Funding & Investment

Funding & Investment

Joe Mandato in conversation with Fred Moll


DeNovo Ventures’ Managing Director Joe Mandato speaks with minimally invasive surgery and robotics pioneer Fred Moll, MD

Medical Device Regulations

Dr. Fred Moll is the father of surgical robotics. Having founded three public robotics companies, he (plus Jay Watkins and Dr. Al Chin) also co-founded Origin MedSystems (where I was CEO) and Gynecare, and he recently raised a record amount of capital for a new and exciting device company, Auris Health, Inc., where he is founder, CEO, and chairman. Fred is an innovator, entrepreneur, and seasoned board member, and I talked with him recently about board governance.

Joe: Fred, you’re an icon in medical devices, specifically robotics. You’ve always been a brilliant visionary, but your board style has clearly evolved. Can you talk about that?

Fred: I would characterise my capabilities as a board member as being limited and focused. You know me well enough, Joe, to know that it’s an understatement to say that I am not the most organised and process-driven person on the planet. I think my attempts to be creative and do new things are probably in direct conflict with my ability to be a great board member. This is part of the yin and yang of being good at something. If you’re creative, you’re usually not structured, and I know I’m more on the creative end of that spectrum. At my age I think I’ve come to terms with these strengths and weaknesses. For good reason, a focus on process characterises board meetings. In that respect, I’m not someone who does a good job being the chairman of, say, the audit committee. The people who can absorb, take notes, and then regurgitate what happened in a board meeting in an orderly fashion, including the conclusions and action items, impress me. While that’s not me, I do listen hard to understand where the company is, what it’s struggling with, and what management is doing that may be getting in the way of moving the value-creation needle. In other words, my value on pattern recognition is pretty focused on product.

Joe: You’re being humble. You haven’t merely innovated, Fred! The things you’ve done have defied gravity. I mean, you went to doctors en masse and said, “Instead of using a scalpel to do surgery, I want you to buy a million-dollar robot. And, we will help you figure how best to use it.” They listened, and you helped them. It was the beginning of a radical new approach to surgery. That’s incredible! But back to board meetings . . . I love a point you made in a couple of board meetings about the different stages of innovation. Can you remind me of the specifics of that slide you have shown your board a few times? I found it to be an extraordinarily elegant way to help educate the board on the challenge at hand, re-imagining surgery.

Fred: Sure. I thought up the stages about ten years ago. In my experience – and this is the slide I show – these are the stages of innovation: Abject Horror–“Are you out of your mind?” Swift Denunciation – “It’s not just a bad idea, it’s dangerous!” Begrudging Acceptance – “There may be limited applications.” Ringing Endorsement – “I actually proposed this ten years ago.”

Joe: I love that! How does that relate to a board of directors and its role?

Fred: It’s about recognising a pattern that takes place in the innovation world. As a board member at an innovating company, you have to have pattern recognition. You have to see through stages of new product development and ask, “What’s most important? Are these entrepreneurs really focused on important, value-creating activity of the company? If so, how can we help them do more of that?”

Joe: Your style has evolved from your earlier days. You were a rebel early on, but now you appreciate some degree of process. Can you elaborate?

Fred: You’re absolutely right. When I think back to my early days, I was all about the product, the product, the product. My view was, You’re not going to be successful without the right product, and the rest will follow. I subsequently stumbled in areas where the product functioned but the organisation didn’t. Luckily, I have worked with very good and reasonable people. Take Intuitive, where personalities with powerhouse intellects sat around the board table alongside very good, process-oriented people. Auris has been a growth experience in that although I appreciate process more, we now face the challenge of creating a culture. Like it or not, I have to lead on that—if you don’t set the culture, nobody is going to do it for you. I haven’t focused on culture in the past. When I was younger, I always rolled my eyes at “culture offsites” because I thought they were big wastes of time, but culture is actually what kept the business of making products going. At Auris, it has hit me in the face how challenging it is to develop the culture you want, because culture happens anyway; it grows up around you if you don’t do it.

Joe: Exactly!

Fred: Early in my career, I let the culture grow organically, which wasn’t good. I’m not one for confrontation, but if you don’t like what’s going on, especially the subtleties of people’s behaviour, you can’t go home and hope they’re going to change. You have to address and work through it.

Joe: Is culture development part of the board’s role?

