There's Still Hope for Medical Device Startups

Much of the venture funding for medical devices has dried up. But that's not necessarily a bad thing, said members at a panel at BIOMEDevice San Jose.

Brian Buntz

Opportunities abound in the medical device space.

That was the impression one got from listening to a Tuesday panel of Silicon Valley-based medical device entrepreneurs. One panelist, Kathy Stecco, MD, said Wednesday that she founded a startup that had a 20x return--without any venture capital backing.

"I am pushing people away from the VC route. The more you can bootstrap and look for alternative funding, the better it tends to be for the long-term growth of your company," said Stecco, who is the co-founder and chief medical officer of Panthera Medtech, a startup acquired by Avantec Vascular Corp. (Sunnyvale).

Stecco stated that many medical devices could be developed by small teams of self-financed rogue entrepreneurs working with a team of consultants. "If you have a 510(k) device, you can often self-fund your device. Go shopping at Fry's Electronics, build your prototypes, do your testing on your own--do whatever you can on your own," she said. "It is doable to get a 510(k) by yourself--especially if you don't need clinical trials. You can either use your own financing or apply for grants to help with funding."

Jim McGough, co-founder, EdgeOne Medical is also a fan of what he calls "small ball-- capital-efficient medical device development."

"If you can get the right team and IP and prototypes and design history file, you can sell that bundle for a 5 to 10x return in four or five years," McGough says. "It is not something for a first timer though."

Other panelists agreed that lean medtech startups can be successful, although some still stressed that having a traditional board can be an asset. "It can be helpful to have investors as team members," says Michael Weickert, CEO of Sonescenece and S.E.A. Medical Systems. "You are not always in the case of being able to choose your investors, but some of them can offer a lot of value to your team."

"Board members with operational experience can be really helpful," agrees Rodney Brenneman, CEO of Rox Medical. Still, it is important to try to sculpt your board so they are empathetic to your needs. "Find people with at least some level of empathy. You don't want board members to say things like: 'Why don't you fire so-and-so. They don't seem valuable to me.'"

Tom Ross, CEO of Pontis Orthopaedics, recommended that medical device startups evolve their team based on how far the technology is from commercialization. More mature firms might need more full-time help. Or the business trajectory for a startup might change, requiring the firm to turn some of their full-time staff into consultants.

At all stages of the game, it is helpful to constantly look for third-party, objective insights from people who are not personally interested in your company's growth. The feedback from your investors obviously doesn't fit that criteria. "The reality of sitting in board meetings is very painful," Stecco says. "You can get different syndicates that end up fighting and it can get contentious. A lot of egos can get involved."

Brenneman, CEO of Rox Medical, recommended that startups go overseas looking for funding. "There is a lot of money coming out of China right now," he says. "It comes with big strings attached, but there's a lot of funding there. ... There's also some off-shore money coming from Europe into the U.S. market. If you are going long and have a PMA device, you might consider that."

If you go looking for Chinese money, it is a good idea to get Chinese patents, says Joel Harris, senior director of intellectual property at InCube Labs (San Jose). "It used to be that people didn't take the Chinese patent system seriously, but it is increasingly important. China is now part of the WTO. Any Chinese partners are going to want to see that patents are filed there," he said. "Just keep in mind that when you file in various foreign jurisdictions, it can get very expensive."

Harris also recommended that even bootstrapped medical device startups avoid skimping on intellectual property. "I have seen multiple inventors who have written their own patents but get often into trouble," he said. "You want to develop a relationship with a medical device IP attorney. In some cases, firms will take equity positions instead of direct compensation. If you start off with bad applications, you will have to rewrite them or go through multiple prosecution cycles. Those can cost you $5000 to 10,000 per cycle."

Brian Buntz is the editor-in-chief of MPMN and Qmed. Follow him on Twitter at @brian_buntz.

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