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Entrepreneur Profile: Alison Perry of Inogen, “How to Raise 55 Million at Age 25″

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YOUTH MOVEMENT: How 3 College Students Took on the Medical Device Industry

Inogen founder, Ally Perry:

“Listen to as many people as you can, talk to people, get resources, but then internalize that and decide what’s right for your business.”

Motivated by her grandmother’s personal struggles with out-dated oxygen transport and conversion devices, Ally and two of her college buddies started Inogen, an innovation based company that since has transformed an entire branch of the health service industry. In 2005, Ally Perry and Inogen were recognized with The Ernst & Young Entrepreneur of the Year award and to date they raised nearly $55 million in venture capital.

Typical success stories only highlight, the high points, what works. So Ally wants to tell you what doesn’t. She shares her struggles with the entrepreneurial process, as well as, some advice for innovators who want to see their ideas materialize.

Website: www.Inogen.net/

Transcript

Interview between Ally Perry and CK Lin
Transcribed by Quinn Duffy

CK: We are really excited to have one of our local celebrity to be here with us. She’s the founder of Inogen, she’s also entrepreneur of the year with Ernst and Young.

Ally Perry: Sure, sure. I’m Ally Perry, I am one of the founders of Inogen and we have two other founders as well. I’m a graduate of UCSB, I graduated with a degree in Economics Mathematics with a minor in Statistics and I graduated in 2003 and have been running Inogen along with the rest of the management team since 2001.

CK: So how does it feel to be entrepreneur, be recognized as the entrepreneur of the year?

AP: It was cool. It was a nice experience to be recognized as a, being a leader in entrepreneurship through Ernst and Young. They had a huge event where we had all gotten to go there and mingle with other entrepreneurs so it was a great experience to see [???] entrepreneurship.

CK: Is it limited to California only or is it nationwide

AP: Our was for the LA area and then they also have a national one as well, as well as world wide Entrepreneur of the Year.

CK: But now that you’re part of the community right, it makes those things a lot easier. Ummm so for those people who don’t know you know, what Inogen does can you just thirty seconds let us know what Inogen does and the story of it.

AP: Sure, sure. So Inogen was founded in 2001 by three students. Myself, and two other students at UC Santa Barbara and the whole idea of Inogen came about when my grandmother got sick and she got put on oxygen and when that happened the quality of her life just completely changed. She was having to deal with regular deliveries of oxygen and always worrying about whether she would run out of oxygen or not. So, in the home they have a stationary fifty pound oxygen concentrator and then when she leaves the home she has these little tanks and they have compressed oxygen in them. So she lived just about forty five minutes from here and she would come for lunch or shopping or something and she would always be worried that, what if I don’t have enough oxygen to get home, what if there’s traffic, can we have dessert? Those types of questions now were daily questions in her life and over winter break I was home with my family and she was there and she actually came up with the idea. She said, “Everything else in the world has gotten smaller, lighter, and better. Why hasn’t my oxygen concentrator had any improvement?” So I took that back to two of my friends here and said, “I wonder if there is something better.” We started throwing around ideas of what it could be, did a lot of research on the Internet and found out there wasn’t anything better. And Brenton who is the more technical person looked at it and said, “You know, this technology is thirty years old, I’m pretty sure we can make this better.” And that’s kind of the idea. So we started with her just really being frustrated with the current technology and taking that and turning it into a solution that would solve that problem and that was the formation of Inogen.

CK: Wow. So your grandma gets an honorary seat in the company I hope.

AP: [laughs] Well she’s no longer with us but she did get the first Inogen One that we had produced.

CK: Cool. Ummm so from our community a lot of times what we hear is only the successful stories right?

AP: Right.

CK: You know, Inogens done this, raised this much money, got this many customers, Entrepreneur of the Year, right? All these great things. So from your journey what are the, can you tell us some of the challenges that you actually encountered and what did you learn.

