Today’s episode is about trust; trust in technology and trust in each other.

Very few startups experience what LPixel went through and far fewer survive it.

Today we welcome Yuki Shimahara, founder of LPixel, back to the show. The last few years have been a roller-coster for LPixel, and despite the chaos LPixel managed to created Japan’s first certified medical AI device and roll it out into hospitals around the country.

And despite his success in Japan, Yuki also explains why smart medical AI startups are all looking to Southeast Asia.

It’s a great conversation, and I think you’ll enjoy it.

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Show Notes

  • How LPixel was certified as Japan’s first AI medical device
  • The transition from diagnostic support to full medical diagnosis
  • Why it’s not technology holding back medical AI
  • The nature of trust in Japanese business
  • Japanese health insurance is now paying for AI diagnosis
  • What happens when an employee steals all your funds?
  • The advantages (and disadvantages) of full transparency
  • How investors reacted and their new demands
  • Why more doctors are founding startups
  • Why research is easier at startups than at universities
  • Why developing countries will see more advances in medical AI than the developed world
  • Going global does not mean going to the US (yet)
  • How the Japanese government should (and should not) foster Japanese innovation

Links from the Founder

Transcript

Welcome to Disrupting Japan, straight talk from Japan’s most successful entrepreneurs.

I’m Tim Romero and thanks for joining me.

Japan is often described as a high trust society, but it’s hard to explain exactly what that means and why it matters.

Well, today we sit down to talk about trust and about medical AI with Yuki Shimahara, CEO of LPixel. Now, a lot has changed since Yuki was on the show four years ago. And by all metrics, LPixel is a stronger and more successful startup today. But one unfortunate event really put that level of trust to the test.

Well, Yuki will give you the details, but the level of trust that existed between investors and clients and employees resulted in saving a startup that no one could reasonably expect to be saved.

And we also talk about why medical AI is going to be adopted so much faster in Southeast Asia, why more and more doctors are starting startups in Japan and why Yuki thinks it’s more productive to do deep research at a startup than at a university. But you know, Yuki tells that story much better than I can. So, let’s get right to the interview.

Interview

Tim: I’m sitting here with Yuki Shimahara, the CEO of LPixel. So, welcome back to the show. 

Yuki: Yeah, thank you for having me.

Tim: LPixel a cloud-based AI image analysis for life sciences and medical research. And well, you can probably explain it much better than I can.

Yuki: I’m very honored to be back here. LPixel is a startup company from Research Lab of Tokyo University, which is a pioneer bio image informatics. We combine life science and imagine analysis including AI, but also we do are the two main business. So, we developed the AI for medical misdiagnosis and then developing AI for accelerating the pharma research.

Tim: And wow. Last time we talked, I think you were still a PhD candidate at that point.

Yuki: Probably.

Tim: Yeah. Because I do remember we were running around into different rooms at the University of Tokyo campus at Hongo trying to find a room that didn’t like echo. So, much has changed since then. You’re a lot bigger and more successful than before. So, how many people do you have working at LPixel now?

Yuki: Now, 60 or 70.

Tim: Tell me about your customers. So, last time most of your customers were research institutions, people working on medical research and it seems like you’ve expanded a lot since then.

Yuki: I think the last time is just developing the AI but three years ago we got the AI as a medical devices. It is said that it is a fast AI got approval as medical devices using deep running. So, our stage changed the last time. Maybe I focusing on R&D, but we do the sales and marketing now.

Tim: And just to clarify, so when you say it’s a medical device, does that mean it is a diagnostic tool? What is the certification of being a medical device mean?

Yuki: Our AI is supporting the diagnosis, the medical doctor even the professional mistakes sometimes. So, misdiagnosis is very big problem for patient. The AI support the diagnosis. For example, by using our AI, the accuracy increase 10%. So, we can claim that it is good for not misdiagnosis and improve accuracy.

Tim: Okay. So, just let’s walk through a typical example. So, LPixel technology works on, for example, imaging from a CT scan. And it would analyze the image. And what would it suggest to the doctor that there’s a high chance of this disease? How does it help the doctor? 

Yuki: So, very simple AI highlight the candidate of the diseases. It is like mis-spelling check using something.

Tim: I like that analogy.

Yuki: Very simple. It’s just highlight.

Tim: When you say highlight, does it, for example, does it show an area of the scan that needs special attention?

Yuki: Yes, exactly. The detection is the most important part I think. But the next we do the classify the diseases and suggest the treatment or something. But for now focus on detection.

Tim: So, it’s not yet a diagnostic tool. It’s a diagnosis support tool.

Yuki: Right, exactly.

