Kiani started the Irvine, Calif.-based patient monitoring pioneer out of his garage age 24 with $175,000 in loans, some of which came from refinancing his condominium, and has steadily grown it into a nearly $500 million firm with more than 2,000 employees around the world.
There’s no doubt Masimo has helped revolutionize patient monitoring with its pulse oximetry technologies, but Kiani’s true legacy may be his willingness to take on the role of David in a series of battles with the industry’s Golliaths.
In 2002, when Masimo was still a single-product company, he publicly took on medical companies’ financial ties to group purchasing organizations Premier and Novation by suing (and winning a $140 million settlement) from Tyco Healthcare for violation of antitrust laws. It was the second time he took on the healthcare giant (which was spun out as Covidien (NYSE:COV) during the subsequent Tyco implosion) in a courtroom and won.
Recently, Kiani took another stand against conventional wisdom, publicly challenging the med-tech industry to get more practical in its fight against the 2.3% medical device tax by limiting the levy to companies above $100 million in revenues. His aim, he told MassDevice.com at the time, is to protect young medical device makers.
We had the chance to sit down with Kiani recently to discuss not only past battles but his political convictions and new-found role as mentor and investor to young start up companies that may be looking to replicate his success.
MassDevice: Last time, we talked about more practical matters, in terms of mitigating the tax. Do you feel that there’s momentum on that front, or do you feel that it’s "repeal or nothing?"
Joe Kiani: I still support the position that, until the tax is repealed, it should be staged fairly so that small companies won’t have their entire profit wiped out. The [small companies] won’t get impacted the same way as a mega-company will, where the taxes will have a relatively small impact. Staggering it makes sense. Ultimately a repeal would be best, but until then we can’t afford to lose companies because of this.
MassDevice: We’ve all heard whispers in the wind that perhaps it might be beneficial for big companies to have this tax around. Do you think that’s because it could help stifle competition from innovative startups?
JK: We’re a small company still – we’re at $500 million in revenues. Believe it or not, that’s still considered a small company. But when I gave my opinion on staggering the tax, I was not trying to include my company. I was talking about $100 million and up getting more taxes than the smaller ones.
I don’t think that people are doing this because they think it’s somehow going to be good for them. I think even the large companies understand their growth relies on smaller, innovative companies coming together, creating new innovations – and then they sell to those [larger] companies.
MassDevice: You’re a vocal Democrat, a vocal supporter of the president, in an industry right now
that does not favor some of his policies. How important is it to you to be public about your political convictions?
JK: I don’t agree with all of the president’s policies. I agree with most of what he’s trying to do. There are issues more important to me than taxes and the dollars, I guess. But I think democracy requires people to get involved, I believe we have to stay engaged in our democracy. Otherwise it doesn’t survive and other people run off with it.
But I support the president for the social reasons, such as no preemptive wars, and at the end of the day the better vision wins. Guns and tanks and jails don’t work.
The vision is what people are attracted to. And the U.S. has an unbelievable vision, started over 200 years ago, and if we live that vision the war will eventually come our way. But if we want to act unfairly, unjustly, then we’re going to fall apart like every other great civilization.
MassDevice: Do you believe that the Affordable Care Act is on the whole favorable for the country?
JK: I do. I think there are a lot of things that could use amending, but I don’t think it should be repealed– I think it should be improved upon. Look at our Constitution and how many amendments it has.
So yeah, I think it should be amended, I think it should be improved, but there’s a lot of good in it.
Except for the 2 or 3 things that I can think of, the rest it looks very positive. From the idea that you can’t pull a rug from underneath the patients just when they need to rely on the insurance they purchased, to the idea that if you take care of the patients before they get very ill and then need emergency care, you’re going to overall reduce the cost of care.
MassDevice: What about the device industry’s de facto position that, "Look, we’re not getting any more patients out of this. Why should we pay for it?" Do you give any credence to that?
JK: The medical device industry erroneously got pulled into the Act. If you think about what the Affordable Care Act does directly, it mostly benefits the pharmaceutical industry and physician practices, because 40 million people got access to pharmaceutical products and primary care physicians. Undoubtedly there are going to be, out of those 40 million, some people who are going to get surgical procedures. So I think saying that there is going to be zero increase in the procedures that use medical devices is probably false.
But it’s not going to be the 2.3% revenue that the tax is supposed to cover. And I think given that we’re now less assured, the more prudent thing would have been to say, "How much more did the medical device industry gain from the 40 million people coming in?" and then the tax should be factored in.
I think to tax before you know what the impact is, is wrong. One thing we’re trying to do is look at what happened to Massachusetts when they implemented universal coverage. To see the procedures increase in those hospitals that we were doing business with before and after.
MassDevice: You’ve never been one to shy away from speaking your mind – I’m thinking particularly about the public battles you have with the GPOs. Do you feel that it’s part of your job requirements to be a public advocate for the industry?
JK: I don’t think that’s part of my job description, but I think it’s part of my human description. A nightmare for me is when something is going on and you can’t act, you can’t fix it, because you’re asleep, right?