AP: We had quite a few challenges as we were going through the process and that actually was one of the hardest things when we started out, when we looked at other companies as entrepreneurial successes, all we heard about were the high points where you go, “OK everythings getting better, this company is on the success track.” and you hear about all of those great things that are happening and what we were experiencing instead was a roller coaster where you know, we would have a high and then a low, then a high, then a low and the general progress was in the right direction but we didn’t understand at that time why we were having such huge swings in, in, in the business and I think that now looking back, most entrepreneurial ventures have those swings and we just didn’t know that other entrepreneurs were experiencing that as well. So I think it is important to talk about those valleys. Umm When we started we were three students that didn’t have any real experience of how to make a medical device and we, quite frankly, didn’t think we could do it. We at first thought about it, we entered the business plan competition and won that and really didn’t think we were going to do with it because what does a nineteen year old know about starting a medical device, especially a manufacturing based company. So we first got some people involved that knew, but right off the bat, right after we decided we were going to pursue the company, September 11th happened. We had already gotten a commitment from an Angel investor that he was going to give us a little bit of money, well right after that, that completely went out the window for another nine months. So we started with the highs were going to get money, then were not going to get money and you know, now were delaying it. We also had an initial problem that we said, “First we’re just going to make oxygen.” The straight, normal process that everybody uses that’s been around for fifty years and for, we thought that would take two days. After three weeks or so we still couldn’t make oxygen. At one point we were actually making nitrogen and we said, “Oh my god. We have no idea what we’re doing. [laughs] We can’t even do this.” And you know, eventually we figured out what happened and got right back on track but we had a lot of challenges getting that initial product together. We very clearly understood what the product needed to be; that part for us was easy. We had my grandmother there. We knew specifically what she needed out of our product, but we were asking a lot. So we had to bring in experts from the chemical process of how you actually separate oxygen from air on battery technology, on compressor technology, on a lot of different areas and kind of bring it all together which ended up costing about three times as much and taking about three times as long.

CK: Now when you say cost is the design cost or is it cost of the unit itself?

AP: Design cost.

CK: Design cost, ok. So you didn’t, it wasn’t like you were able to approach a professor and say, “Hey professor so and so, I was a student help us out pro-bono.” kind of a thing?

AP: Yeah, we didn’t really use the engineering staff here. We had some meetings where we worked through them. Actually we used a design firm in town to do the design work, but he actually is also a professor here at school [CK: I see.], it was just his side venture that, that we used. But we kind of leveraged that relationship to get in with the design firm and get that work done. And we actually ended up using multiple design firms for specific components.

CK: Hmmm, interesting, ok. Umm any other challenges?

AP: We had a big challenge bringing our device from design to manufacturing. And I think a lot of entrepreneurs, especially technology entrepreneurs they focus on getting the design and the prototype. And we had a beautiful prototype that looked like it was going to work great. What we found out was when we actually took it to manufacturing that the skill level required to put this thing together was fine for an engineer doing ones and twos of making a prototype, but in mass volume it just didn’t work, and it wasn’t as reliable as we needed it to be. So we actually, we were using a contract manufacturer. We have huge, huge reliability problems with our initial configuration so were putting units out there that are failing, we’re having a lot of problems with that. At the same time our contract manufacturer got acquired by a larger company. So now have an entire change in management there that really you know, also is affecting our product. And so we’re trying to work through those reliability issues and trying to get to the heart of the design problem, is this a process problem. Quite frankly we didn’t spend enough time before we took it to manufacturing testing it in a manufacturing environment and I think a lot of people make that mistake of rushing. Alright we have a prototype, let’s get it out there, let’s get it in our customers’ hands and we, we struggled in that period.

[10:00m]

And then our contract manufacturer actually filed for bankruptcy. [CK: Nice.] Which just made a bad situation so much worse. [CK: Right.] Umm and after that we actually ended up bringing manufacturing in house and we were actually manufacturing here in Goleta. [CK: Really?] We felt that at the point in time it was important for us to make sure we could manufacture our product, that we had the quality because we cared the most about the quality and its a medical device and we just felt that that was an important strategic reason for us to bring manufacturing here to Goleta.

