Fledgling device companies can get a leg up with VC firms by developing a product that is ‘unique and protectable,’ says Tibion’s anchor investor.
The cofounders of Tibion Bionic Technologies may want to send a thank-you note to Will Smith for helping their start-up get off on the right foot in 2004. Ted Driscoll, a technology partner at Claremont Creek Ventures (CCV) in Oakland, CA, says that Smith’s “I, Robot” was in movie theaters when he first saw a lab demonstration of Tibion’s Bionic Leg. Driscoll recalls being impressed by the device’s capacity to provide enough force “to lift a person out of a chair,” its unique lack of resistance when turned off, its computer-guided technology, and the 25 or so patents.
But the technology zeitgeist also played a role in CCV’s decision to invest venture capital funds in the start-up that was cofounded by Tibion’s chief technology officer, Robert Horst. “I, Robot” was packing theaters, and “there was a lot of talk about bionics,” Driscoll says. Sold on the applied technology, the VC executive realized that a robotic body part was no longer confined to the fictional realm of big-screen blockbusters “They could actually do this,” Driscoll thought.
Six years later, Sunnyvale, CA–based Tibion is set to finalize a $15-million B-round investment, and the Good Shepherd Rehabilitation Network in Allentown, PA, has become the first healthcare system in the United States to use the FDA-approved device. Stroke patients at the Whittier Rehabilitation Hospital in Haverhill, MA, are also using the leg, while Stanford University and UC San Francisco are conducting research with it. The leg is not a prosthetic but a rehabilitation device that patients wear during therapy until they relearn how to walk on their own.
In addition to his position as a CCV technology partner, Driscoll is an active angel investor in the Life Science Angels and a founding director of the Sand Hill Angels. Before becoming a VC investor, Driscoll helped found five imaging-related companies, including Be Here Technologies, where he was CEO. He also was responsible for MRI, ultrasound, digital x-ray, and related technologies as division president and CTO of Diasonics. At Diasonics Driscoll directed the team that developed the first commercial MRI scanners.
Holder of more than 40 U.S. and foreign patents, Driscoll received a PhD in digital imaging from Stanford, a masters degree in computer graphics and remote sensing from Harvard, and a bachelor’s degree from the University of Pennsylvania. CCV continues to be Tibion’s “anchor investor,” says the VC executive. Besides discussing why Tibion knocked his socks off, Driscoll talks to MX about what he looks for in a potential device company, the importance of securing IP rights, CCV’s view of the investment climate, and what’s in a name.
MX: As an investor in medical device start-ups, what elements do you look for that convince you to either pony up or not?
Ted Driscoll: The first thing I’m trying to look for is a market that has some venture scale to it—something that I can scale to a venture return. We don’t want to come up with a device that serves only left-handed Lithuanians; we can’t necessarily make a sufficient return to justify the time and money. We are looking for deals that will, first of all, justify the years we will put into them and the millions of dollars we will put into them. So we need to make multiple millions of dollars back to justify that. That’s a key one.
I’m also particularly interested in technologies that are unique and [IP] protectable, as opposed to just “me-too” technologies.
Generally speaking, what draws you to invest in the medical device industry?
I also find it very important that the entrepreneurs be able to succinctly and directly describe what they’ve got. This is related to [questions] one and two together. In other words, if the entrepreneur can’t …get me interested and explain what he’s got and isn’t able to describe why it’s unique and why it’s important, then he won’t be able to convince other people to invest in it.
With that in mind then, what attracted you to Tibion?
First thing, they showed us a technology capability that I had never seen before: a knee brace that could provide hundreds of pounds of force to lift a person out of a chair, even a heavy person out of a chair….
Second, it would swing back and forth like a pendulum. It didn’t have resistance. Most braces I’d seen in the past that had a hydraulic system that gets that much power meant that you do get resistance when it was turned off. When it wasn’t giving power, you got resistance. You’re effectively pumping a fluid in and out of a piston. What this machine could do—and I was seeing it on a bench in their laboratory—it was capable of lifting a 250-lb weight, but when it was turned off or sensed that it wasn’t needed, it could move back and forth like a pendulum.
