had already told me, being an academic is the best part about being a PhD. Being a professor, that's what you should go for. If you aren't a professor, I was told I'm a waste of a brain if I'm not a professor. And I was like, "Okay, then I'm going to be a professor. If you tell me I can't do it, I want to do it." And then I was like, wait, being a professor kind of sucks. I don't want to be a professor, but I like this independence, I get to chase science ideas, but what I really want to do is make an impact. And I want my research to actually translate to patients or saving animals or things of that nature.

So I approached Mike and his team at Tech Transfer and I was like, "I think we have something really cool here." They were like, "Sweet. Let's get the patents figured out. " And I was like, "I have no idea what that is, but that sounds great." And then at the end of my PhD, all of us were sitting around. We were like, "We have this really cool technology. Let's do something with it. Let's go really fast. Let's make these miniature human organs. Let's test drugs against them. Let's make an impact on the world." And Mike's office was so supportive.

The University of Michigan has multiple venture funds for pre-seed companies like us. So it's me and my co-founder who are also PhD students. We've never done this before. They taught us customer discovery. They introduced us to investors, and they actually, three of the funds ended up investing in us in our pre-seed round.

And when I then went to the coasts or other areas to more institutional investors and I was like, "Hey, the University of Michigan has three venture funds and they've already invested in us." That validation is really what put us over the edge. So we closed and oversubscribed $2 million pre-seed round last year, and we could not have done that without Michigan's support, both from training and from a capital perspective. So we are just so thankful.

Mike: Jim, you've worked with an amazing list of startups in your career that have spun out of universities, not just U of M. Can you talk about how that engagement works, your work with tech transfer offices in general, which is what Innovation Partnerships is for U of M, but also how you engage with the founders and what's the best for those of you who have startups or looking for startups at a university, what does it take to catch your interest as a venture fund?

Jim: Yeah, I mean, we could talk for hours and hours, and every project is different, just like they're different. And every single one is different. It starts with a good, what's traditionally called a tech transfer office, but actually Michigan changed theirs to Innovation Partnerships for a reason because tech transfer and most of the offices, I would say, focus on that legal technology transfer. You have the license to a patent and that's the tech transfer. And what I learned, and as I said earlier, my firm has done over 40 companies based on university research over the lifetime of the firm, which preceded me, but I've been doing it for over 20 years. I've done 10 myself. And what I actually realized was, and this is like a great setup just sitting here listening, that tech transfer offices, we're going to transfer the technology and the license.

And it's actually not about that. It's about the people that transfer the technology, like these two right here. And I've also learned that most often it's the students, not the professors. And that's kind of the dirty little secret here that just hit me that I've had this kind of epiphany before, that it's the students that transfer the technology. Typically, the PhD students have been working in the labs for three to five years, and you want the professor's support and buy-in. That's really important, but it's people like these two that make it happen, and then it launches.

Ramses: I think one thing I'll touch on that, just bounce off of it, and I think Charlie said it really well. I think that the passion for seeing your work create impact is the reason why you go down this path. I didn't go to get my PhD because I wanted to work in a lab. I wanted to see the impact of something that bothered me so much I couldn't let the world exist with that problem still existing. And that's like the key essence of what entrepreneurship is. It's like you're willing to go through the pain in order to remove that pain for humanity, right? Because it is painful. It's a very painful pathway. And so it's really beautiful that you put it that way, Jim, because I think it really captures the essence of the humanity and community that the University of Michigan brings to their entrepreneurs.

Charlie: Are you a type two fun enthusiast, would you say?

Ramses: I don't know what that means.

Charlie: You don't know what that means? Type two. I think PhD students and startup founders are all type two fun enthusiasts, not fun while you're doing it, but funny afterwards. Do you feel like that's your entire experience with startup?

Mike: That was not a planned question.

Charlie: I just want to ask Ramses. We'll talk about it later. Okay. All right. Find me if you're a type two fun enthusiast after this.

Jim: Say, I mean, maybe just carrying on part of this is that when I first started in this business, I focused on the patents. Oh, what patent do they have? What did they invent? And that was like, I spent half my time on the diligence and understanding that. And now that I've been doing it, I focus on the people. I focus on the passion because that's what's going to drive it. The patents, I mean, that's kind of like a fact, you know it, and that's always evolving, too, in the patents and you have to grow the patents. And usually the university patents are like, I call them the starter patents. Most of the time they end up not being the best patents and most valuable patents, and maybe I don't even know if that's your case or not, but that's what I've learned. But then it's the people that take those starter patents, get excited by it, get people like me excited to put some money in.