Fred: Yes, I think so. The Auris board culture presents an interesting situation that I haven’t been in before. We have two young, energetic investor/board members who became very successful software investors early in their careers. They bring to the board the mindset of tech investors and they consider developing a tech culture to be important; they encourage it. That said, they haven’t invested in medical device companies before, and their tech viewpoints don’t always fit well with what I’m used to. The varying viewpoints regarding what category we’re in—technology or medical devices – has ramifications on the culture and decision-making processes at the board level.

Joe: Huh, that is an interesting challenge. How do you manage it?

Fred: Board dynamics are always a work in progress, but I spend time educating them in how a device company culture is different from the tech companies where they’ve had such strong successes. I try to be open to their ideas and challenges when they say, “Why is that necessarily true about a medical device?” and “Sure, the medical device industry has operated this way for a long period of time, but why can’t you run a device business as a SaaS model?” They put forth challenging ideas, some of which have turned out to be extraordinarily helpful challenges to the conventional path that medical device companies take.

Joe: Do you do this board culture development work in board meetings themselves, or in one-on-one meetings with board members outside the board room?

Fred: You taught me, Joe, that what you don’t do is walk into a board room and say to directors “Well, whaddya think?” You make sure you know what they’re going to say before the bell sounds. All boards are different, though. The chairman of one of the boards I was on said, his first week on the job, “I only want to know two things from board members: who runs the company and who owns the company? If they’re not talking about one of those things, I don’t want to hear from them.” That’s the way he ran the board.

Joe: To that point, in venture-backed companies where there’s a founder who’s the CEO, chairperson, and a significant shareholder, she or he sometimes attempts to call all the shots. These are companies like Theranos, Snap, Tesla, Facebook, and others. What’s the difference between your board and those companies?

Fred: I have worked with personalities who absolutely demand things get done in a certain way. If you’re in a position of power like Elizabeth Holmes was at Theranos, and you have a disengaged board, then you can get away with it. That said, that dynamic seems to happen more often in technology investing than in other areas. High-visibility entrepreneurs can develop celebrity status, which Elizabeth Holmes and Elon Musk and other icons did. They lost focus and their respective boards let them get away with it I’m probably different in that I’m rarely confrontational. I believe getting into a fight is a waste of time.

Joe: Do you see a difference in how boards of medical device companies versus software companies should and do operate?

Fred: With medical companies, natural checks and balances help the board not be misled. I know of a couple robotics companies that went for years telling stories that didn’t make any sense. They got away with it until the FDA stepped in, understood they didn’t make any sense, and stopped them in their tracks. These cases are failures of board governance. It’s a failure that the board let things reach that point.

Joe: With Theranos, the company had dumb money. I don’t think anyone from the industry was represented on the board. Board members didn’t understand the industry, which turned out to be tragic. Your description of your board composition sounds like it’s primarily financial people, but you have an extraordinary sense of the device industry. Are there other checks and balances, in the form of relevant board expertise, in place?

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Fred: Probably not enough. Bijan Salehizadeh is an independent board member who acts as a check and balance for us. He used to be with Highland (Capital Partners), and he worked at Medtronic before becoming a venture investor. He has lived in the device investments world for quite a while, knows the device industry, and is a physician. He’s the referee when the tech investors ask, “Why can’t you do this?” He’s seen enough devices go up, down, and sideways that if investors say something like, “Just drive the valuation as high as you can,” he’d be the one willing to say, “That may not necessarily be such a great idea, and here’s why.” The way to think about our board is that we have a couple of people who push hard to innovate in the business of health care devices, which is a dynamic I have not really experienced before. In the past, I have had more conventional venture investors, and the metrics we followed were things like, “How much does it take to get to a prototype? How much should it take to our first FDA submission? What sort of approach to the market is going to work with how many sales people,” and so forth. The young, also successful, venture investors on my board haven’t lived that, which means they ask seemingly outrageous questions that challenge me to say, “Well, some of this is crazy, but some of it is about pushing boundaries, which is great.” It’s often balanced out by Bijan and other people around the table, including former senator Bob Kerrey, who brings a very big picture perspective about where healthcare is going in America.

Joe: That’s interesting. Have you had board members who you thought were really good, and on the other hand, who you thought were really bad?

