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Most of the people deciding where billions of health care dollars get invested have never treated a patient. Harsha Moole, a physician scientist and health care venture capital founder, joins Kevin to discuss his KevinMD article “The crash cart that taught me physician-led investing.” You’ll hear how a single overlooked workflow problem on a hospital crash cart became a multi-hospital company, why physician-led groups screen every deal through three gates of clinical, regulatory, and reimbursement diligence, and how doctors can get involved without leaving their day job by advising startups, advising venture funds, or co-investing through a physician network. Harsha also breaks down why angel investing requires a long timeline, the discipline to diversify across 4 to 10 companies, and money you can afford to lose. If you’ve ever looked at a health care product and thought you could have told them it wouldn’t work, this conversation makes the case for using that clinical instinct beyond the bedside.

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Transcript

Kevin Pho: Hi, and welcome to the show. Subscribe at KevinMD.com/podcast. Today, welcome Harsha Moole. He’s a physician scientist and a health care venture capital founder. Today’s KevinMD article is “The crash cart that taught me physician-led investing.” Harsha, welcome to the show.

Harsha Moole: Kevin, thanks for having me.

Kevin Pho: All right. So let’s start by briefly sharing your story, and then jump right into why you decided to write this particular article on KevinMD.

Harsha Moole: Well, thanks for having me, Kevin. It’s good to be here. I’m an internal medicine physician by training. Got trained at University of Illinois in Chicago.

During my time in residency, I’ve done a lot of medical outcomes research, published north of 100 research papers, including work, some of my work being published in New England Journal of Medicine. During that time, what we started to very repeatedly see is there is a massive disconnect between where the clinical problems are and where health care investment dollars were being allocated.

As physicians, we had a unique vantage point in looking at these problems because we live our life through looking at these pain points, but then when you see billions of dollars being allocated to solve problems, these decision-makers had never seen a patient or never talked to a nurse about what their problem is, so there was a very big disconnect that we noticed, and that gap started to bother me at some point, and me and four physician buddies of mine thought, “OK, let’s just try to change this,” and we started to invest our own personal capital as small angel investment checks into startup companies where we felt like the innovation was meeting the clinical need.

And eventually we started doing this in 2017, 2018. Word of mouth spread and physicians, their friends, their friends. Fast-forward, we are now a group of 200 physician scientists investing our capital together. We have made 22 investments, and our thesis is simple. Physician scientists, we have first-hand clinical experience and are uniquely positioned to evaluate health care investments that general financiers or general venture capitalists generally miss.

Not because we’re any smarter with money, but because we have lived inside the system these companies are trying to change. So that’s pretty much a high-level background. Happy to dive into any follow-ups on the questions.

Kevin Pho: Yeah. So before getting into what you do, give us an example when you said that sometimes venture capital dollars are misallocated because they don’t solve the problems that are clinically relevant on the ground. Just give us what would be a common example of what that would look like.

Harsha Moole: I think that’s a fantastic segue into the article that I wrote. It can naturally flow into it. So, every physician remembers working with a crash cart, right? So, the adrenaline rush and trying to keep things organized.

But we always look at the crash carts and see who’s the one maintaining the compliance and auditing for these crash carts, and what goes into it, how much time and resources are being spent by the hospitals maintaining these crash carts. So, turns out the bedside nurses and supply chain managers spend hundreds if not thousands of hours trying to maintain the expiration dates of hundreds of items within each crash cart, tracking them.

Also, it turns out everything is old school, maintained by spreadsheets and manual logs. If you see, there is a sheet on top of each crash cart with a check mark where the nurse has to go in every day and do a compliance audit. So it’s been an existing problem for, I would say, ever since crash carts were invented.

And with the technology moving so forward, nobody ever cared to look at this individual problem. So anyways, one fine day, seven years ago, a physician buddy of mine who is a co-investor with us calls me up and says, “Hey, there’s this new founder that I met through my network. They’re trying to address this problem and digitize this problem.” So as soon as we got the call, we immediately met with the founder. The next three days we spoke to, I think, 15 different health care stakeholders, frontline workers, nurses, supply chain managers. We spoke to the chief nursing officers trying to validate the idea and validate the product.

It was still in the idea stage. And as soon as that happened, within a month, we cut the first check in for worth half a million dollars investment into the company to give some funds to the founder to go build the product up. And fast-forward, this was seven years ago, we followed up our investment with multiple rounds of follow-on investments.