Then they figure out, what's the real patent behind this? And usually it's tens of patents.

Ramses: Yeah. I can attest to that. We started out with one patent at the University of Michigan and we now have 45 patents. Think about that. That's insane. And I look back at the university one and I'm just like, why the hell did I write this? Things have evolved so much, right? You learn so much.

Mike: Yeah. And having been at U of M for about 12 years, that is a very typical path. And in fact, many of our startups spin out of the university and evolve over time. And the patent that they started with at the U is not relevant to the business anymore. And it's great because we got to maybe invest in them and so that patent isn't going to generate what we had hoped in the past, but because of the relationship and being able to support the activity, like Ramses said, there was one patent out of you. They've got a massive portfolio now. It is a company we're very proud of. We call them a University of Michigan startup. I think he's pretty proud of calling himself that at times. And the starting block's the key. All startups eventually pivot, and that's true with the IP that they develop in the company.

So Jim, why don't you … I think people are going to want to hear the HistoSonics story, and you've been there from the beginning. I'll do a quick intro in that HistoSonics is an incredible technology, and I'll say this publicly. I've said it many times. I think the faculty member, that the faculty team that has found this will eventually win the Nobel Prize.

The company is the second-largest venture-backed medical device company in the world, as I understand it, and probably on the path to being the largest. And I think that'd be a really interesting story for the team to hear since you've been involved for so long.

Jim: Yeah. Well, that's another couple hours to get the whole story.

Mike: You get two minutes.

Jim: But maybe I'll start with … It started with a team, and this one actually was a bigger team. It included faculty and also junior faculty, because it was really like a whole lab. So there was, let's see, one, two, four faculty from the University of Michigan, and this is a lot of the companies that we've invested in have been partnerships between engineering and the medical school. And that's one of the things about Michigan, about Wisconsin, that they have leading colleges of engineering and major medical hospitals and teaching hospitals on the same campus, and they often collaborate. And so HistoSonics was one of those where you had docs and engineering PhDs working together. And what HistoSonics is, very briefly, is it takes ultrasound energy. So think about ultrasound for, say, looking at a baby in utero and looking like, well, boy or girl. And so that same ultrasound, but that's called diagnostic ultrasound. It's lower energy just to produce an image.

What the team at the University of Michigan came up with is how to change the energy, and I'll just use that as a very high-level simplistic way, but change the energy to go from creating an image to creating at the focal point. So you think of sound waves coming from a transducer, shaped like this, focusing on a point, and where it focuses, it creates tremendous energy that is really high peak positive and negative pressures that rips apart cancer cells, just destroys them instantly. But what's really cool about it is the pathway through the body, there's no damage. It's just like if you're at SXSW, and like Mike and I were a couple nights ago, and you're standing a little too close to the speaker, you can feel the energy. So it's similar to that. You feel the energy, but it goes through your body, doesn't harm.

But where it focuses, it creates that high energy and destroys the cell, which unlike ionizing radiation that we have for cancer, that as where that goes through the body, it's doing damage all along the way. There's others, you can use heat to do the same thing, but it damages tissue all along the way. HistoSonics does it with mechanical action. So it's non-invasive, no knives, no needles, no pricks. And in our procedure, you can ablate golf ball-sized cancer tumors. Now it's cleared for your liver non-invasively. And that night you can be out with your family celebrating that that cancer is now gone from your body. And we've even had patients in the studies wake up from anesthesia and say, "Wait, you didn't do anything. I don't feel anything. I was the control group. I know how these studies work." And like, no, there is no control in this study. Every patient is treated.

So fast forward, we worked on that for now, this is the 16th year since it was spun out. So I've been an investor for 16 years. I led the series A and the series B and was chairman just until last summer. 16 years, I would say it wasn't until probably year 13, they were like, "This is going to work." We had a couple times where the company was almost out of money, where I had to twist arms as a lead investor and saying, "You got to invest or else." And we scraped together enough money to keep it going and we ran a clinical study. It's cleared by the FDA. So this is real FDA-cleared device and surgical system is robotically controlled and we're now commercializing in many countries in the US. Revenue last year was over a hundred million dollars, in less than 18 months of commercialization, and that's faster than any medical device company in history, that revenue ramp.