CK: You know actually I have a question for you. So you know, I love innovation, I am actually obsessed about the innovation process [AP laughs] to be quite geeky about. Umm the CEO of Google, Eric Schmidt said that their model, you know, Ready, Shoot, and Aim just to throw it out there for the customer to test it out and to give them feedback so they can do it iteratively. It works for them. Obviously it wouldn’t work really for the medical devices type of things.

AP: I think that’s a great strategy for software and that type of thing, medical devices its less, its not as optimal. We ended up having to do a recall [CK: Recall.] of our product. And now we have the best quality in the field. We decided to make that a focus of the company, that we would make high quality products and now our reliability, no one else in our space can touch our reliability for comparable products.

CK: That’s great. I think we’re going to quote you on that. [???]

AP laughing: OK.

CK: Umm so these are the typical you know, first time entrepreneur mistakes and actually you are in a very old industry. [AP: Right] Medical devices, fifty to seventy years. [AP: Yeah.] So hows, what is the reaction from your competitors. You know these youngsters come into the space, you know what is the reaction from that? Whats the feedback?

AP: The initial reaction was surprise. There really wasn’t any innovation in the industry in awhile and they were pretty complacent. They only made new technology and put in new technology when absolutely required. So we showed up at our first tradeshow when we had a prototype done and this was a year before we actually ended up launching the product. But we showed up and no one had heard of us before, and when we got there and set up and everybody saw the product that we had and heard that we were some venture backed company from California, our competitors all came to the booth like, “Whoah! [laughs] Who are you guys, whats going on, I want to learn about the product and see what you guys have.” So they were very surprised to see somebody entering the field that had such a different perspective on the field than they did. Our competitors at that time, when we had actually set up, to start the company I had called our competitors and I think its a great strategy for people who are looking at starting a company. I called them up as my grandmother, for my grandmother and said, “My grandmothers on oxygen. She doesn’t like her oxygen concentrator. Do you have an option, like a small portable oxygen concentrator that would work for her?” And the reaction I got was, “That’s impossible, it’s physically impossible to make a portable oxygen concentrator.” And at first we said, “Uh-oh. We may have an engineering problem, if this is physically impossible.” And as we dove into it more, they all said, “Yes we agree. If there could be a portable oxygen concentrator that would be the holy grail of the industry. But we don’t think it would be possible.” And what we later realized is the reason they thought that it wasn’t possible was because they were thinking within the scope of the current oxygen concentrator business and that’s a commodity business. Where people, they want to buy the cheapest oxygen concentrator they could find and because of that what happens is they buy the cheapest components that they can and they sell it for very small margins. So they were thinking in terms of, for a three hundred dollar cost of goods I agree it is completely impossible at this point in time to make a portable oxygen concentrator within those specifications. But what we realized was, with our product you take away an entire delivery structure for the tanks and because of that cost savings on the servicing side of the equipment you can charge more for your product and lower cost for them.

[15:00m]

So that’s what was critical for us is finding that key market input where we said, “Yes it’s possible at a different price point and the reason people will pay that price point is because of the other value that we’re providing.” Because it’s like a milkman [CK: Yeah.] You don’t get your milk from a milkman anymore. You don’t have somebody come into your house once a week delivering milk because you go to the grocery store and you get it there and its a much more efficient structure. Well for us that’s what tanks are for patients. They’re in the house once a week, once every other week, delivering these cylinders of compressed oxygen. Everyone of those trucks, every time they go its fifty dollars. For us, we could charge three to four times as much to the provider and save them money over the long run as long they invest in the capital upfront.

CK: Very interesting yeah. I’m sure its music to the investors ears, like wow.

AP: And really, when we brought investors in, the investors who ended up investing in us saw the vision where they said we could get rid of this infrastructure of service based cost. Fedex will deliver for you and then the patient, also you have a patient preferred product. The patient, if you ask any patient, I mean we’ve done tons of patient studies and they say, “Do you want a stationary concentrator with tanks or do you want the Inogen One?” They all want the Inogen One because it prov-, it was designed completely for a patient. It provides all of the freedom and mobility that they want. Now obviously we could do better in battery life or weight, you know everybody wants everything smaller, lighter, better [CK: Sure] but in terms of comparison to what their other options were, it was a significant improvement in value for them. And if the provider can make that capital investment and then reduce their service and cost they also will improve their business as well.