I never want to look back and say, "We were fortunate enough to be in this place, had this opportunity and all I did is look for my own self-interest and not try to make things better for the people following us."
MassDevice:Let’s move on to some Masimo business. You said in your earnings call that the company right now is weighing several acquisitions.
MassDevice: Have you moved any further on those fronts?
JK: [Chuckling] I can’t comment on that.
MassDevice: Are you feeling any pressure from investors to do more with your cash reserves, such as share buybacks or increased dividends?
JK: I think the investors typically have 1 measurement, and that is the stock price. Although as a native shareholder, the stock price is important to me, I don’t look at it daily or monthly. I look at it as, "What can our management team do so that I can assure a solid stock price whenever it is – 5 years from now?"
So, yes I’m trying to do what we can do to make Masimo fundamentally strong – make products that improve patient care, because that will be valuable and we’ll be rewarded for it.
The investors have a shorter outlook, unfortunately. And I think that’s one of the big problems of public companies starting to look quarterly instead of what they can really control long-term. So we feel pressure and we’re sensitive to it, but I still can’t run the company based on that. I’ve got to run the company based on what we think is right to do.
Because, I’ll tell you, the things I do today I won’t see the impact of it in a quarter unless I’m somehow manipulating the books. What I do today, hopefully we’ll feel it in a year to 3 years from now. Maybe 5 years from now. So when shareholders say, "What’s your stock price?", the answer is, "Okay, well, where it is today is because of what I did wrong 3 years ago [chuckling] and not what I’m doing today."
MassDevice: Is that some of the push and pull in being the founder/CEO of a public company? Do you ever kind of say, "Well, it’s a real pain in the ass to run the company that I founded."
JK: No, I don’t have that attitude, because I feel blessed to be given the opportunity. You know, the people who believed in me and invested money in Masimo, they’re the enablers. They’re the ones that really did it, not me. So I never came out saying, "It’s my company. I do this." I just feel like, "Okay, while I’m here, I’m going to do what I believe is right for the company."
We went public in 2007 with $200 million in revenue, without having proven hemoglobin, without having proven acoustic respiration and technology. And we priced it at $17, it traded the first day at $20 and went up to $40. The investors were giving us a lot of credit, no matter what I said to them. And today we’re $500 million, almost, in revenues. We’ve proven hemoglobin, we’ve proven acoustic respiration rate and I think we might be trading below where we traded the day the market opened.
So I can’t control what the shareholders think of that. I’ve been truthful to them about the whole technology adoption curve. I can’t predict when it’s going to rise up. The industry has a furture, but it takes years for people to believe in something and to start moving toward it. And I really believe those who buy shares, if they hold it long enough, they’re going to be rewarded the same way our initial investors were.
When we went public our initial investors made 200 times their money. The least amount someone made, which was the last investor, was 10 times their money. So I wouldn’t be doing what I’m doing right now if I didn’t think that 5 years from now we have the same potential. But can I guarantee it? No. But is that what I’m working towards for the rest of our management team? Yes.
MassDevice: I often talk to young entrepreneurs. And I’m pretty much always talking about the headwinds that the industry is facing. Is the med-tech business facing bigger headwinds today than it ever has, or is this just another S-shaped kind of problem?
JK: I think maybe it’s the last swing of the pendulum, and the pendulum has swung the furthest I’ve ever seen it swing towards negative. But I think it’s swinging back. Some of the data we saw at the FDA is encouraging. I’m very concerned about [the Centers for Medicare & Medicaid Service], I’m very concerned about private insurers or deciding not to reimburse for things.
So there are days that I wonder, "Why did we choose a medical space?" [chuckling] But at the end of the day…
MassDevice: You don’t really wonder that.
MassDevice: I know you don’t.
JK: I think that medicine chooses you. I wanted to be a doctor before I became an engineer.
MassDevice: Do you think it’s important for people who want to start companies to understand all the problems out there? Or is ignorance is kind of the best medicine?
JK: That’s why we die, right? We die by the time we know all the problems. Because otherwise you won’t do it, right? I was 24 when I started Masimo. If I knew it was going to be this hard… or this successful…
So trust me, I’m not complaining, but it ended up being so much harder than I ever imagined.
MassDevice: What was the hardest part?
JK: Every part was hard, but I think the surprise for me was the GPOs. The surprise for me was how the mega-company I dealt with decided to just take our [intellectual property]. Sometimes I can see if there is a footrace on some new innovation. And it seems wrong that I beat them by 1 day and they got kind of worried about my IP. But when we started up Masimo, the industry had given up on solving the motion artifact problem. Because it was just thinking it’s just inherent physics of pulse oximetry.
So for us to solve the problem and them saying, "Wow! They did it." Then us going to them saying, "Do you want it? We want to work with you," and still they took the approach of, "Let’s just steal it, it’s cheaper. And who is Masimo? It’s simple processing, but it’s hard to talk to the jury about." That was disappointing.
MassDevice: So you were 24 when you started this company. Do you think that’s possible today, to start a company at that age?