Tim: That’s a subtle but very important distinction. How many years away are we from having AI being able to actually diagnose?

Yuki: For now, legally AI cannot diagnose, it is just supporting tool. But little by little we improve the AI. Probably next step is we change the double check system. The US are the same. So, US and Japan, the government recommend double check because human misdiagnosed sometimes. So, we can change human plus human to human plus AI. So, it is the next step.

Tim: So, but not yet AI plus AI?

Yuki: No, not yet. 

Tim: Is the biggest challenge one of technology or is it one of perception?

Yuki: Good question. So, because the technology is very important, but I think that society development is very important. So, we show that evidence human plus AI is better or same as human plus human. And then so we do lobby activity with public sector or academic society. I think it takes seven or eight years, but it is very soon I think.

Tim: When both technology and society get to the point where AI plus AI counts as the second opinion. I think that’s going to transform medicine completely.

Yuki: Right.

Tim: And eight years sounds like it’s far away, but I mean it was only what, five years ago you were on the show. It’s not that far away. Let’s talk a bit about your go to market. So, last time we talked you were just starting to work with the manufacturers of CT machines, MRI scanners. How has that played out?

Yuki: I think the five years ago, so we do joint the research business mainly, but from five or six years ago we had just started product development. Three years ago we got approval. So, our policy is vendor neutral. So, investors like Cannon Medical and FujiFilm and Olympus and also GE and Siemens, not investors. But our policy is vendor neutral.

Tim: I think it is interesting because well one of the things I want to talk about is how trust works in Japan, the importance of trust in Japan. And how the level of trust enables different kinds of relationships between startups and enterprises and startups and the investors. You’ve had research relationships with these companies for many years. And last time we talked, you were saying that you weren’t that concerned about having a direct relationship with the doctors, which as an American founder I found like shocking and like kind of made me nervous. But has that strategy been successful? Have the partners, the OEMs supported you and helped you get to market without those direct relationships?

Yuki: Good questions. I think that timing is good. So, we was first paying in this market and then medical doctors present our AI or good AI is coming. So, medical doctor trust medical doctor sales, right? 

Tim: Yes. 

Yuki: Right. So, academic presence is very important. So, health insurance coverage is very important. So, this fiscal year government support, insurance coverage for AI, it is very limited, but it is good trend.

Tim: That’s very interesting. And that’s very new. When you say insurance is paying for AI, what does that mean?

Yuki: For example, if medical doctor diagnose MRI or CD images, they can get 3000 yen a year per scan and then from this year using AI 400 yen.

Tim: And so until this year, hospitals couldn’t even bill for it?

Yuki: Right. But it is very limited, but it is good first step.

Tim: Well I think that’s an amazing first step, especially since it’s like one-tenth the price.

Yuki: Yes it is. Good change.

Tim: The other thing I really want to talk about is what you and LPixel went through back in 2020. Well, actually why don’t you share what happened?

Yuki: So, it is very hard things for us. So, two and half years ago, one of our members director and embezzled about 25 million. So, we lost all money and then cannot pay the salary.

Tim: Yeah. Like $25 million and it was gone and not recoverable because he spent it on like FX trading or something like that.

Yuki: Exactly. Yeah.

Tim: And that was all the money your company had? So, what’s going through your mind at this time?

Yuki: Yeah, so it is a tough situation. The first thing is we explain to the investors and very sorry, so why it happens or like that. And then this is a new brand, so that’s why we need this kind of resources.  So, very tough communication, few months.

Tim: What about your employees? Because I think like customers and investors you can have more rational conversation. How did you explain the situation to your staff?

Yuki: So, we do open almost all information to employee after one week. So, one week we needed to communicate with investors first and then we opened all information. But we asked them that not share the others. So, that’s why we trust them. And then the information didn’t go out. So, I think that it was, of course a difficult decision, but good decision.

Tim: So, you were able to talk about it to your investors first and then to your employees before it got into the media?

Yuki: Yeah. It was a risk of course, but otherwise we can’t overcome this challenging.

Tim: How did the employees react?

Yuki: Yeah, of course that they are shocked. Someone cried. Few people quit, but the good thing is that key members didn’t quit and almost 90% people keep working. 80 to 90% keep working, wanted to overcome these challenges. So, that’s good thing for us.

Tim: That is amazing. And your investors were also very supportive in this.

Yuki: Yeah, it is very difficult situation. Because we did a big mistake and we are communicate with them the quickly and everything, make them understand.

Tim: But you pretty quickly raised another round of financing from those investors?

Yuki: Yeah, no, not quickly, about six months. About the six months the news was out to the public so that the same time we finished the fundraising. So, it was a good timing.

Tim: So how did you survive in those six months? Did you have to borrow money or…?