CK: I’m getting really excited just listening to this. [AP laughs] I mean you know, from an investments perspective, from also from the customers perspective so I think that’s really great. So other than your grandma, I know that you talked to your competitors to talk to get the engineering feasibility study there which is great, two thumbs up. Did you talk to other potential customers who may acquire this?

AP: We also in our initial work before we even won the business plan competition we called providers. So how the channel works is the manufacturer makes product then the provider rents the product to the patient and typically gets reimbursed from Medicare or other insurance. So we had already gotten the patient feedback and we had talked to more patients than just my grandmother but she was the primary. [CK: Right.] What we also did was talk to the people who would be our customers and we called providers and we had a hundred percent of providers say, “If you could develop a portable oxygen concentrator that reduces our servicing cost like you say it will, we would be interested in buying it.” So we got that feedback from every part of the channel. We also got a scientific advisory board with doctors because for us there are three components of people who have a stake in our product. Its the patients, its the provider and its the doctor.

CK: Who makes the recommendation.

AP: Right. The doctor actually writes a prescription for oxygen, oxygen is a drug and they want to make sure their patients have the best product and we wanted doctors to be accepting of our product as well so we brought them in in order to make sure we met their needs for a clinical efficacy for the patient.

CK: So sounds like the system is working.

AP: Yeah, yeah I mean overall I think its working. You know we still have the highs and lows, we’re still in that entrepreneurial stage where you go, it swings back and forth but overall we definitely are making great progress and continuing to innovate in the business.

CK: So sounds like you don’t really need to get on the infomercial trail to you know the AARP community.

AP: We are actually doing TV advertising now. With just this last year we started that and this is actually a new business model for us, we typically before that had just sold to providers and then what we found is that a lot of patients wanted to just buy their oxygen especially with a portable solution that would work for them. So we started offering that to patients and got such interest in the product that we now drive patients through advertising to our call center and then we sell them for cash if they’re interested and if they’re not we refer them to a local provider that can help them.

[20:00m]

CK: Sounds good, that’s great. Let me see if I have any other questions. Oh yes. Transition from student to entrepreneur. What did it take you, was there any moments where you finished school and you said, “Alright, now I’m an entrepreneur.” Was there a moment or was it just really gradual?

AP: There actually was a moment. We had, my senior year was the year that we really had been working on product development. We had our first Angel money in so we had our CEO, we had our design firm working starting late in my junior year and then we knew were going forward, we were working on the design and we actually closed our first venture capital round the Monday following graduation. So it was perfect timing for us and, and right then we knew, OK now we’re serious, everbodys going full time as fast as we can go with the venture capital money. But for us it was very nice to have that security knowing right when we graduated that we were closing that following Monday so we jumped right in, into the process.

CK: So as you’re developing this venture, this enterprise and it sounds like things are, you’re hitting all the right notes, new people are investing, your customer feedback, your competitors are also giving you feedback and so forth. What’s going on in your head from a students perspective to an entrepreneur perspective? Did you think about, oh I need to go read some XYZ books to learn about strategy, marketing, or investment and so on, so forth was it-

AP: I love to read so I was reading constantly and, and trying to absorb as much as I could. We had our CEO Cathy O’Dell umm and she was really trying to mentor us. Make sure we got the information we needed but all three of the founders were just trying to dive and really it was sink or swim for most things and using the community as we could to get feedback and help on issues that we didn’t know but we were jumping right in with everything basically.

CK: So was there, you mentioned community, was there a particular reason why you stayed in Goleta?

AP: Yeah, I mean a lot of it was actually because of the proximity to the University. We had had a tremendous amount of support from UCSB through the Technology Management Program in our early stages and so we had already reached out to the community you know, through our CEO, through our first Angel investor, through our law firm then it made sense for us to stay in a community that was so supportive of local entrepreneurs especially people our age where they were looking to help us, they wanted to get us help so for us it was a great environment to start a company and there’s a lot of people around here that are technology focused so we could leverage the people graduating out of UCSB for help-

CK: For staff.