So it's this amazing company we did, this is all public. We did a, it's called a change in control transaction where we had very name brand investors like Peter Thiel and Jeff Bezos. And then some investors that are so high profile, they didn't want to be named. So people like I can't talk about, but are very wealthy and very, very connected globally. And we did a $2.25 billion change of control transaction and it was a bespoke transaction and the company is cranking. Now they have plenty of capital really for the first real time that capital's not an issue. It's like, what can we do? And they're on their way to hopefully be a $10 billion company. And it all started with University of Michigan technology and now we've expanded to work with other universities. We work with University of Wisconsin, Virginia Tech, and now other universities in Singapore, Hong Kong, London, England. So it's going global. And for me, it set the bar on what companies can be, starting from a couple University of Michigan patents.

Mike: So can you talk about the other indications that you guys are looking at right now?

Jim: Yeah. So this can be used anywhere that you can be within roughly 20 centimeters from the surface of the body. That's how you couple the ultrasound. And we're FDA cleared for liver and the FDA requires us to do a study for each organ. So we're FDA cleared for liver. We've run a study for kidney and kidney will be submitted any day now to the FDA. Hopefully that will be cleared by the end of the year. We're also doing pancreas. Pancreas, we're going to take a novel approach that hopefully we can get the FDA to agree with us and cooperate with. And then we're also going back to BPH, benign prostatic hyperplasia, which actually that's where the company started 16 years ago. And our first study, we failed and it was almost the end of the company. And I saw enough of a signal in the failure that kept funding it and convinced others to keep funding it. And now we're going back to BPH because the challenge of BPH, we couldn't get enough energy through to the prostate. So we were just doing a little bit of that ablation I was telling you about. But now with all the work that's been done inside the company, we can do it. We have confidence that we can do it and we're going to go back to it. We're going into brain and that's going to be … Right now, if you've got a brain tumor, glioblastoma, often you have a craniotomy, which you talk to a neurosurgeon like, "Oh, we're going to do a craniotomy," but that's creating a hole about that big in your skull. And I watched one on an animal and you think going to the dentist is bad? Even watching an animal having a craniotomy, it's just the freakiest thing. With HistoSonics, our goal is to do it non-invasively. Through the skull, millimeter precision to ablate a tumor, and we've done it in animals.

And this is research that's actually continuing at the University of Michigan. So it's cool about the University of Michigan. The professor stayed inside the university. We spun it out. We hired people, we hire almost everybody out of their labs, but we've had this partnership with the university that we fund now the research at the university for the university to do the pure R research because we're a company. We want to do the development and commercialization and all the regulatory and reimbursement, but doing research inside the company, probably right until now, is just not feasible. We just didn't have the money. But doing it with the university where some of it is government funded, some of it we funded, and then we spin that into the company when it's ready. And so that's also a great example of how you can stay connected to the university and leverage kind of both sides of the house.

Mike: Thank you. And this is a funny twist to this story. So if you listen to what Jim just said, the company's been around for 16 years. They were the National Venture Capital Association startup of the year last year. So that shows how long it took for the company to get to something that would be recognized in a commercial fashion.

So great segue though from my next question to you guys is you have both taken technologies that you were working on out of the university. And if you could talk a little bit about at what stage did you feel it was right to do that? You spent years on your PhDs and what was the trigger was like, okay, I'm going to go. And I don't want this to be a very, okay, I didn't have … Maybe you didn't have a choice because your PhD was over and your postdoc work was over, or it was something about the stage of where you led the research, because I actually don't know the answer for these two.

Charlie: Yeah. Like I said, halfway through my PhD, I was like, "This is so cool. I don't really want to give it up." And we started approaching the tech transfer office. I didn't know anything about anything that I do now and they saw promise in it and I was like, "Well, I need a job after graduation. I guess I could give this a try." But me and my co-founder were like, "We've done a PhD. We've done our time. We're not going to live underneath a box in San Francisco and put all of our money into this, our measly grad student savings into this. We want to really make sure that this is going to work." So we actually talked to Ramses. He did a lot of the student business plan competitions that you're able to do as a graduate student. So you got second at the Rice Business Plan Competition? You did. Yeah. But you guys got first, right? And I got first. Yeah. No, but there's all these resources that you have as a student. People are much more likely to talk to you as a student. So I actually stayed for my PhD an extra year to take advantage of everything that Michigan had. So when you reach out to Big Pharma and you're like, "Hi, I'm just a whittle grad student. Would you please tell me about what you're doing in your lab?" They are much more likely to do it versus me or Ramses's now where we might be a competitor. So I spent the last year, my PhD, doing all the customer discovery I needed to do, applying for grants. Michigan has wonderful academic commercialization grants. We got about $350,000 to really prove out the R&D that we were doing. And at the end of my PhD, me and my co-founder were like, "Okay, we think there's legs beneath this. Let's do this." So then the tech transfer office was extremely helpful in helping us figure out how you actually spin out the company and the legal parts to that and things of that nature. So it really wasn't until the end when I had convinced myself that it was going to work. What about you?