Yuki: Yeah, borrow money.

Tim: So, the investors funded it again. Was it at the same valuation as before? Was it…?

Yuki: No, no. Much lower but we couldn’t mention about it.

Tim: You’re not in a strong negotiating position. So yeah, it was an emergency. It was a down round. 

Yuki: Right.

Tim: Did the money come with any additional changes? New structures? Or did the VCs want to tell you to go in a new direction?

Yuki: Of course resources very limited. So, budget is less than half. So, we changed the business brands and we closed the Boston office. We do the many products plan, but we cut almost 50%. So, it was a big.

Tim: I’m sure that was really hard decisions at the time, but do you think that’s been for the better? The forcing you to focus?

Yuki: We can say, yeah, we could focus, but we wanted to expand our business globally, but now we focus on Japan now, but we start that East Asian business, the government support the funding. Finally at one years ago we start to expand our business globally, but very small steps.

Tim: So, back on track.

Yuki: Right.

Tim: Putting like the investors aside for a minute, how did it change you going through this? I mean, do you look at things differently now or are you like less trusting of people? Or how did it change you as a person to go through something like that?

Yuki: Great questions. Actually, this nine years I keep changing. So, I don’t know when I keep change timing, but big thing is that I think the 99% we should closed our business on that time. But I’m alive, LPixel is alive.

Tim: Well I think it’s amazing how you have turned things around, move forward and come out of that smaller but stronger. 

Yuki: Yeah, I think so.

Tim: Let’s talk about biotech investing in Japan in general. So, there are relatively few biotech startups in Japan. And last time we talked, almost all of them were being funded from like university deep tech venture funds. Has the situation changed in the last five years?

Yuki: Yes. So, I think these days the number of startups for medical or deep tech increased. I think that two times or three times five years ago, mainly for IT or web service. So, I like that.

Tim: B2B SaaS. 

Yuki: Yeah, exactly. But I can see that so many startups, CEO medical doctor or CEO PhD or like that.

Tim: And that is a really interesting combination. We do see more and more medical startups where the co-founders are a medical doctor and a technology person. I mean, as you say, doctors will only buy from other doctors. They don’t listen to anyone else. And has the funding situation become easier too? Are there like non-university VCs investing in life sciences?

Yuki: Yeah, so Web3 or NFTs is a big trend of course, but deep tech is big trend. So, investors looking for the opportunity to invest.

Tim: I think you’ve pointed out like the perfect two extremes of investing. So, like Web 3.0 and NFTs, people are investing and they know they’ve got to get their money out like next month before the whole thing collapses. But you can make a whole lot of money really quickly. And then you have life sciences investing where you’re investing a huge amount of money and it’s going to take 10 years before you see a profit. 

Yuki: Exactly.

Tim: Last time we talked, you mentioned that you didn’t go into graduate school wanting to be a founder. It was just something that kind of happened. Do you ever miss research, just being able to focus on one problem, like really, really deeply and published? Do you ever miss that?

Yuki: Yeah, I think so. I think so. But doing startup is kind of same as research.

Tim: Really?

Yuki: Or technology, even for working for university, it is not freedom. Professor needed to hire researchers and then they got funding and then do education. But if we do startups, so we focus on the technology base business so we can say that we can focus on our technology

Tim: I like that perspective. You never have complete freedom either way, but more with a startup. 

Yuki: Exactly. It’s difficult to make the few hundred people team in the university, but the startup can do.

Tim: I think that would be a really inspiring message to most deep tech startups. That’s awesome. Let’s talk a bit more about how doctors and AI can work together. How else do you see AI being used in medicine, either with LPixel technology or more broadly? 

Yuki: We can do a big challenge in developing countries. For example, Babylon health is a startup from England. Auto diagnose in chat and then AI bot diagnose, but it is not legal in the developed countries. They do the service in Africa. In Africa not so many medical doctors and then the people cannot access medical services. So, that’s better than nothing. So, I think that AI can do the developing countries. So, that’s why we start the East agent business.

Tim: That’s a really interesting insight. So, the traditional disruption model, the Clayton Christensen Innovators dilemma disruption model, it says that the disruption always comes from the low cost mass market that no one else is serving now. And I think for this kind of medical tool, yeah, you’re right. The sub-Saharan Africa parts of East Asia, there is a huge, huge need for it. And it does make sense that it would develop and advance there and then be re-imported into the higher value, higher price markets and displace. So, has that changed your plans of going global? You mentioned before you’d entered the US market and for financial reasons you’ve pulled back. So, are you planning on going back into the US market or the European market, or is your plan to be the bottom up disruptor and focus on developing solutions in the developing world?

