Five Questions: Norwest Venture Partners’ Dr. Zack Scott

In this series, Digital Health Business & Technology will interview a range of digital health investors, from those who work at venture capital and private equity firms and at health system and health insurance venture funds, to individual and angel investors. If you’re interested in participating in this series, email us here.
 

When Dr. Zack Scott was going through medical school, he didn’t originally envision a professional trajectory that would lead him away from clinical care.   

“But once you start to practice medicine, you realize that despite all of our advancements, the delivery of care is not as good as it should be,” Scott said. 

During his medical training, Scott got a chance to interact with Dr. Julio Palmaz, who invented one of the first cardiac stents to prevent heart attacks. Meeting Palmaz and learning about the power of health innovation, along with Scott's family history of entrepreneurship, inspired him to get his MBA after residency and pursue a venture capital career path. 

In September 2022, he became general partner at San Francisco-based Norwest Venture Partners, which invests in digital health, biotech and medtech companies. 

Scott spoke about the importance of clinical evidence when it comes to investing in digital health companies, the potential role real-world data can play in clinical trials and more. The interview has been edited for length and clarity. 

What are some areas of digital health you’re excited to invest in?

I've done a fair amount of investing in the real-world evidence sector in health tech. In my previous firm, I was on the board of two real-world evidence companies. The 21st Century Cures Act, passed during the Obama administration, created a profound opportunity to get a deeper understanding of patient care. The promise of more personalized medicine has been talked about for decades, but now we're starting to have the capabilities and analytics to do that. Physicians today operate based on data from clinical trials as well as on their interactions with the patients in the clinics. They kind of get a snapshot of the patient’s experience of their disease. They can now access, through real-world evidence companies like Syapse and Evidation Health, a 365/24/7 view of what that patient's journey is like. Real-world evidence gives physicians more information to work with inside and outside the health system. There’s a lot of potential for innovation in that sector.

Real-world evidence technology is still developing. We also don’t know how pharma will use it post-pandemic. Are you taking a leap of faith by investing in a space like that?

You’re right. In my previous firm, a portfolio company's original business plan wasn't always exactly where they'd end up. As I've developed my investment interest in this space, it's always important to talk to your customer. In the case of real-world evidence, that means talking with large pharma and biotech companies. There aren't a lot of them, but they each have their own way of looking at the real-world evidence opportunity. I spent a lot of time understanding what they liked and what they didn't like about products I was invested in and products from our competitors. I think getting a granular view of where their challenges are is important. It's an evolving space on the venture side and within pharma. So, one of the key capabilities is the ability to articulate a company's value to customers. That's not always easy to do.  

With a physician background, how important is clinical evidence when you're deciding to invest in a company?

Healthcare is a unique industry compared to consumer tech. Things move more slowly and are driven by data. We are always focused on companies proving their value add in a rigorous, scientific way, whether that's through a clinical trial or something else. That’s one of the main questions that we ask our companies: How do you define your value proposition? How is that sustainable?

One of the ways we do this, particularly for medical products, is by having them define their perfect patient population when they first enter the market. Who is that patient who will be an immediate candidate for their product or service? How does the company fit within the broader market spectrum? How does it address those patients? How does the company find them? How does it position its product to the physician and the patient to get them to adopt? I’d also like to think I bring the practicality of working with physicians and hospital settings. You need to ensure not only do they have a value proposition, but that their product will work within the system. 

What else do you like to hear from entrepreneurs and potential portfolio companies when you meet them?

Number one is: What is your value proposition to the system and how are you different from others? How is that reflected in your customers and your revenue? You should be able to demonstrate that. Particularly important in the health tech space is that the CEO understands the value of the dollar and knows how to reach profitability. With real-world evidence, it can be very capital-intensive to develop some of these platforms. So, as we mentioned before, you need to focus on how to demonstrate your value with the path to profitability. This is something we're very focused on. We are not fans of just investing $2 to make $1 and then hopefully someone will give us a good multiple on that top line. Lastly, but equally important, is the level of candor in terms of where you are in the market, your strengths, your challenges and where you need help. The best partnerships I've had with CEOs and management teams over my career are ones where we're able to develop a good level of candor.  

What kinds of conversations should investors be having with portfolio companies right now amid economic uncertainty?

We’re entering a period of clear risk. We've all seen the initial public offering market clamp down. The large acquirers are being cautious. So, when we talk to our portfolio companies, we try to help them plan for lean times. We tell them to anticipate problems. Fix things before the problem becomes acute. Try to be proactive in how you think about your product development. Stay focused on your biggest value asset. Don't try to do too many things. Do one thing really well, as opposed to three things OK. And then, when you look at the financing environment, it's going to be a tough period for companies to go and raise capital. Cash is king. Try to reserve your runway as long as possible. When you do go out and finance, whether that’s through grants, debt or partnerships, just be prepared for a tough process. Be realistic. And lastly, don't try to solve any problems by yourself. As a venture firm, we'll help you manage this storm together.