Reduced VC Funds Means New Challenges for Medtech Start-Ups

A reduced pool of venture capital presents some new challenges for medical device start-ups, which must now rethink strategies for attracting funding. Experts say VC dollars are still available, but the amount of dollars and the timing for exits have changed. Old routes for seeking funding are no longer viable.

Sherrie Conroy

September 23, 2010

3 Min Read
Reduced VC Funds Means New Challenges for Medtech Start-Ups

The change can be attributed to several economic reasons. “The venture community itself was bloated and had too many participants,” says Paul LaViolette, venture partner with SV Life Sciences (Boston). “They had too much money and created too many companies over the last decade. The VC community is going through a retrenching to some level that is not yet normalized. It’s going to take time for it to happen.”

LaViolette says that there is also an overarching theme of capital efficiency, which means VCs are taking less money in and spending those funds in a more graduated way. For example, rather than putting $20 million into a start-up, he says the dynamic now would favor putting in much less money and making sure the company’s mission and milestones are documented and then follow with more money later.

“It’s much more stepwise and progressive than it was in the past,” he says. “The last thing you want to do is pull the trigger on that investment decision until you really have reduced the likelihood of failure,” he says. “Companies are spending more time up front doing preclinical work. It’s taking longer but it also reduces the total capital in before reaching big binary outcomes.”

With multiple factors influencing medtech investing, experts note that it is of great concern for patients awaiting important new therapies. “The global economic slowdown has resulted in a difficult public market, and this has directly limited liquidity for investors,” says Josh Makower, MD, founder and CEO of ExploraMed, a medical device incubator. “As a result, these investors are reconsidering what areas they should place their investments. At the same time, the FDA environment has become extremely difficult, and many companies have become ensnared in lengthy and costly delays advancing their products to the market.

Makower says that as a result, small companies are requiring substantially more capital to reach the market, and many are running out of cash. “The venture groups that fund these companies are also running out of cash, and several firms are closing shop or exiting investment in the space.”

LaViolette also says that the strategic buyers—large device companies—are under more pressure to grow earnings and top lines. “They know that their R&D pipelines are becoming a little bit less productive and higher risk. And therefore they need to save money. They are reducing investment in some of their higher-risk programs.”
He says that the large companies will soon be ready to buy again. “They’ve been slowed in that process over the last year or two just because of the macroeconomic challenges, but they’re all accumulating cash. They’re looking to grow.”

All of that power, he says, is going to continue to be unleashed on venture-backed acquisitions. “It’s going to be healthy. In many ways, the need for venture-backed start-ups is as great as ever. You’re going to see the strategic buyers return to being acquisitive. It may only be 60-70% the size that it was before but it will return to some health.”

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