Large Device Firms Working More With Startups Than Before But Want Some Rights In Exchange

Posted in Medical Venture Capital by Arundhati Parmar on July 18, 2013

Large pharmaceutical companies have had a history of working with startup companies in a way that big medical device companies haven't.

That is changing and there is evidence of a growing trend of large device working with startups, said Kirk Nielsen, a venture capitalist with Versant Ventures, a healthcare-focused firm. Nielsen, managing director, is leading the healthcare venture firm's Minneapolis office in order to find promising Midwestern startups that Versant can fund. 

Kirk Nielsen, Managing Director, Versant Ventures

A former Medtronic executive, Nielsen is also working with large device firms - and there is no dearth of those in Minnesota - to understand their innovation needs. In an interview last month, Nielsen expanded on this trend that he is seeing where strategics - industry jargon for large acquirers like Medtronic, Boston Scientific and others- are investing in startups more than ever before.

I think there has been a trend toward them being more active so I think if you look back a number of years ago, [you had] JJDC - J&J's venture arm, Medtronic didn't have a venture arm but they were pretty active and made small investments - 50, 60, 70 investments in a year - and you didn't see as much from the other companies.

Now you look and you have JJDC, Medtronic, you've got BSX that is starting to build out that capability and you have Abbott and you have Covidien. So I think you are seeing a blending of traditional VC and strategics and what you are seeing increasingly is that they are more willing to go early but in many cases they are looking for some rights when they do that. That's leading to some very interesting opportunities where even at an early stage project we are working hand in hand with a corporate, and that goes back to the concept of VCs being outsourced R&D of strategics.

"Some rights" essentially translates to being able to buy the startup at a future date once they invest in it. An example of this is the deal that St. Jude Medical struck with California neurostimulation firm Spinal Modulation. The Minnesota medical device maker announced June 7 that it is investing $40 million in the startup and reserving the option to buy it for no more than $300 million plus milestone payments.

This is all the more interesting given that Spinal Modulation had two other strategics that had invested in it - Johnson & Johnson Development Corp. and Medtronic. 

"Corporates increasingly want some rights," Nielsen said. "Historically the data shows that the ultimate buyer of a company may not be who the strategic investor had been."

--- by Arundhati Parmar, Senior Editor, MD+DI


To learn about funding straregies, attend the Entrepreneurship track at the MEDevice San Diego Conference & Showcase, Sept. 26 and Sept. 27.


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