Fred: I sat on a board once where the dynamics were all wrong. The primary investor was a strong personality. She was sometimes right, sometimes wrong, never in doubt. She drove hard and long on unimportant topics. We also had an investor board member who showed up and tried to do a good job but didn’t have time to focus. And we had an entrepreneur who was arrogant, as in “If it isn’t my idea, then it probably isn’t any good.” Plus, we had a strong founder and inventor who was CEO and who didn’t listen well. Oh, and we had a distracted corporate counsel board member. The CEO usually came into board meetings and said, “This is what we’re doing. This is what I want you to do as a board, and there are no alternatives to the fundraising path I’ve laid out.” Then the founder-engineer, who didn’t work there full-time, came in and said, “There are no alternatives to the product development and design I’ve laid out.” Board meetings didn’t involve interacting to solve problems. They were unilateral updates. I had no ability to affect outcomes. It was a waste of time, I quit.

Joe: How about a good example of a board you’ve sat on?

Fred: The RefleXion board is a good example of a group of investors/board members and a management team who are in complete sync. They know that the more we discuss the challenges associated with our new business, the higher the chance we’ll all be successful. Two young co-founders, Sam Mazin and Akshay Nanduri, invented the product. They are absolutely, positively dedicated to the business, and they are smart enough to leave their egos at that door. They say, “We don’t really know about business. We know about this technology, but we will walk through doors to do what’s right. Will you help us?” For instance, they asked the board, which consists of senior investors with experience in the industry, for help in recruiting the right CEO. They also asked for an education about where and why others have failed. They have allowed themselves to be mentored in the board room in an impressive way.

Joe: That’s great. Is there a specific board meeting that stands out as one of the best you’ve attended, or one that is the poorest?

Fred: The most unproductive board meetings I feel are ones where management delivers bad news at the beginning of the meeting. As an example, when we missed our product development milestone for Auris, we had to come in and tell new investors that what we had told them about the product development timeline was no longer accurate. I talked earlier, Joe, about ‘no surprises,’ which you taught me. Well… in this case, although we thought we had communicated the bad news, board members hadn’t fully digested or understood the bad news until the morning of the board meeting. Suddenly, our newest investors understood that the company they had just invested in and been so excited about—especially with respect to capturing the value related to product development milestones—was going to grow differently than they had modelled. They were angry. Because the news wasn’t fully communicated before the board meeting, the board meeting became unproductive. The in-meeting argument became, “How could this have happened?” The resulting argument impacted newly formed relationships. This reminded me in full force that you really have to have the tough conversations you’re going to have before you show up at the board meeting. A board meeting is not the place to deliver bad information that hasn’t already been fully communicated and vetted and that is a surprise to the board.

Joe: Is there a positive story?

Fred: Yes. As background, let me posit that it’s dangerous to think that a board member can understand at any detailed level what a new product development effort is all about. Any CEO struggles (or should struggle) with the challenges associated with how deeply to get into details board members may not understand. But the board meeting that I think was a great decision by management and a builder of confidence at the board level is one where we communicated prior to the board meeting, news that we were changing the product strategy, and that the change would have significant ramifications on the amount of capital required to achieve our product goal. Considering board members didn’t have deep internal knowledge about why we needed to make the change, I feared we couldn’t and wouldn’t communicate the specifics in a way that would make sense to board members. I felt the only way they would understand it would be to hear the rationale from the customer’s mouth. So, I brought in a community hospital surgeon who had never developed products with us or worked with us and who was a potential customer. He explained, with no particular agenda or bias, but with extraordinary effectiveness, the diagnosis and treatment of lung cancer. As a completely objective, but interested party, he walked in and said, “This is just how it is, and this is, from where you are, the most logical pathway.” He offered perspective that board members would never otherwise have gained. He removed suspicions where they might think, “Management is going to spin this however they want to spin it in order to justify what they’re doing,” His “guest speaker” role proved to be extraordinarily helpful and made our job of resetting the thinking on what needed to happen with the product much easier.

Joe:  That’s a powerful story, Fred. Switching topics, do you believe in the combination or separation of the chair and CEO roles and could that have helped what you described above?

Fred: At Auris, I’m chairman and CEO, which in our case I think is not an unhealthy combination. However, I do know of unhealthy chairman-CEO situations. There’s a company I’m in involved in where the chairman is not CEO, but he has taken the chairmanship role to a place where it should never go. He wants to run the meeting and set the agenda, which is fine, but then he tries to overstep what a chairman should be doing by getting way too involved in the activities of management. Bottom line, I think if you’re going to have a chairman (instead of a lead director)—and I think you should have a chairman— and I think if you’re a company of some size, the chairman role should be separate from the CEO role. Importantly, a board needs to make clear exactly what the chairman’s role is and isn’t. If you read what a chairman might do, the role is vague enough that it’s important to go down a level and say, “This is what you will do, and this is the sort of bright line that you shouldn’t cross.” Otherwise, roles and responsibilities can become very confusing.