AP: Yeah right, right.

CK: Awesome. In what other ways could, are there advantages to stay close to the University.

AP: I still think that we’re getting advantages from the University. We still use a lot of interns from UCSB to come in, especially engineering, but also other areas of the business as needed to kind of help, we feel that the students here are great and that we get a lot of great talent. People who want to learn, want to get involved in business and have a great attitude. So that’s helping a lot. We also just, you know the local community, I have to tell this story. Our law firm, when we initially got started and we were students, we didn’t have money for the incorporation fees you know its like a thousand dollars or something and as poor college students a thousand dollars is a lot and through the University they introduced us to a local law firm, Stradling, Yocca, Carlson & Rauth and they, they basically allowed us to pitch our business plan to them and after hearing the pitch, David Lefeet, the partner there said, “Alright we will pay to incorporate you.” And not just their time, the fees, they were fronting the fees and actually did legal work for us for a year and a half and they were accruing bills but didn’t require any payment until we got our first venture funding.

[25:00m]

So they said, “You know, everything if it works we think its a great idea, we’re behind you and if it works then great you can pay us then, otherwise we’ll write it off as an experience.” But they were the first people who actually put their neck out and said, “Alright I’m in and want to help you get this started.” And I think its critical to create those relationships, the people that see your vision and want to help you make it happen and there’s so many people that will help you. And as entrepreneurs I think, we thought, you know, you do it all in a box, you do it in your garage, and you don’t tell anyone what you’re doing, don’t ask for help. And what we found is that the more people we asked, the more people that were willing to help us. We had people that we would say, “Why would they spend time with us?” and they would spend hours you know just talking because they enjoyed passing on that knowledge. And I’ve found that now I love talking to other people about their ideas and trying to help them grow so I can encourage other entrepreneurs to step out and ask for help and see what they get, because I think you’ll get more than you expect to get.

CK: Thanks for sharing that actually. This is really one of the reasons why we started this whole interview series because a lot of techies think that, “I just need to get a perfect product out there then the world will love it.” [AP: Right, right] [???] But the truth is that you know if you don’t ask for help, you know, all these things available for you especially in the University won’t be able to help you so its perfect. [AP: Yeah.] Thanks for sharing that. That’s fantastic. Ummm let me see.

CK: OK great. Alright, so, thinking back, know what you know now right, we’re at now the, do you have some advice for technologists who want to do similar things that you’ve done already in terms of fundraising, in terms of prototyping, in terms of marketing, in terms of monetizing from your innovation?

AP: Yeah, I mean there’s a ton of things and I think that every entrepreneur is influenced by their own experiences in the past and its important that an entrepreneur, when they’re asking for advice, that they recognize that everybody is influenced by the experience that they’ve had and because of that you’re going to get conflicting advice. I know we got so much, you should do this, you should do that, you should do this and none of them were the same so I think you have to go out there and you have to hear peoples’ opinions and listen to them openly but then you know what you’re trying to do and your business and you need to decide whats the right path for you. So listen to as many people as you can, talk to people, get resources but then internalize that and decide whats right for your business because some people will give you advice that maybe is right for a software company, as you said as Google you know, that’s a great approach for them. Wouldn’t work in other industries and so there’s a lot of movement and business is not right and wrong. There’s a large shade of gray in the middle and there won’t be as clear of a path, so entrepreneurs need to realize that, accept that and enjoy that. That’s part of the fun is deciding which path you’re going to take and going through with it. In terms of product development, I think that I would recommend people spending a lot of time making sure your product works and again that is influenced by my own experience but making sure you put a product out there, especially when its a product, that works and that people will when they look at it they go, “Wow that is the high quality product that I know I can rely on.” So, and its also important to use a lot of resources there, I know we said we started with a local firm, we quickly realized the chemical process of actually separating oxygen from air, they didn’t know anything about that as much as we didn’t know anything about that so recognizing where your short falls are in terms of technology development and pulling in those resources and you can just have them do small portions and then integrate it in; but if you don’t understand something and that’s a part of your key product then bring in those resources.