That was unique. I had never seen that before. They had very good patent protection for it; something like 25 patents for that. That was interesting. At the time the movie “I, Robot” was in the theaters. There was a lot of talk about bionics and things like that. And I suddenly thought…they could actually do this. This isn’t a movie thing any more…. All the pieces to make a bionic leg were now available. These guys had bionic arrangements that could do something unique and protectable. We were impressed by that technology, and we were the first institutional investors in the deal and continue to be their anchor investor.
How important is airtight IP protection in making a decision to invest?
I tend to be old school in that I need to look at that.
I think in this day and age of Web applications becoming companies, it’s harder to make an IP case about your product. It’s hardest to apply to software patents. I have a way I express it: Not having good IP protection is submitting yourself to something called a “success tax.” What I mean by that is if your company fails, nobody cares. But if your company is successful, you have to pay a “tax” [if you haven’t secured your IP, because you may have to sue to protect your rights, for instance.]
Out of 10 medical device concepts or technologies how many would you say are actually viable or worthy enough to attract VC investment?
Let me answer that question in two parts. How many do I think will get invested in by somebody? I would say two out of 10. We, however, have a certain focus. We are looking for things that are more capital-efficient, more IP-oriented, that have a computer in them. I would guess we’re investing in fewer than one in 10. Our investment focus [is different from] the overall industry’s investment focus.
Do you sometimes find that the device technology is sound but the inventor or principals lack business savvy or good business plan?
Yes. Or the start-up team may be missing some important component as they commercialize. They might not have good marketing and sales, for example. Most early start-up teams tend to be strong in technology because [that’s what their focus has been.] As early-stage investors, we first look for good, protected technologies in big markets, and we do care if the entrepreneurs are experienced and knowledgeable. But we expect to do some company construction. We expect to help build the team.
How would you describe the VC investment climate at present? Have VC firms been more discerning or even skittish?
I think you could say they look like they’re more discerning or skittish. I think what’s really happening is the investments they made a few years ago are taking longer to reach profitability. They’re taking more cash, and therefore VC firms have to preserve more cash for their existing companies and are making fewer new investments.
Do you see any changes then for VC companies going forward?
You need to see some return on previous investments…. I think the overall VC community will open up and invest more aggressively. Now, Claremont Creek Ventures is a little different. We’re a younger fund, and we raised money in 2008, so as a consequence, we are as active as we were in 2005 and 2006, whereas the overall VC community maybe is doing less early-stage investing because they’re preserving capital for existing companies.
How do you go about finding medical device companies, or do they find you?
There are a variety of pathways. We go to a lot of conventions and appear in pitch sessions with the local entrepreneurs where people pitch us. I’m also a member of four different angel [investment] groups and look at their deal flows frankly. A lot of the good deals come from people we already know from the past or have invested in the past successfully.
Let me put it this way: It’s very rare that a deal gets thrown over the transom unsolicited by e-mail in the early morning. I don’t think that we end up investing in those. I don’t think that has ever happened.
How do awards such as the recent MDEA that Tibion received help a device company, if at all?
I think it gives you visibility. Those [awards] are trailing indicators, not leading indicators, that are the result of having gotten investment, not a precursor to getting it. I can’t say that alone would make the difference in our pulling the string on an investment. But it’s certainly a positive, and it helps.
What effect has the passage of healthcare legislation had on the device industry and on the investor community?
I think it’s real early. This healthcare act is not fully in effect, so I think it’s a little early to say what the result will be. But I know that in our research on start-ups they’re now paying a little more attention to the issue of outcomes and reimbursements and the economic analysis associated with it. That’s because of the things the healthcare legislation is trying to emphasize, like outcome. We are paying more attention because in the future companies are going to have to make that case.
How was the FDA approval process for the bionic knee?
The bionic knee is similar to other external knee braces. It’s what’s known as FDA Class II exempt. That means we just had to certify in a letter to FDA that this device had little or no prospect of hurting someone; it could only help them. As long as we have good manufacturing principles and make no extraordinary claims that it cured psoriasis or something, we could go to market. It’s known as a “letter to file.”
How much does it cost, and how has the reimbursement process been?
There are two ways in which you can acquire a Tibion knee. One is to buy it outright as a piece of capital equipment. It’s approximately $36,000 retail; you’re probably looking at $40,000 or so if you buy it with disposables. The alternative is pay-as-you-go. It’s like a lease arrangement. You pay on a monthly basis. In fact you in effect rent it from us.
