Episode 5: Surgery Brokerage, Outcomes Transparency, & Serial Entrepreneurship after the Marine Corps with Dutch Rojas, Founder of Sano Surgery

INTERVIEW

GUEST: Dutch Rojas, Founder of Sano Surgery

[1:45] Current Business.

“I started a surgery brokerage 18 months ago.”

There are important delineations to make between a (1) marketplace, (2) brokerage, and (3) exchange. After building surgery centers, I decided we needed to build in Transparency. That’s the solution for more efficient allocation of capital. So we’re building a marketplace, and that’s a classic B2C play.

“Much like Amazon or eBay or Craigslist, it’s my goal to make SURGERY available to everyone via the web.”

[3:15] Paying for Surgery with Bitcoin.

“I actually had my first bitcoin customer a few weeks ago.”

We had a Chinese TPA or 3rd-party administrator for major metro areas who work with tech people, and that’s how they deposited the money. It was a funny thing to see come into the Escrow account. I had to learn all about Coinbase and that medium, so thankfully I have a friend Jeff Neuenschwander who specializes in crypto-currency.

[4:30] What first clued you in that transparency was a big trend to get in on?

In 1998 I graduated college and met anesthesiologist Keith Smith, now at Surgery Center of Oklahoma. These days they control 4 hospitals and 2 surgery centers, but early on they said: we just want to post our prices on the internet, which I thought was very forward-thinking for a couple old guys, white-haired doctors. My people here in Silicon Valley call the Midwest ‘Flyover Country’. At the time I was doing ASC mergers & acquisitions.

“Competition fosters innovation, and surgeons are the most innovative people I know… In the next 5 years, healthcare transparency will truly be the great equalizer for our business.”

[7:00] 30,000-foot view of Outcomes. I consult for the McKinseys and Deloittes and Citibanks of the world. When we talk to them and take the global perspective, outside of the U.S. and EU, most patients are 60% responsible for their healthcare expenses. That’s a major downward economic force to drive down costs. So if you say, “I need a colonoscopy” — there should be MASSIVE outcomes data which essentially tie that to price, just like hospitals in Thailand already produce. This can’t help but happen here too. Currently, the only way to grow market share is to buy out insurance companies OR utilize healthcare transparency, or a bit of both.

[9:15] Investing Analogy. Picture in your mind what it looks like when you log into your MorganStanley, CharlesSchwab, MerrillLynch accounts to buy and sell equity. There’s buy- and sell-side information, analysts giving buy vs. hold ratings. That’s what I anticipate seeing for surgery exchanges and healthcare brokerages. When people start shopping, they’ll take these into account. And we’re not talking Yelp ratings, those are just garbage.

“Institutions will rate and rank orthopedic surgeons, list how many procedures they do per year, and post price ranges… Healthcare transparency doesn’t just mean price, it also means outcomes, which combine to give us value.

[11:00]

“Five years ago, NO ONE wanted to talk about healthcare tech.”

Three years ago, I was in a meeting with Google, and they said: “We’ll never invest, not one dollar”. They reevaluated and last year put ~$250M into Oscar as an insurance play. 2014: latest numbers we have say we’re spending $3.2T on healthcare in the US. $650B of that (PER YEAR) is dedicated to elective AKA non-emergency surgery. On a global scale, this is a $3-$5T market! Huge variation, cuz it’s not clear exactly how they’re priced in Asia. “People now realize they want to, and I want to, dominate that market.”

[16:45] Forward Contracts have been prohibited in healthcare. Orthopedic surgeon cannot sell surgeries 3 years or 5 years from now. Future orders are worth more than past orders. Creates brand loyalty and gives their practice a higher valuation, reduces under-utilization of the OR. We have to report that metric to the joint commission. We’re helping employers hedge costs and stabilize expenditures by finally enabling them to fill Forward Contracts. Castlight conducted a Harris Poll of 137 CFOs in 2014 showing that 96% of Fortune 500 companies wanted a way to reduce fluctuation and better project healthcare spending.