Jim: I was going to say, I first heard of Intero because I heard about organoids and frankly, I wasn't that interested. It was just, "Oh, it sounds like a cool research project." But I kept hearing what got my attention. They kept winning these contests. Everyone, they would win and come home with these big checks. I'm like, "Wow, they're doing something right." And that's when I started talking to Charlie.

Mike: Yeah. So the Rice Business Plan Competition, for those who don't know, is the largest university student startup pitch competition in the world, I believe. And you have a first place winner and a second place winner. And they bring hundreds of thousands of dollars home from that event. So Ramses did his first and Charlie being the competitive person that she was, she got coaching from Ramses and then kicked everyone's butt.

Charlie: The whole time I was like, we need to beat Ramses.

Mike: Yeah. And I can attest to that.

Charlie: It was the motive.

Mike: In a good-natured way.

Charlie: Thank you, my friend.

Mike: So how about you, Ramses?

Ramses: I just want to also highlight that even though we got first, they crossed off the check and they wrote a bigger number than the first place team. And later on I figured out that there was politics involved. So that's a whole- We'll talk later. We'll talk about it.

Anyways, that's beside the point. Let's see. What made me think that it was the right timing? I have, I think, a skill that a lot of entrepreneurs have that is both a gift and a curse, and it's called hubris. For me, I have this belief, and maybe it's something that they told me when I was a kid too much. It's like you can do anything you set your mind to. And that's 100% the truth. And as soon as the technology felt like it was ready to potentially move out of … I wanted to use it with the labs that were at the university and start to actually build a business with it. That's actually when I decided I'm going to go down this path. And so that was about two and a half, maybe three years into my PhD. And so honestly, I think it was probably a couple years too early.

And more refinement would have, I think, put us in a faster, more easier path long term. But what I will say is that that delusion to believe that you can do anything that is possible is such a superpower.

And I just want to share this. I'm going to get on my soapbox for a little bit. If there's one thing I hope all of you can do before you leave is set a super ambitious goal that you don't believe that you can achieve and then just go fucking do it. Work so hard, it's possible. And that's what entrepreneurship taught me, which is we're having this issue right now with our suppliers in China, with one of our partner companies. And I was talking to my co-founder and he was like, "How do we solve this? We need to hire all these people and do all this other stuff." I'm like, "I'm just going to go solve it. I can do it." He's like, "You don't have any experience in China. You don't speak Mandarin, you don't know the supply chain." Well, guess what? It's solved. And just having that mentality where you're not afraid of trying things. And he's probably right, we probably should have hired an expert, but it's like in early stages of your company, that's so valuable. And that's, I think, why we started the company at an early stage of where the whole technology stack was. But I think that that's what enabled us to get the positioning that we have right now in the market, because we were able to start early enough and develop the technology enough that now we're really positioned in a place to win.

Jim: Yeah. I just want to say, Rams, how you said you maybe started a couple years too early, that's actually one of my learnings after over 20 years of that's a mistake I've made starting, spinning out something too soon where it's not really ready to leave and be not even commercial, but just start paying its own bills. So there's a right time, just like companies that scale too soon, they blow through many millions of dollars. The same thing of a startup out of a university. There's kind of like this right time where you're ready to bust out and sometimes you maybe want to stay inside a little bit longer, take advantage of not having to pay rent, the programs, the help, the calling card that says, "I'm from the university of X, Y, Z," as opposed to, "I'm some random company." And I think that's a key learning. Really think about that. I know you want to start, "I got to spin it out now," but think about is now the right time? "What if I waited a little bit more and obviously achieved a milestone, de- risked it just a little bit more, and then kind of go off and try to fly on your own?"

Ramses: I'll share one quick story actually from the Rice Business Plan competition. So our lead investor, the Rice Owls, he came up to me. His name is Robert Winter. He's an incredible investor. He backed Nvidia before they even grew up at all. He essentially led their series back in the '90s. And he came up to me and he's like, "Ramses, I want you to know that you're two to three years too early." And he's like, "Now there's a pro and there's a con to that. The pro is that if you use this early momentum, you're going to be so far ahead that when the market timing is right, you're going to be in the right position, but it's going to be so much more painful for you. You're going to almost die so many more times. And I need to know if I'm going to write my check and back you, and if I'm going to go back to my investors and say, 'I'm going to back this person and I'm going to write big check and I want you guys to do it too.'" Because a lot of it of fundraising is FOMO, momentum, like conviction. He's like, "I need to believe that you're going to go through that pain." And at first, I mean, obviously I believed it myself. I was like, "Yes, of course. This is my life's mission. I've been doing this since I was a young kid." I didn't realize he was going to be so right, but it shows how important timing is. But the key gem that I want you to know is that everything that you do has an advantage and a disadvantage.