And as of today, the company is being, they created a working product that’s fantastic. They are now being used by Mayo, Hopkins, Northwestern, and several other IDNs, and they’re growing rapidly. And that’s kind of, the only reason we were able to recognize the opportunity was because of our subject matter expertise, being physicians living this problem every day.

It’s not like it’s an innovative solution. It’s practical, barcode scanning technology, RFID scanning technology are used elsewhere in supply chain mechanics in other industries. But it’s just that the identification of the problem becomes such a critical piece to the puzzle in the health care space. That’s where we as physicians can add so much value in trying to dictate where the dollars get invested. So that’s pretty much a high-level summary of literally how every deal flows through our system and how we add value to the companies.

Kevin Pho: So when you evaluate companies to potentially invest in, just give us some criteria that you would use to determine whether you would want to use your capital and your co-investor capital in this particular company. What specifically do you look for?

Harsha Moole: There is a qualitative way to look at it and quantitative way. I’ll first go over the qualitative way because we feel that’s the initial screen that we look into. Internally in the company we have a phrase called delta P. What that means is there has to be enough pain or pleasure created by that product for it to be worth using it by the stakeholders or for somebody wanting to pay for it.

For example, the crash cart, right? The crash cart was delta pain. The delta pain when we spoke to the frontline workers, the nurses and the supply chain workers arranging these carts, they said that, “Oh my God, I would go talk to the CEO to get this product approved.” That kind of validates how much pain they’re going through to deal with this problem.

And another example would be some sort of a drug device combination that can help reduce the mortality. You talk to patients and, or, like a specialist who is dealing with that problem and say, “Hey, if this solution were to reduce the mortality or morbidity by certain days or certain percentage points, would you be willing to implement this system?”

So everything starts at delta P. The problem, the solution has to either reduce a pain point or create some sort of happiness and pleasure in terms of patient improvement. Once that’s done, that’s the initial clinical diligence layer. We send every product through three different gates. The gates is like almost like a due diligence structure.

The first gate is the clinical gate that we talked about. And once that’s done, we send it to a regulatory gate saying if it’s a drug or device, you need FDA regulatory approvals. If it’s some sort of a health tech company, you need HIPAA compliance and software compliance approval layer. So we have specialists that we work with. Sometimes physicians know a lot more than you think they would about these regulatory mechanics.

And once that layer is passed, the last but not the least one is the reimbursement gate. There is many products that pass the regulatory gate, get every approval, and nobody wants to pay for them. Like, thousands of them come out of FDA every year, nobody just wants to pay. So again, we feel like the first question of clinical diligence and delta P is so important because if the delta quantity is big enough, the stakeholders would obviously be willing to pay for it. So every company that we look at goes through the three gates that I just mentioned.

And again, that’s the qualitative part. On the quantitative part, we have metrics internally because we are a group of physician scientists. Any, let’s say, a neurosurgery drill bit company comes to us and says, “Would you consider investing into it?” We have at least five neurosurgeons in our network that we immediately call up. We need to have at least 80 percent consensus from these neurosurgeons that it has to be useful to them, and that they would change their clinical practice based on what the novice product is being developed. So that way there is many floors that we have internally before we mature a product to the investment stage. So that kind of gives you an understanding of how we work.

Kevin Pho: So the physician network sounds like, of course, it’s more than just the capital, but the expertise that you said 200 physicians can give you can give a much more in-depth evaluation of a company versus, say, a non-physician group, a venture capital group that only has limited access to such a network of physicians.

Harsha Moole: Absolutely. I think the capital is, if not, probably the less important part of what these physicians bring to the group. I think the clinical expertise is what matters the most, and we have built a moat around it, right? Capital, if not for physicians, I can probably go raise money from an institutional investor, endowment fund or family office or whatever, right? But the clinical expertise is not replaceable. That’s our moat and that’s where we try to live and add value to the health care system.

Kevin Pho: Now, have you ever done any comparison studies about success rates, about the companies and startups that you invest in versus just say a more traditional way of investing? Are the companies that you invest in, in general, more successful versus companies that don’t have that physician network?