JK: Absolutely. Absolutely
MassDevice: Do you think it’s up to successful people like yourself to reach back and talk to those younger folks and give them encouragement, give them microfinancing?
JK: Yes, I do. And in fact, with the help of smart guys, I kick around a lot of the startup companies, especially in this period where venture capitalists because of their limited partners are hamstrung and they can’t invest in the early stage companies. I’ve gotten more active and I’ve become an angel investor. And I like encouraging them. Because, again, the stuff they’re working on is going to solve the problems that are facing our families, facing us. So you’ve got to encourage people.
MassDevice: You leveraged your condo to get startup funding, but who was the first person to give you money and do you remember your pitch?
JK: My first angel investor was Bob Feibusch. He invested half a million dollars. By that time I walked away from VCs because they kept changing the deal on me. I thought that was not right.
MassDevice: And so do you think there was something you said to him that made him believe in you? Or do you think it was because of the technology?
JK: It was actually a funny story. He told me years later he invested in me because he had a really brilliant guy named Val Valden. (Val went on to start Benchmark Capital, which was a huge success in the Internet days.) Val had kicked the tires for 2-3 months and they were ready to invest [in Masimo]. But right before the investment, Bob came in to check this out and during the whole period Val kept telling me that "Bob is not like VCs. This guys is a CEO, he’s got a heart."
So Bob comes in with his partner and we put the device on him and he happened to have a really thick callus on his finger and it wouldn’t pick up. So I made a comment – because it was a very tense and there was silence, I was nervous and I went to Val and said, "Val, I thought you said Bob had a heart."
Bob said, "That will be all, I just needed to look at you. I am definitely going to invest."
MassDevice: So is that what you look for when you look to making angel investments? What do you look for in a startup CEO/founder?
JK: Well, number 1, I’m looking for products that I think are needed, whether it’s a small market or a big market. For example, I invested in a small company that has a product that you shine basically light and automatically it can look at how fast the eye closes and opens. I think that’s a great technology for protecting shock trauma from head injuries. Not a big work, I mean it’s going to be 1 day a $150 million company, to maybe looking at may solve the other immune deficiency problem.
But I ask myself, "Would I hire that CEO? Do I align that person on that who I think is capable or she’s capable enough so I put her on my team?" And if that answer is not, "Yes," I won’t look at it.
MassDevice: Do you think a lot of people have technologies that are looking for problems or do you get a lot of people who are very mission-driven, who have a very set idea of what they’re doing? Do you think, given where we are today in terms of what people know about the economy, what people know about healthcare, when you see these investments, are they taking into account the difficulties in commercialization, regulatory, that sort of thing?
JK: No, if you look at those issues you won’t start a company. No, all of these guys are bright-eyed people that are looking at the problem. They had some kind of a "eureka!" in their life, or some scientific background, that led them to this particular place. But they’re looking at the problem that’s worth solving.
You’ve got to kind of put your blinders on, thinking that if you make a product that has value, eventually you’re going to make money out of it. And eventually you’re going to get through all the hurdles and problems. Otherwise, if you really just think about the hurdles…
MassDevice: So you’ve only invested in med tech right now?
JK: No, I’ve also invested in technology. I know technology. I’m an electrical engineer. I don’t know anything about chemistry, but I have some friends that do, so that counts.
MassDevice: Do you invest as part of a fund or an angel group?
JK: No, it’s just my own money, and sometimes my friends co-invest.
MassDevice: What’s the worst mistake you ever made in your career?
JK: Calling my competitor to show what we have, thinking they’re going to adopt it because we solved the problem that no one else could solve. I think we got surprised by that. Even if your ultimate goal is to work out a deal with them, the way management in these companies think, you have to surprise them in the market and then when they feel like, "What am I going to do?" they usually do the right thing. But if they have time to prepare for you, don’t take that route.
MassDevice: When did you do that?
JK: I did that in 1992. I went to 2 of my competitors and 2 people I thought shouldn’t be competitors, they should be partners, but all 4 of them as soon as we called them, they all decided just, "Oh, he broke the 4 minute mile." They saw how we did it and they just tried to work around the pattern.
Fortunately the pattern was very fundamental, the invention was very fundamental, so ultimately our claims gave us the protection we should have had. But it was 7 years of litigation, $25 million. So yes, I think the lesson is – as hard as it is – go work it with your prime, then contact potential partners.
MassDevice: So do you discourage young entrepreneurs from trying to go to the big funds that these big companies have now? For example, Medtronic invests money where they spread the bets around a little bit.
JK: If they really had a Chinese wall, they’re okay, but I think if they don’t… I discourage anyone going to their main competitors or potential competitors thinking, "Look, I did something that they’re going to value and of course they’re going to want to work with me." Because unfortunately that’s now, it just didn’t happen with my company, all 4 companies their natural instinct was to go copy it.
MassDevice: Has your penchant for speaking your mind ever gotten you in trouble?
JK: I’m sure it does, but I don’t think about that. I think I’d be worse if I didn’t speak the truth. That probably would haunt you.