How do you take your disadvantaged position and turn it into an advantage position? And sometimes that's not immediately clear when you're in the disadvantage, but think about that. And we think about that a lot. Every single time we're almost at dying or something wrong has happened, we think to ourselves, what can we turn this pain into that when we get out, we're so much stronger as a company. And that's a really … I know this wasn't about entrepreneurship, but now I'm on my soapbox, so I'll pass it back to you.

Mike: Entrepreneurship covers everything.

And I'd like all three perspectives here. You guys have been in the process or through the process for a while now, some longer than others. During that first six months when you took that leap and you weren't inside the umbrella of the university anymore, and I do want to follow up on some of the things about staying in the university, but I want to get to this question first is looking back, what would you have done differently? Or in Jim's case, with the companies that you've engaged with early, and aside from going out too early or going out too late, what were things that if you had the chance to make changes you would've done? And why don't we start with you, Ramses.

Ramses: Yeah, I mean, I'll keep it short, but I think that the biggest thing that I would've done differently is I would've seen failure as something that is actually winning. There were times where we had to do an extension in the company and I just felt like we had failed because we're doing this extension. And so we ended up not asking for more employee stock options or getting a flat round instead of going up in valuation. And I look back and I'm like, "No, dude, you just had to tell a different story. You guys were crushing it. You guys hit your milestones." And so it's this concept of failing forward. That's actually what progress is. If you're not failing on the way toward your goals, you're not pushing yourself far enough. You're doing something achievable and something achievable is not how you change the world. Like I said, set a really hard goal, fail on your way there. That's okay, but you're going to get so much farther and then celebrate how far you made it.

Mike: So you don't think you set a high enough goal for you when you first launched? Because it was pretty ambitious.

Ramses: I did. I did. I think that when we didn't reach that point, I didn't see it, as in "Ramses, this is still a win." I saw it as like, "Man, I failed. Now I've got to go do this extension." And people are negotiating and they were like, "Oh, we're going to get you a flat round." And I was like, "I guess I deserve this because I failed." And instead I should have said, "No, we crushed it. Do you see how far ahead we are? Do you see the innovative leap we did from here to there?" This is just the stepping stone to a hundred times where we were now, which is a hundred times more than where we were where we started. And people don't really remember your failures when you make progress. And progress and momentum is how you build the next ladder towards success.

And I didn't really understand that well enough through the journey. And it's because I had this science brain. It's like if your experiment doesn't go well, you're always critiquing yourself. And honestly, selling the future is different than telling the facts on a piece of paper. And it doesn't mean you have to be disingenuous, not at all. But what it means is that storytelling is a way to enhance how you're progressing and growing. And that's not something that I knew well when I started the company.

Mike: Great. Thanks.

Charlie: Mine's very similar to Ramses's. I think I would've changed my mentality. So PhD-trained scientist, very rigorous, all good qualities, but we live in a new world that's not the academic lab. And I think you really need to think failures aren't the end all be all. So for me, I was like the first six months, if I make a single failure, this whole company's going down. And I was so proud of myself. Company hasn't gone down yet. Must have not made any failures. And I was reflecting a couple months ago and I was like, I did nothing but mess up. Everything I did was a mistake and we're still here and we're doing pretty well, so it must be okay. And I also think that, especially being a PhD trained scientist, and a critique that I have about the Midwest is that we don't set the bar high enough. Coming out of a scientific lab, you don't want to set the bar too high because you want to achieve something. You don't want to sound crazy. You don't want to overpromise. And once you're playing in this startup world, it goes back to what Ramses says earlier, you can do anything you set your mind to, so why not do something great? And I think we could train that more in our PhD scientists within reason. And I think that would make a lot more successful entrepreneurs. And I think we found that mind shift now, but it took a lot of getting dragged over the coals and figuring out the hard way, which I didn't need to do.

Mike: So you touched on it, a quick follow-up and then I'll jump to Jim. And what could have happened within the university that would've prepared you for that mindset other than your faculty member going, "No, it's okay to do that"?