Joe: Did you have a mentor? And what’s the best advice given to you related to board meetings and governance?

Fred: I’ll give you credit as a board mentor for the advice you gave me. You said, “Don’t surprise anybody, and have everything negotiated beforehand.” Lonnie Smith (co-founder and chairman of Intuitive Surgical) taught me that you’ve got to be tough with people and run a tight ship. At Intuitive, Russell Hirsch, John Freund, and I served on the board. We all had different opinions, and Lonnie was pretty effective at saying, “I hear you, but we’re not going to talk anymore about that.” He went overboard with this in some ways, but he also ran the board effectively and with an iron fist. He held the line between what board members know and what board members don’t know. He didn’t ask board members to opine on internal matters they don’t know about because that’s dangerous. He knew there would be too many opinions not facts, and things would become confused. In that sense, he was a board mentor to me.

Joe: If you could give one piece of advice to a founder-CEO who’s a board member or chair of a high-growth company that has other people’s money, what would it be?

Fred: Keep your eyes open and don’t get arrogant. If you don’t continuously question what you’re doing, why you’re doing it, whether you’re creating value in a way that is most efficient, and your own beliefs about your business model and your product, you’re going to slowly lose your vision of how to win. To me the most important thing is to always be open to improvement of product, process, model, and people. That’s one. Another piece of advice would be to try to leave your preconceived notions about what somebody has to offer at the door. I am continuously surprised by people who don’t have the ‘appropriate’ background, or aren’t the ‘appropriate’ age, or don’t have ‘appropriate’ experience. If you try hard not to see the people you work with through a particular eye, like, “They can’t be good at that because they don’t have any experience, or they’re not old enough, or they’re not this, that, or the other thing,” then you can find surprising talent in places you wouldn’t expect. Really trying to understand someone—without the bias of what they should be good at versus what they really are good at—and trying to be brutally honest with yourself about what you believe about the person, are important.

Joe: What about this CEO-as-celebrity myth? If a board could do one thing to prevent this, what should it do?

Fred: Change the idea that one person is responsible for so much of a company. As the saying goes, “Power corrupts; absolute power corrupts absolutely.” I may be naive, but I am fascinated with the idea of co-CEOs. I don’t know whether it in fact makes any sense, but I do think that being careful not to put so much emphasis on titles is a good idea. Innovation around titles can drive organisational behaviour in different directions. I think the notion of the sole visionary, the Steve Jobs thing, is as harmful as it is helpful. It can be helpful, in that people want to look up to a person and say, “I may not know everything, but I guess she or he does,” and you need some of that. But the hero worship of CEOs I think is dangerous when taken too far. We’ve talked about examples – Theranos being the perfect example—of the emphasis on an image and a culture of one. That’s a dangerous path to go down.

Joe: Fred, you’ve given me some terrific lessons to provide to readers. Thank you!

Fred is a modest, visionary leader. I’m thrilled he took time to talk with me and provided me (and you) with thoughts on his experiences relating to governance at high-growth, venture-backed companies. Here’s a bonus link to part of our interview. (At the site, click arrow on upper left, and enjoy!) Lastly, here’s a partial list of boards Fred has served on.  Cephea Valve– catheter-delivered mitral valve replacement. Fred is chairman. Hansen Medical—medical robots for minimally invasive cardiac care. Fred was co-founder, CEO, and chairman. Intuitive Surgical—publicly traded maker of the da Vinci surgical system for laparoscopic surgery. Fred was co-founder, chairman, and CEO. MAKO Surgical—robotic surgery for joint replacements; acquired by Stryker in 2013. Fred was a board member. MIVI Neuroscience – clinical solutions for neuro-interventional procedures. Fred is a board member. RefleXion Medical – biology-guided radiotherapy for cancer treatment. Fred is a board member. ShockWave Medical – devices for cardiovascular interventional therapy. Fred is a board member, and Restoration Robotics – publicly traded robotics for hair transplant surgery. Fred is co-founder and chairman.

(This interview originally appeared on the MedTech Strategist Community Blog.)

About the author

Joe Mandato is a seasoned entrepreneur, executive, innovator, and investor specializing in medtech and other technologies at companies in the US and in Europe.

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