Yuki: It depends on the business. So, medical air business, we want to expand to East Asian countries. So, we start joint to research with Mahido University, a top medical school in Thailand. We developed AI for tuberculosis screening. So, if that AI is success, we expand to Indonesia or Philippine or Cambodia. But if we see the pharma AI services, so almost all pharma companies is gathering the Boston technology is no boundary. So, it is no reason to stay in Japan. So, we want to challenge Boston.

Tim: Yuki, before we wrap up, I want to ask you what I call my magic wand question. That is, if I gave you a magic wand and I told you that you could change one thing about Japan, anything at all. The education system, the way people think about risk, the attitude towards AI, anything at all to make things better for startups and innovation in Japan, what would you change?

Yuki: Ah, okay. So one thing I want to change Japanese government vision. So, we don’t have the vision on how should we do to change the medical? So, we should be number one, our medical system in the world. So, if Japanese government says that we should lead the medical society, we can’t think, what should we do? And then we should develop competitive AI and we should apply and like that. 

Tim: What would you want them to change? Because I know that like the government wants to be number one as like a goal, but what would you change for them to better support that goal and achieve it would be like more specific direction or more support for AI or better understanding of AI?

Yuki: Everything, everything.

Tim: Everything. All of the above.

Yuki: Number one is I do everything. For example, if you see Korea, Korea government focus on the Samsung or energy or music a cap or like that, it’s very clear.

Tim: So, just stronger direction and focus.

Yuki: Yeah, stronger direction. Japanese not threat words. 

Tim: I see what you mean. It is a lot of very passionate talk about being number one and being the leader, but not a lot of details and the specific points.

Yuki: So, we don’t ask them their message. 

Tim: Do you think it’s getting better? I mean, there are things like the government sandbox and things like that. So, are you seeing things improving?

Yuki: Yeah. That thing is that we ask them mainly of health economy. So, every time someone ask me, we should have a vision to be number one.

Tim: I mean, maybe Japan is evolving closer to the American model than the Korean model. Because in America, it is the startups that kind of lead the government and set the vision. So, maybe Japan’s headed that way.

Yuki: It should.

Tim: It’d be nice.

Yuki: Yeah. 

Tim: Well, listen, Yuki, thank you so much for sitting down with me. I really appreciate it.

Yuki: Yeah, thank you very much. Be nice to meet you again.

Outtro

And we’re back.

Most startups would not have survived what LPixel went through, but I think we’re all better off because they did.

You know, medical AI as a whole is so important. And we’ve had a number of med tech AI startups on disrupting Japan recently. Medical AI holds a special fascination for the general public. Some of the earliest experimental uses of AI were the medical diagnostic expert systems of the 1970s. It’s very clear that that much more so than self-driving cars or image recognition or image or text generation. I mean, those things are cool, they’re impressive. But we all seem to inherently understand how utterly transformative, accurate diagnostic AI would be. How much it would improve the quality of life for everyone on the planet.

It would be up there with the invention of antibiotics.

But this kind of diagnostic AI is a wickedly hard problem. And not just on the technology side, but on the business side. Move fast and break things is not really an appropriate model for healthcare startups. The healthcare industry is highly regulated and very conservative. And on one level, yeah, you know, that’s a good thing. But it does make disruptive change very, very difficult. So, we tend to see a lot of incremental innovation and innovation at the edges.

But things are changing around the world. Medicine has become increasingly complex and increasingly specialized. And much of the world is facing both doctor shortages and aging populations requiring more healthcare. Incremental innovation is just not an option. And the industry knows it. In Japan, this has resulted in programs like the regulatory sandbox where startups can request regulatory waivers and a more aggressive approach to medical startup collaboration in both government and industry.

And that’s awesome, but that’s not how this technology is going to be brought to market. No. And Yuki clearly understands this as he explained. He’s following the classic disruptive innovation blueprint by targeting Southeast Asia because this technology will be embraced there first because that’s where the most pressing needs are.

That’s where medical AI has the potential to impact millions of people right now. It’s only natural that’s where people will be the most passionate about adopting and refining this technology.

And if you want to disrupt an industry, regardless of where your technology comes from, you want to be close to the customers who need you the most.

 

If you want to talk about medical AI and disruptive innovation, Yuki, and I would love to hear from you. So, come by disruptingJapan/show198 and let’s talk about it. And if you enjoy disrupting Japan, share a, link online or you know, just tell people about it. In this age of reviews as a service, you’d be amazed how much power and honest recommendation has.

But most of all, thanks for listening and thank you for letting people interested in Japanese startups know about the show.

I’m Tim Romero and thanks for listening to Disrupting Japan.