Charlie: Well, I think if only HistoSonics had exited a year earlier, I could have looked at Jim, but I think really what it is, is we were told we were never going to be VC-backed. They were like, "Your business model is not VC fundable." And I was like, "Here's all the data to show that it is." And I was like, "Here's all the data to show that we are VC backable. This is a super scalable company. We could exit for a very large amount." And a lot of people in our ecosystem were like, "No, I worked at Pfizer in 2007 and this was never going to fly." And I was like, "This technology was not invented until … This is decades away." So I just think being creative and really believing in yourself. And if the university can foster this like, "Oh, that is a crazy idea. How are we going to get there? Show me the customer discovery. I do believe that this is going to work. That would be great."

Ramses: I think that's actually the biggest issue that we have in Michigan when it comes to the venture community, which is like they just don't see that vision and scale as much as they could. I think something that one of my friends told me, and he owns one of the largest consumer product goods companies out there, he said, everything is venture scalable if your vision is big enough.

Charlie: Exactly.

Ramses: Like Giphy. You know those gifs on your phone? Yeah. So I was talking to that guy and I was like, "What is your vision? How do you even pitch this thing? I don't get it. How is this a billion dollar company?" And he's like, "The number one language in the world is pictures." What we convey is an emotional connection that you can't do with just words. That's a vision. Look at Chipotle, look at all these things that very easily you could have said are not venture backable. It's really up to how do you as a founder want to scale this to the world? And I think that if you find somebody with that energy who's willing to go through that pain, they'll make it venture backable. That's my opinion.

Charlie: No, I totally agree. And I have to give it to Jim because he's one of the few people that has actually pushed me on this. My first meeting with Jim, the entire time we just spent on the vision slide and he was like, "Can you make it bigger?" And I was like, "Yeah, I guess we could do this." And he's like, "That's sick. You should do that. " And I was like, huh, okay, that's a great point. Why not? If he says I can do it, he's done it before, there's the data. So I'd love to hear what you have to say.

Jim: So I mean, there's, I guess, a lot to cover. For me, I've learned a ton and I'm still learning. Every company, I learned something new. And I think when I'm talking to founders, I don't get hung up on if they've failed or succeeded. I want to understand, well, if you failed, what did you learn? And that's all. I don't care if it's a win or a loss.

And what I've learned is most people learn a lot more when they fail. There's been a lot of successful companies that I don't think they learn much. And no, and the people, like I've looked at serial entrepreneurs or somebody, "Oh, I was in this company and it was a 10X and $300 million exit." And then I'm meeting with the guy and I'm like, "I don't think he was ever challenged." And he got on a wave and just was riding his wave and got rolled in the shore and like, woo-hoo, I just surfed. I'm like, "Well, you didn't really surf. You just got thrown by the wave." And then I've seen on company number two, they were huge failures. And that's where it hit me that you got to understand what have they done and what did they learn because you're always learning. I'm always learning. As great as HistoSonics is, I've learned from it and we're still learning. I mean, it's not done. I'm still a big investor in the company because the transaction, we've got to roll our money, either cash out or roll it forward, and I rolled all mine forward.

So I'm still learning and it's not done. So I think just to reiterate that point, I think for me, a big one is building the team. Again, it's not about the technology, but it's building the team and when to build the team, when do the founders need to bring in team members that are outside of their core founding team. I've seen founders that started with two, three people and they stayed so loyal to each other that it pretty much killed the company because people grow. Some people continue growing and some people just kind of lose that passion and it's like, there's nothing wrong with it. We all are different, but you can't let that person be in charge of your sales if they're no longer that passionate and aren't cutting it. You have to put them in a different role inside or outside the company and bring in someone who can do it.

And often that means bringing in experience and expertise. Most industries, there's a network in that industry. I've been in many industries in healthcare and tech. There's a network in them. Bring someone in who brings the network to go sell or that. And how you build a team will be the course of how you succeed personally and with the company.

Mike: Great. So we've got about 13 minutes left. I have other questions, but if there's questions out there, we'd be glad to take them. There's a microphone right in the middle of the room, and I think this is being recorded, so it'd be great if you could step up there and we're happy to engage.

Audience question: I guess this is a question for Charlie. It sounds like you're creating organs and you're using them to test diseases, which is really, really cool. I'm thinking back about 2015, I'm over in London and I'm in my hotel room and I'm watching this show about all these beating hearts in Japan. So this technology like creating organs has been around for a little while and what you're doing with it is great. I think that's awesome. Do you have any plans to produce the organ transplant that's perfectly DNA capable with no rejection and along those lines, tell me what you think.

