Predictable and repeated returns on investments in medical devices have been elusive during the past five years.
That has led entrepreneurs who are still active in medtech, where many have withdrawn or failed, to search for the most effective models to finance a successful startup.
Of course, there have been some exceptions where above average exits have been driven by investments in ground-breaking technologies such as TAVI, refractive surgical devices and surgical oncology tools. In large part, however, too much capital has been buried in companies hindered by lengthy regulatory and reimbursement processes and expensive distribution efforts.
|Wende Hutton, General Partner, Canaan Partners|
Now in meeting with many entrepreneurs hoping to craft a next-gen device startup, I am discovering more evidence that startups are getting increasingly creative during this financing drought in medtech hubs such as Boston, the Bay Area and Orange County. Capital efficiency is the name of the game and doing more with less is therefore creating a new model for return on investment in medtech.
The jury is still out on whether these startups will thrive, but these models for capital efficiency are looking very promising for medtech innovation. Here are four models of startup innovation I am seeing:
The Garage Shop/Band Model:
New design teams are working in garage shop conditions with very low overhead and pared-down or virtual teams. Some are funded by angels, a few by venture capital, but the hallmark of these deals is less than $10 to 12 million of funding to reach meaningful clinical data and even, regulatory approval. Companies such as Sinusys in sinus dilation and Medina Medical in aneurism repair exemplify this approach.
Expert Teams Utilizing an Outsourcing Model
These lean teams can only stay lean if they have incredible insight into the right technical solution from the get go. With unique market and IP perspective, a savvy team can be laser focused on the mission critical activities while ancillary services like regulatory, contract manufacturing and testing can be outsourced to keep overhead low.
Additionally, the incubator model is well in play with groups like Fogarty Institute for Innovation, ForSight Labs and TauTona Group showing fast and nimble device development. Examples of companies who are lassoing up great talent but have used metered services from the outside include Serene Medical in aesthetics and MitraSpan in mitral value repair.
Better, Cheaper, Faster (Really! This time we mean it)
Value is appreciated in the hospital enterprise, especially if it is truly better clinically, is a cheaper option through cost reduction and faster in terms of treatment times for patient care. Branchpoint Technologies is hoping to harness “BCF” for intracranial pressure monitoring while Relievant is striving to provide “BCF” as an alternative to spinal surgery to treat chronic low back pain.
Proof of Demand Focus (or “Sell the company before it costs too much”)
Commercializing on a targeted basis to establish productive key accounts can pay off. Rather than raising oodles of capital to field a 30-person sales force, companies are setting up strike force distribution of eight-to-10 reps to demonstrate a positive revenue run rate.
This enables a small company to build bridges to strategics early with $20-to-30 million in account revenue and determine if an early strong exit is possible with lead account penetration. Companies putting lead account sales models on the map include Neuroptics in quantitative pupil assessment for traumatic brain injury and Minimally Invasive Devices(MID) in minimally-invasive surgery.
Many of us watching these next generation companies are cheering in the hope that medtech innovation takes a new form. At that point, capital will flow back to the sector in a more sustained fashion.
[Featured Image Credit: iStockphoto.com user aluxum]
-- By Wende Hutton, General Partner, Canaan Partners, a venture capital firm. Of the companies mentioned above, Canaan is an investor in MID, Relievant and MitraSpan