Investors Warm To Promising New Medical Firms—And Fund Them

Originally Published MDDI May 2003

NEWSTRENDS

Investors Warm To Promising New Medical Firms—And Fund Them

by Maureen Kingsley

One of the biggest challenges a start-up company faces is fundraising. The good news is, after years of wary venture capitalists shying away from the medical device industry, these investors are now realizing a new-found confidence in the device sector. 
The reasons for this shift are many and varied. For starters, says Robert (Robin) Bellas, general partner and head of the Lifesciences team at Morgenthaler Ventures (Menlo Park, CA), there exists a “relatively welcoming regulatory climate”—as opposed to that of drugs, for example. “The risk in getting a device approved at FDA is far lower than getting a drug approved.” 
Bellas also points to a reduced reimbursement risk. The Center for Medicare and Medicaid Services, he says, “with new management in place, is more likely to approve the reimbursement of money-saving new procedures that are less invasive and have lower complication rates, because they see that the patient can get out of the hospital more quickly at lower cost.” The combination of these three reduced risks, in Bellas's view, has “caused some VC colleagues” of his to spend “as much or more in new investments for medical devices than they have for biotechnology.”

Having said that, Bellas offers a caveat. “The caution I would have for anybody thinking about increasing their investments in medical devices is that there are also far fewer billion-dollar hits in the medical device market.” The market cap of the device industry as a whole, he says, is about $400 billion across the public companies. “Historically, it's been hard to develop billion-dollar firms,” he says. 

In addition to working for Morgenthaler Ventures, Bellas sits on the Board of The Foundry (Redwood City, CA), a device incubator. His colleague Hanson Gifford, The Foundry's CEO, offers his take on why medical devices are so attractive to both The Foundry and the investing community at large: “The ability to add value and reduce risk significantly, fairly quickly, fits well in the medical device arena,” he says. “You've got the chance to make prototypes fairly rapidly, do animal studies fairly rapidly, to prove a concept will work in vivo-that reduces risk dramatically. So, I think [added value and reduced risk] are what makes it work in the device world.”

Allan Will, chairman of The Foundry and, like Bellas, a general partner with Morgenthaler Ventures, offers some insight into what investors are looking for in a potential funding recipient. He advises medical start-ups, “You must have a great idea that addresses a real medical need, that represents a significant market. You must have a good management team in place early on. The intellectual-property picture needs to be clear, and you must have a proof-of-principle.” He adds, “Investors are demanding more to be in place earlier in the history of the company. They look for earlier clinical data, they look for earlier confirmation of intellectual property, they look for a company to have a more-complete management team in place earlier in the company's history.”

Companies for whom these requirements seem overwhelming, Will says, are good candidates for incubators. “When a firm is being developed by a group like The Foundry, it has “a team of engineers in place, experienced senior management available, a facility with a machine shop and a laboratory, connections to clinicians,” and the ability to be identified as a company “from day one.”


Copyright ©2003 Medical Device & Diagnostic Industry