Harsha Moole: It’s hard to compare just because how new we are. I’ll take it down two paths. The first path is the timeline. And this can also talk into some of the things that I wish I knew before. Health care investment is a long game. No matter how you slice it, whether if it’s drug device pathway, FDA regulatory pathway, we are talking about seven to 10 years on the minimum. So even if we were to invest something in 2020, we wouldn’t know if it’s a successful thing up until 2028 or 2030.

And the same thing with digital health and health tech. You would assume that, oh, it’s technology. You see these AI companies going from zero revenue to 10 million revenue in two years, but health care is different. And the reason I say that is the procurement cycle for hospitals. They make decisions on capital allocation only once a year. Let’s say a digital health company approaches a hospital wanting to sell a service. “Oh, our procurement cycle’s already done for the year. Come meet us next year.” So the sales cycle is so long that it will take forever to figure out if a company’s doing well or not.

One thing I can definitely say is the companies that we have invested, it’s hard to benchmark because we don’t have exits yet because we are so early. It’s only been six, seven years we started doing it. But from whatever we can compare internally. So in the beginning when we started our investing, we’ve indulged a little bit into general investing just because we didn’t have the physician network all formed and ready to go.

There is clear night and day difference between how our later health care portfolio is doing compared to how our general portfolio is doing internally. Just because not just decision-making on what companies to invest in, but we are also able to impact the sales cycle of these products. The crash cart company that we talked about, right? We are able to make introductions to the C-suite in the hospital health care systems to help expand the footprint of these companies where they can increase their revenue. So we are able to directly play a role in pushing these companies through the systems and increasing their revenue and increasing their value as opposed to, let’s say, if I invested in some non-health care product, I’m just a passive backseat person not having any role or impact on the company.

So yes, internally we see that very visibly. But it’s hard to quantify it this early. If you ask me this question four years after, I would probably be able to tell you, “Hey, we suck compared to the other companies or we are doing better than them.”

Kevin Pho: So if I’m a physician listening to you here now and just exploring the whole avenue of early company investing, physician-led investing, what kind of questions do I need to ask myself to see whether this path is right for me? And if so, how do you get even started in this area?

Harsha Moole: I’m a very big advocate for physicians getting involved in the investment space. And it all starts with how big the health care market is. It’s a multi-trillion dollar with a T market. And when you look around who’s making decisions on what investments or where these dollars go, doctors are not even 0.1 percent of that decision-making process.

There are several ways for physicians to get involved without having to leave their primary job. When I talk to physicians, I talk to several physicians every day about some form or the other about investing. The biggest thing physicians are worried about is, “Hey, if I get into this field, do I have to leave my secure nine-to-five job?” No, the answer is straightforward no. There is ways physicians get involved by still keeping their job. You could advise startup companies, that’s a very straightforward thing, in exchange for equity or some small fee. You could advise venture funds. For example, ours is a group of 200 doctors. We are always looking for a specialist advisor to come in and give their two cents when we’re evaluating a particular product. You could advise other non-health care venture funds and let your voice speak about what products are useful or not useful. Trying to somehow get integrated in the decision-making processes where real value for providers is.

Not everybody should go out and start their own venture fund. I wouldn’t recommend that either. But somehow, while still keeping your stable job, getting involved in the decision-making process, I think would go a long way in creating downstream impact for what gets built and how, who, which people can use it.

And another thing I would say for providers trying to write angel checks or invest their own personal dollars is have a long timeframe, and you have to have a very big risk appetite. Angel investments are massively risky. You could lose everything that you put in. The only money you should even consider putting in is the money that you’re comfortable losing. That has to be table stakes. Anything starting from there, starts your due diligence, or who do you co-invest with, or do you want to do the active diligence process, or do you want to invest with another group that’s already has this intelligence process set up?

And the second part that I always talk to physicians about is, don’t just pick one product. Let’s say you have $100,000 to invest this particular year. Don’t just pick one product and go all in, especially if it’s angel investing. If it’s stock market, public investing, I’m not an expert there, but maybe you could do that there. But in angel investment side, just with how bad the risk profile is, you always want to diversify. You don’t want to invest your 100K in one product. Unfortunately, the 100K goes to zero, because zero is a very real possibility in venture. Normally the market standards are if you, like out of 100 startup companies, 60 to 70 go to zero. So that’s the average math across the industry.

So you always want to diversify that 100,000 across at least a minimum of four to 10 companies so that you can pick up one of those companies which does a 20X or a 30X, which would compensate for the other losses, and you’re still net positive. So that’s pretty much an overview of what I would talk to physicians about from a high level. So happy to dive into details.