Charlie: Yeah, absolutely. I mean, this goes back to what me and Jim talk about often. That is like coming out of my PhD, that's my ultimate dream. How cool would it be and what a challenge it would be to make … We make the small intestine right now, and they're about the size of a nerd's candy. They're really gross. Imagine if I could do that on a six-foot tube scale, that would be sick. But coming out of my PhD, I was like, "That's impossible. There's no way. They're this big right now. How could I ever do that? " But we're now realizing with enough money and enough expertise and the drive to do it, we could do it. So our ultimate goal is to make an artificial organ. I'm not going to lie to you and say that's going to be tomorrow. That's probably 10 to 20 years out, but I truly believe that the IP behind our company is the IP that is going to make the first artificial organ.

And I hope that we can hold on long enough to do it. So yes, and hopefully you can watch a TV show about my giant organ someday. I guess normal sized organ, normal sized organ. Thank you.

Mike: Come up and talk to her afterwards then because they're fundraising soon.

Audience question: First of all, this sounds like amazing technology and it does sound Nobel Prizeworthy and congratulations and how wonderful. But I do have a couple questions. If we eliminate the death rate, what do we do about the birth rate in terms of balancing out the population? Number two, what kinds of concerns and security concerns do you have about this kind of technology being weaponized? Because it seems like just a couple shifts away that it can be used as a weapon instead of a cure.

Charlie: These are all great questions. I'm not going to lie to you. I only think on an organ scale, I've never thought on a human body scale. So no good answer to the first one. And the second one is also no good answer. I see this technology as a way to test viruses or test things, different challenges that the human body might be able to see. And for instance, acute radiation syndrome, your intestine really doesn't like getting irradiated. What a wonderful platform to figure out cures for that. I'm sure every single technology can be twisted into something evil, totally with you. I like to think about only the good parts of it, but thank you for the question.

Mike: Anyone else? Or I'll jump in.

Jim: A little commentary on the first part of your question on birth rate. I mean, I think part of the challenges we're having now is you need to have a healthy economy that includes everybody and you need to have a sustainable climate. I mean, that's why people aren't having kids - because it's too expensive. They're afraid of what's going on. And so I think you need to change that. And I think birth rates will go up to some level. But I think there's lots of data. I can't quote it, but I know I've read all this. So it kind of gets into macro way beyond the scope of this panel.

Mike: Well, and just to add that I'm an optimist in a pretty significant way, and all technologies can be twisted without a doubt, but the technologies can also solve those problems. And within a university ecosystem, most people are trying to develop technologies. We're not perfect. We're big organizations, we're bureaucratic at times, but we're trying to have a positive impact on society and the economy and moving the technologies in a way that will benefit our communities, countries, and honestly, the world. Great research universities, for the most part, do that. Does that mean that all of the technologies they spin out are ideally used? Of course not. We're humans and some people go down that path and some don't. But historically, if you look at what happens at universities, for the most part, they've had a very significant benefit as those technologies developed.

Jim: Actually, just one of the companies I spun out a number of years ago from the University of Michigan, it's a company called Inset Biosystems, and it was for artificial reproductive technologies to improve the viability of embryos. So we were trying as a kind of case in point on that.

Audience question: Yeah. I think that that's absolutely praiseworthy. I love the optimism. I'm just making sure to ask these kinds of important questions- Good question. … along the way. I have one more follow-up question. Where are you at in terms of human trials on this kind of technology?

Charlie: That's a great question. So we're currently focusing on the preclinical space, so we don't have to go through human clinical trials. Obviously, if we make an artificial organ, that will change and no one has really done that before, so we will cross that bridge when we get to it. But great question. Thank you.

Audience question: Yeah. This time I actually don't have questions. I just don't want to miss the opportunity to thank you, to be grateful for your conversation. All of your stories and experiences are such an inspiration for us. I want that ecosystem in Mexico. I want to be as great as Mike in the work of the university. And of course, we want to inspire as much as people as we can to be like Charlie and Ramses. So thank you so much for being that inspiration for us and we hope someday we can have you in Mexico also.

Ramses: Also want to shout out Mike real quick. He is the biggest gem that the university has ever had. And I want to make sure that this is on record at SXSW because even though there probably have been moments of tension, that's the level of conviction that gets stuff done. And that's why we have the fun that you created at the university. The sacrifices that you've made to make sure that this mission happens, that's entrepreneurship. So I just want you to know that.

Mike: Thanks for making me cry on stage.