[20:00] There are about 281 data points that we recommend you include in your profile. But get this: “outcomes-based medicine is really in its infancy.” Joint Commission, Quality 200, etc; there’s about 6 measures and people will eventually agree on one. Indiana had a bundled pricing initiative. There are 5 or 6 companies thinking along the same lines that we already consider competitors, and about 15 or 20 who will eventually try to do it to but just haven’t thought this far ahead yet.

[23:15] One day a company will say: I’m gonna buy 50 knee replacements, but several months later decide they only need 35, so in our marketplace they can turn around and sell those. Plenty of people don’t believe that storyline, don’t believe that patients will become shoppers. McKinsey published a report on “patient responsibility”, predicting that the market will be $1T by 2020, or $12K per patient — that’s three times what it is today.

[24:50] How do you decide who to hire?

Initially I just partnered with a development company who built out our product over 6 months, and they had 22 employees. The 11 that I have on my internal team are all biz-dev people. Either you believe: I’ll build the product, and they’ll come OR “People like me believe: I’ll sell the service, then we get the orders, then we build the product. A year and a half ago: I started selling things I didn’t know would sell, did my own A/B testing, then once we got initial contracts we started building.”

[26:00] Our company will grow just in sales and business development. We have account managers and are trying to figure out what a good algorithm is. I have a set once/week call with physicians and facilities who want it, we try to be really available to our customers.

[28:00] Quote from Chris Sacca on Tim Ferriss podcast: VC is a Rigged Game.

Dutch: “I don’t like VCs, I don’t do business with VCs.” Two of the startups I advise (because I love them, not for money) have made deals with VCs in the last 5 years, even though I generally discourage it. “What we’ve found is that lots of physicians will pool their money together, so we use that capital and structure it as a private equity transaction like a limited partnership: so they’re all LPs, put in $50K or $100K, and we act as general partner. Everyone has ownership.” Everyone’s got skin in the game. VC guys are generally just not my ball of wax: they don’t sign an NDA; obviously bright, but I only deal with people who have a vested operational interest. I help out BetterDoctor.com because their VC investors said you have to have someone with medical expertise who knows what they’re doing in this space — so they bring me in for my tech + M&A but ESPECIALLY healthcare domain expertise. “Save your money, eat ramen noodles, and build your own business.” When you start doing finance, need capital for growth, begin doing weighted average costs, then find like-minded people who want to work in Operations side of the business.

[32:30] The formula is simple. Here’s the wonderful thing: be a founder. If you do some good A/B testing, you’ll get the contracts. The contracts then equal money. You can take the excess money, then build your business. Once you build a revenue stream, there are plenty of loan opportunities available. In the next 12–18 months, we’re already seeing less money go to funds; founders have to get away from hiring a CFO and paying themselves exorbitant bonuses & salaries. We had a $3M injection of capital, but I only take a small salary for my group.

[34:30] Do you think equity crowdfunding, soon to be allowed by the SEC, will make a splash?

“I think it’s gonna be huge! Substantial is not a big enough word.” Let’s get clear on the rules: now a family of 4 making only $75K/year can participate in part of the market where really money is made, pre-IPO. “Startups are the new middle class for the next 25 years, and I’m very happy about it.” Over the last 15 years, we’ve built plenty of mass-spec labs for urinalysis — I could build it for $600K and within 3 months, make ALL my money back. I did four, and after building the last one, I remember thinking: why can’t my friends who are engineers and CPA’s with wife and kids invest 1% of their paycheck in these kinds of things? “I’ve always thought that it was a bit shameful … that the government tries to protect us from Wall Street, but has really been holding those opportunities out of reach.”

[38:00] Can you tell us the story about the business you built and sold around age 21?

There were 3 or 4 of those right around when I was finishing up college, sometimes I forget which one because the stories overlap. Healthcare land-business deal: I had a mentor from Bible study, taught me how to analyze land with accounting degree (acquisition & disposition, monetize & securitize). The fun story I like to tell is: I went and bought a fancy car with the $356,000 I had just made, went to the country club to show my mentor, and he turned to me … This guy was a wrestler in college, but he teared up and said, “You haven’t listened to anything I said. The capital in your pocket is worth everything, and it makes all the business you want to start possible. You’ve just wasted every penny, and all the money that I gave you.” It was a hard lesson for me.