There are reimbursements for the use of the knee brace for a one-hour stroke rehab session. There’s a standard [reimbursement] code. The idea is that they can do more patients because with the knee on the patient doesn’t require two rehab specialists, only one. Today with stroke patients they need another specialist because the patient could fall over. They have to be able to catch him. In effect, they get an increased number of patients coming through [the rehab center.] The idea behind paying on a monthly basis is that [the knee] is paid for by the increased reimbursements they receive at the rehab clinic or hospital.
We are just launching that process now, which is renting to purchase. This is a fairly expensive piece of capital equipment. It’s a long sales cycle because you have to convince not only the clinic but also the CFO and then convince the financial people, and the reimbursement manager, and they have to go look at a big spreadsheet to make sure they have the money to pay for this piece of capital equipment. It’s a much easier [acquisition] process, and it also generates a recurring revenue source for Tibion.
What experiences did you derive from your previous executive positions that have helped you with medical device investing?
First of all, my medical device experience was in developing MRI scanners. I’m certainly familiar with the capital equipment issue, the long sales cycle. I was very happy to see that these guys at Tibion know that the knee brace could be used in a recurring revenue model—to in effect rent it. The other thing I learned from working in medical devices…is an understanding of the politics of the medical care system. You can’t, for example, sell a product that allows a radiologist to do a procedure that used to be done by a cardiologist. If you give a radiologist a product that allowed him to do procedures done by a cardiologist then the radiologist will get more revenues and the cardiologist will get less. That means it will get very difficult to sell the product because cardiologists are very important in a hospital. There are a lot of politics [and a need to understand] how the specialties interact in a hospital and who holds power. An obvious example is a product that allows a nurse to do cardiac surgery.
I would say that’s one of the things I bring. [I have long experience] in medical device investment and in understanding the politics and money flow in hospitals.
What do you see as the biggest challenges for the device industry, say, over the next three to five years?
I think we’re going to have to make sure that the devices being introduced to the marketplace do actually improve outcomes. In other words, they aren’t just sort of whiz-bang, cool shiny new devices that seem like they should work but maybe don’t. Actually, we’re going to have to be prepared to do that and respond to, frankly, the 30 million new patients. We can’t afford to use throwaway catheters at $1000 per catheter for every single one of them.
TheFunded.com Web site has a few reviews of Claremont Creek Ventures by prospects who were less than flattering about their experiences during pitches. How do you view these types of sites? Do you find them helpful? Annoying? Sour grapes?
As you probably know, most of these are referred to as “the unfunded.com.” Most of the time, like everything you see on the Web you’ve got to read it with a grain of salt. I don’t pay much attention to it.
I’ve made the observation a number of times that VCs typically invest in fewer than 1% of the companies that they see. That means they’re saying “no” 99% more than they’re saying “yes.” By definition. I actually wrote a post on the Claremont Creek blog about what “no” means. It doesn’t mean you’re stupid. I try to help people…. If you’re good as a VC, you try to give people of indication of why you turned them down.
How important is finding the right name for a new device company?
I’ve started five or six companies, and I’ve had to pick at least three names. I’m aware of the issue. First thing I say to people is you do need a handle. You do need a name so when we talk we’re not talking about “that-deal-the-guy-came-in-on-Tuesday-and-talked-to-us-about.” I think it helps to have picked a name that’s somewhat descriptive of what you’re doing. Avoid doing a name with a lower-case “I” that ends up “tronics.” There are just so many of those that they just blur together. I think if it’s nice-sounding name with a nice connotation it definitely helps getting funded.
Do you have to do extensive name searches?
Nowadays there are Web sites that spit out names. I will peek at a thesaurus. There are groups that like to find biblical names and there are groups that like to find Latin names. Frankly, with a lot of entrepreneurs from Southeast Asia you see a lot of Indian names and companies named after some Sanskrit word for “efficiency” or something like that.
I think a name is important, and I think it’s worth paying attention to. Once we picked a name and two weeks before we launched we found it had already been taken by another company. So, when you pick a name, check it out immediately, and make sure you get it filed.