Audience question: First of all, thank all of you guys for being here. I've really enjoyed the conversation so far. My question was for Jim. I know you mentioned when you're starting out, I think you said 20 or so years ago, you would look a lot more at the patents that companies had and sort of the science they'd done, and now you look more towards the conviction and the people. I'd love to hear more about your process to evaluating conviction, to evaluating character. And obviously it's a case-by-case basis, but if you could give some anecdotes there and some chances you've taken, I'd love to hear.

Jim: Sure. So one thing I can say for sure, it's not over Zoom. It's in person. I mean, that's how it done. Charlie can tell you, when we first met, it was in person, it wasn't in Zoom. So I'm old school, and so it's like meeting with the people, having lunch with them, talking about what drives them, and then spending time teasing out these questions because everybody who's halfway good can make a nice, compelling PowerPoint. Now, you can do it on AI, even though I haven't been successful doing an AI PowerPoint that I think is really good yet, but people can do that. But I want to learn what's behind that. What have you learned? Let's talk for a couple hours about that failure when you almost ran out of money, when the experiment didn't work, when you got in a huge fight with your professor, how did that go?

And learning about that and getting to know what your vision is. And then also, how can I help? Sometimes it's not a good match. What I do, what I know, what I want to invest in might not be a good match, and you should go talk to somebody else. But for me, it's just spending time. Unless right now, I think AI is so ridiculously hot, you come in with a compelling, "Oh, I got AI this and that." Some investors will just invest. I mean, you look at it, just that, but that's a bubble. And while AI is here to stay, it is amazing, going to be amazing, there's going to be thousands of companies that flame out really fast because it's just like whatever they were, AI. When I was just starting in venture, I saw it in the bubble of 99, 2000.

I thought back then it was like a few months before I was going to be a billionaire like, "Well, I just got to find one of these." And I remember being in a board meeting with investors that were in pets.com and these were grown men that were just cackling like little kids and none of them ended up being billionaires because that went like that and like that. But it's real-time engagement, genuine, authentic, and in person.

Mike: I think that is why we have come down from our office to SXSW is that we get the opportunity to have those kind of engagements. This is my 10th, I believe, and the value to the university and we're massive for our team to be down here and in engaging with folks and entrepreneurs and investors has just been incredibly valuable. And we could do those over Zoom and we do meetings over Zoom, but it's just not the same. And I've made connections that have lasted a decade as a result.

Audience question: If you were to consult at a private school that had no relationship with venture capitalists, what would be your advice? If you were hired as an advisor, how would you go to them? Would you have the school go after VC or would you go after venture capitalist to find a school that maybe has a lot of talent and has yet to utilize it or capitalize on?

Mike: So are you embedded in the university that you want me to refer to the private university to the -

Audience question: Sure. I'm an advisory board for the McLane College of Business at the University of Mary Hardin-Baylor.

Mike: Yeah. So what we have done … So we have a pipeline report, so thanks for asking this question because I hadn't thrown that out there yet, that talks about the startup projects that we've had, as well as companies that are actively fundraising. And we send it to over 1,200 investors around the world, primarily in the US, but very broadly. Half of those investors came from meetings at this conference in the 10 years that I've done that. And we will not put you on the list unless we have met with you or met with someone from your firm, so we know you're an accredited investor. And it takes time, but to get real engagement, they've got to meet you, you've got to meet them, and go, "All right, these people qualify." We don't make personality judgments or anything like that. It's like, "Okay, this is a legit firm, you're on the list." And the list has generated over $200 million and it's an Excel spreadsheet. It's not some fancy report. It's an Excel spreadsheet of the 100 to 150 startup projects we have and the 20 to 30 startups we are launching and companies from the portfolio now that we have a fund, and it's now the word's getting out. And so people are asking, "Can I get on the report?" And it's not an overnight thing. And the sell is, what does your university have to offer? And if it's a business school, it's probably going to be more around the students who have developed startup ideas rather than research like we're talking up here, but also the reputation of the people that are coming out of the program will grow the reputation in the venture community.

Charlie: And can I just say we've had multiple investors come to us through this pipeline. We were offered over a million dollars from a single investor from our pre-seed round because they found out about us through this pipeline.

Audience question: Thank you so much. I appreciate it.

Mike: So we're right on time. So thank you, everyone, for attending. For those who came a little later, there is a reception out in the hallway immediately after with some beverages and supposedly some very good appetizers. Please join us. You'll have an opportunity to engage with these folks as well as the previous panels from Ann Arbor SPARK.

I'd like to thank this incredible panel. This is literally the best panel I've ever had the opportunity to moderate, and it was also a lot of fun. So thanks again. I hope you guys have all had a great SXSW and come out and talk to us.

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