[41:00] When I had my year and a half in the Silicon Valley, I got really disappointed in the same ways. Seeing people waste a lot of money on trips and adventures. We paid $64/foot for rent, and I wanted to have employees in Austin or Denver or Scottsdale. These people looked at me like I was crazy because they were interested in fun, not building a real business. Don’t get me wrong, “I’ve had fancy cars since: an SL-55, E-55, a G-wagon, G-63, 2 Ferraris, a Maserati, but it doesn’t do for me what building a startup company does — now you’re making a difference in patient’s lives, and that’s the reason God put us on the earth. I want to build my purpose on what I did, and not what I have.”

[44:00] What was the next step?

“Like any entrepreneur, I can change my mind 15 times in one day. The advice I give to people like myself is: make sure the people around you can understand how you process your thoughts.” In August of 2000, we started working with Reitz on mergers and acquisitions of ASCs — trying to figure out how we could create a Realtor.com for healthcare facilities. I losted $85,000 in that deal. Then I tried to start a men’s barbershop: you could smoke cigars, get a shave, all these wonderful things… that went terribly too. Seven or eight in a row went just like that, it might be more. Did I want to puke my guts out from losing so much money? Sure. I went to Cambridgeshire for a while, worked with an ALS startup, and was able to sell that. The market teaches you a powerful lesson that just because you’re good at healthcare tech, doesn’t mean you’re an expert in retail or another type of tech.

[48:00] Where did the military service fit into all this?

Christmas Day of 1995 I went to bootcamp with the Marine Corps. I was a “Hollywood Marine” for those people who know the difference, spent time as a reservist, went back and finished undergrad, spent some time away after 9/11, but then came back home, and all was well. Lessons on what I learned from that for business are not for the podcast. “I get really intense, and in order to be able to accomplish something, you’ve gotta be willing to give everything — I’m the downer guys who says what about this and this? People don’t like that, but I’m the guy that’s willing to give everything. I learned the 14 leadership qualities” and I try to live it.

[50:45] Did your reputation as the no-fun guy precede you?

Heck ya. “Physicians don’t wanna look bad, don’t wanna be the bad cop. So I often play that role, I do it at my startup now, and every company needs it. A company can’t survive by drinking their own Kool-aid. When I hire people, we do it by committee in our company. The other day I was doing our Comp Plan: it shows everybody’s salary, potential bonuses, totally transparent, so everyone knows what everyone makes, and it winds up being totally fair and performance-driven.”

[52:15] Do you ever advertise jobs with salary/equity like on AngelList?

Usually no. I’ve never thought of that, actually. I pay everyone what the work they’re doing is worth, which they can live with. But if you want more equity or salary or bigger bonus, there are ways to earn those as well. I don’t want the constant bickering where people are always looking each other’s shoulder or asking around, so I just made everything transparent. It shouldn’t be a difficult decision for when people should get paid more — it’s easy for executives to say, you met this criteria, great job, here’s your bonus. Make it easier for people to work for you.

[52:30] Can you clarify investor lingo like the Mom & Dad test?

Hospitals operate differently from surgical centers, but say they require another specialty. The mental test is: would I send MY OWN mother or father to this physician, or would I refer them out to someone else? It’s about setting intentions, and a determination of trust. Test your own ethics when there’s a financial stake in it for you. “We don’t want to be in the business of business; we want to be in the business of helping people.” A lot of the times doctors are sending patients to other parts of the hospital [remember TURFING from The House of God] just to generate additional RVU’s or revenue instead of doing what’s best for the patient.

[54:30] Book recommendation: The Innovator’s Prescription by Clayton Christensen. As far as I’m concerned, he’s the father of healthcare tech. He was using the term “disruption” (correctly) before I was born. I’ve read it a dozen times or more, and I’ve given out ~3,000.

If you wanna get in touch, send Dutch a message on LinkedIn!