CK: Quick interjection really quick. Bringing those resources, so a lot of people think that [???] Santa Barbara resources. So the Internet is a very good tool to do that as a entrepreneur when you don’t know where to find that process that could concentrate things quickly.

AP: This the great story, kay? So we didn’t know anything about the chemical process of separating oxygen from air, we learned on the Internet that it was called pressure swing absorption. We actually went to the UCSB library and at the UCSB library there’s a book called Pressure Swing Absorption, so we pulled out the book and it was a big book and we said, “Oh this is kind of complicated.” We looked at the author on the book, googled him and then we actually called him and he said, “Oh yeah, I could be interested in that but you know what? The co-author on the book has this little consulting business and he helps companies figure out how to do PSA, you should call him.” And we actually ended up and we found out that there were only like three people in the world that really understand PSA, the one was the author of that book, the second was the co-author and another was another guy. And we talked to the guy who owned the consulting group and he actually bought, we again pitched him on the business, the vision of what we had for where we were going and he actually gave us an exclusive for PSA cycles in a small portable oxygen concentrator that he would design with our help for our system. So a lot of its just, you know, I mean, we, this has got to be somebody who knows something about PSA instead of reading the book we’re looking for real help not theoretical work. So reaching out to those people its not that hard to get contact information and then calling them and seeing if they’re interested in a consulting venture.

CK: That’s a great story, I love it, it’s awesome, that’s awesome, that’s good. OK. Anything I should, actually no I’m sorry, so you talked about fundraising, prototyping, you talked a little bit about marketing already, monetizing from your innovation. Can you say a little bit about that, thirty seconds.

AP: Yeah so, umm, you know, it’s, when we looked to actually you know, start selling our product a lot of it was figuring out who our customer was and kind of with the marketing of who are we as a cust-, as a business and who do we want to sell to. So we took the product and said, “Alright, we know that we can save money on the service component so we need to factor that value into the cost of our product.” And so when we looked at our profit margins we could get significant improvements in profit margins just because of that value. So once we sold customers on that we were able you know, substantially start rackin’ up the sales. In terms of our long term strategy and kind of where we’re going as a business, we’re still looking to continue to grow revenues, continue to grow profits as we go along and our venture capitalists eventually are looking for some sort of exit.

CK: Eventually.

AP: And I think, eventually, I think we will be able to get them some level of return for, for the investment that they’ve made in helping us grow and reach the level of profitability but we continue to want to grow over the next couple of years and invest in R and D and new business strategies. So that’s a critical component of making sure we reach our our end goal.

CK: Great. Is there anything that I should be asking on behalf of our listeners, fellow technologists that I’m not asking right now?

AP: You know, the one thing I can think of that a lot of people, entrepreneurs, and especially students ask us is, “How did you guys raise so much money? As students?” and we’ve raised fifty five million dollars and uhh we actually have done that through great relationships. Getting the key expertise and the business, having an experienced CEO, people designing the product and then getting investors to buy into that vision of where we’re going and what the company could be. And for us, once we got that first venture capitalist bought into the idea, the world opens to you, of other venture capitalists that may be interested in the deal. So I tell people, “Don’t focus on how do you get fifty five million. Focus on how you get that first three to five million.” And once you get that three to five million and you are tracking and going in the right direction and starting to show your vision then the rest of the money can come as you meet milestones and grow the business. But some people go, “Whoa! Fifty five million that’s a huge chunk to get,” and it doesn’t come like that and you need to just focus on the initial rounds and then grow from there.

CK: Excellent. Thanks for the feedback and some stories. Ally really really appreciate you being here with us, if anyone who is interested in Inogen as whole, or advice from you, where can they reach you or find out more about you?

AP: Yeah, you can go to our website it’s www.Inogen.net and our contact information is on there and they can reach me through there.

CK: Great thank you so much.

AP: Yeah thank you.