Kevin Pho: So going forward, what would you see are some of the trends when it comes to health care angel investing? What type of companies are out there? I’m going to assume AI is going to be related to a lot of these trends, but just from your perspective, what are some trending early stage companies that you’re looking at right now?

Harsha Moole: Very good question. We, for some reason we’re still very standard health care life sciences companies. AI is a big part of pretty much every company that we touch. But AI is always, we are a strong proponent of AI being used as an enabler than AI being be all, do all kind of a thing. I think it’s a massive enabler where it can help companies scale faster, solve some modular problems faster, but we just don’t see AI as this one big thing that would do everything.

So in terms of trends, we are seeing AI help with drug discovery process obviously. And we are involved in a lot of spin-outs from Ivy League research labs where, let’s say, a particular molecule is showing good promise in bench research. We talk to the tech transfer officers and have that IP be transferred into a independent startup company, and then we fund the company. So in those companies, AI is being used to accelerate the drug discovery and get to the formulation or successful efficacious formulation years in advance. So those companies are really big on our table.

I also want to speak a bit about how initially there was this big worry that AI is going to reduce the importance of domain experts like physicians, whatnot. It’s refreshing and surprising to see that it’s done the opposite in our opinion. AI, if anything, is taking care of the mundane tasks that physicians normally do while it is actually increasing the demand for domain expertise. Now, my clinical acumen or judgment, I have more time to deploy that to spend more time with patients, solve more critical problems, while most of the legwork, I could use AI to do that. So we invest in a lot of companies that apply that thesis in terms of figuring out solutions to patient problems.

So yeah. So AI is a big thing for drug discovery and for solving modular problems. Like for example, the crash cart, we can use AI applications on the back end to figure out which crash cart needs which item to be replaced and what time. Instead of 10 member person doing it, an AI can automate that process. So there’s a lot of application-based things, modular applications that AI is good at, we’re investing there.

We’re also very, very keen on how AI can reduce regulatory burden, and this current FDA has been very open to using technology to reduce the burden. But a typical FDA approval process takes years on end, right? Like, once a founder or company submits an IND application, it takes half a year for them to respond back to us. Now there is ways for FDA to explore using AI to expedite that review process. So this whole 10-year timeframe can really get compressed into four to five-year timeframe.

You’re talking about affecting millions of lives. Rather than a drug, potential life-saving drug sitting in the back bench for 10 years, you can apply that to patients five years sooner, saving millions of lives. So we are always on the lookout for companies that are creating solutions where stakeholders like FDA can use these companies to expedite the review process. So I think ours is a mix. Traditional standard health care investments into devices, therapeutics, in addition to AI companies that are helping expedite this process.

Kevin Pho: We’re talking to Harsha Moole. He’s a physician scientist and health care venture capital founder. Today’s KevinMD article is “The crash cart that taught me physician-led investing.” Harsha, let’s end with some of your take-home messages that you want to leave with the KevinMD audience.

Harsha Moole: It’s been a good talk, Kevin. I think an important point to note is we as physicians, we spend our entire careers solving for clinical problems. We develop an instinct for what works, what doesn’t work, and what the system needs, right? That instinct is an extraordinarily valuable resource, and it is almost entirely absent from the rooms where health care capital allocation decisions are being made. So billions of dollars are being deployed by people who’ve never treated a patient. Well, the end result for that is capital flowing into these solutions. It’s completely missing the fundamental clinical realities. Products that add steps to the workflows of physicians that we have spent decades optimizing. Devices that clear FDA, but they never get adopted because nobody asked the end user.

So, physicians can change this. Not everybody needs to become a VC, but they can engage. They can engage by lending their expertise to people who are making these decisions. A simple rule of thumb is if you’ve ever looked at a health care product and thought that, “Oh, I could have told them that this wouldn’t work,” then it automatically means that you’re sitting on an asset the investment world is desperately needing and consistently undervalues. So it’s not the question of whether physicians have expertise, I think it’s the question of whether we choose to use it beyond the bedside. So that’s pretty much a very important take-home message that I want physician investors to really think hard about.

Kevin Pho: Harsha, thank you so much for sharing your perspective and insight, and thanks again for coming on the show.

Harsha Moole: My pleasure, Kevin. Have a wonderful day.