Posts Tagged VC

Crowdfunding – New Source of Capital for Medical Industry


Wilson, Sonsini, Goodrich, and Rosati 2013 Medical Device Conference (www.wsgr/news/medicaldevice.com) focused on understanding the challenges that Medtech startups encounter in the current environment, and the emerging strategies to respond to these challenges.  It was heavily attended by industry CEOs, venture capitalists, industry strategists, investment bankers, market analysts, and life science industry professionals.

Wilson Sonsini Goodrich & Rosati

Wilson Sonsini Goodrich & Rosati (Photo credit: Wikipedia)

Below are some highlights from panel on crowdfunding.  Crowdfunindg is emerging as a source of potential new source of capital for early stage and emerging growth companies.  The panel was moderated by Phil Oettinger, partner at WSGR and the panelists included Andrew Farquharson, Managing Director at InCube Ventures, Scott Jordan, Partner at S. Jordan Associates, Greg Shearer, Managing Director at Healthios, and Ben Lee, Director of Business Development at CircleUp.

Oettinger gave a background on Crowdfunding.  He also discussed impact of JOBS act that is expected to enable advertising for private investment offerings and allow unaccredited investors to participate in online equity crowdfunding.  Thus far, crowdfunding has not lived up to the hype of being a startup panacea.  It caps an amount an issuer can raise to $1M, in any 12-month period and caps the amount a person can invest in all crowdfundings over a one year period at 10% of annual income or net worth of the investor.  Shares issued in crowdfunding transactions are subject to a one-year restriction, and there are other restrictions that render non-US companies ineligible to participating in crowdfunding.  Crowdfunding also must be done through a registered broker-dealer or registered “funding portal”, who cannot solicit investments and law requires extensive due diligence, including background checks on management and large stockholders.  None of the challenges however, have dampened the enthusiasm.  SEC has already stated that equity crowdfunding portals are exempt from certain restrictions and more changes are on the way.

Scott Jordan is an accomplished life sciences business development and investment banking professional with over 20 years of corporate experience in negotiating strategic corporate alliances, securing international licensing agreements, building national sales teams, and contributing to successful product development, approval, and launch.  In partnership with Greg Shearer, Managing Director at Healthios Capital Markets, and CrowdConnect, Jordan and Associates, launched Healthios Xchange fund, with an aim to assist emerging growth healthcare companies raise capital from accredited investors, and non-dilutive financing from foundations.  It offers three large value propositions, said Shearer.  Open access eliminates selection bias and does not curate the deals going on the site.  “Crowd” anchors the continuum.  H/X scoring based on sophisticated algorithms, makes it heavily data centric, similar to LinkedIn.  Healthios charges fees to companies that raise money on its portal, except in certain cases where it offers carry-free, fee-free feature allowing investors an opportunity to directly invest in companies, eliminating transaction expenses.  The fees will likely fall in the 5-10% range.  The fee structure will be different for non-profits.  Each company gets a company pitch page.  Several features including e platform button, e signature of docs, e regulatory assessment etc., enhance ease of use.

Ben Lee, a developer of innovative teeth whitening products at GoSmile, and founder of TaskRabbit, an online services marketplace, joined CircleUp, which offers consumer companies an access to funding through passionate, sector focused investors.  “Very simply, crowdfunding is a numbers game and it offers an opportunity to reach out to large number of people, who are looking to invest”, said Lee.  CircleUp has launched a highly active, fast growing portal and has gained considerable credibility.  Lee said, “We are 100% focused on branded consumer products” where there is little institutional investment.

Prior to his current role at Incube Ventures, Andrew Farqharson, a serial entrepreneur had co-founded Operon with no venture capital and sold it for $150M.  He also had launched a company in microfludics, Innovadyne, and had held several roles in research operations at Genentech.  At InCube, with Mir Imran and Talat Imran, Farqharson co-founded VentureHealth, a crowdfunding portal, to enable physicians and other accredited investors to invest in “compelling biomedical inventions”.  Farqharson said, this emergence of crowdfunding is very exciting and enables entrepreneurs to be less dependent on VCs, while it unlocks a lot of latent capital, and also gives investors more degrees of freedom.  Unlike other equity crowdfunding portals on the panel, VentureHealth has adopted a carried-interest business model.  They do not charge fees to the companies that raise capital but charge the investors; just like a venture fund.  In this model being driven by carried interest, they make money only if their investors do.  Clearly, they have an incentive to only support the most promising companies, unlike many broker/dealer sites that may have lesser interest in screening for quality, as their primary incentive may be to raise capital for as many companies as they can.  It will be interesting to see which approach holds more long-term promise.  My initial thoughts are, if I, as a rather naive investor, were to risk my money, specifically in the complex class 2 and class 3 devices, with many regulatory, reimbursement, and marketing challenges, I would prefer to risk it where some prior due diligence is done by seasoned and serial entrepreneurs like Imrans and Farqharson.  Explaining the success of InCube Ventures, Farqharson said, despite the challenging environment, they have had 3 exits this year.  BodyMedia was acquired by Jawbone, NFocus Neuromedical was acquired by Covidien and most recently Spinal Modulation was acquired by St. Jude.  Exists led to $700M+ in 2013, said Farqharson. They are actively screening investors.

Image representing Spinal Modulation as depict...

Image via CrunchBase

 

 

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Lessons for Starting a Medical Device Company in Silicon Valley


Mr. Michael Allen, a serial entrepreneur, (previously in executive roles at Xlumena, Metrika, and Chemtrack), and currently CEO of Vascular Designs, a targeted drug delivery company, talked about “starting a medical device company in Silicon Valley”, at www.bio2devicegroup.org .

 

Financing is one of the major early challenges that entrepreneurs face.  While it begins with a good idea, they also need to obtain some seed financing, and they need a short 2 page summary.  Their business plan should be an outline that includes some financial projections, some data about market and market need, information about regulatory path and reimbursement issues.  Advocates, typically medical experts, are also needed.  With these pieces in place, they would be ready to go for institutional financing and begin to meet the investors.

 

The VC model has changed, said Allen.  Traditional VC model used to focus around a goal with very high end value, in the range of $250 M where 10’s of millions would be invested.  It was built around the idea of large management teams in the early phase and a ready sales force in anticipation of the launch, that often never happens.  Many VCs who adhered to this model, are out of business.  The current model is to focus on a goal to achieve a moderate exit.  Team is scaled in proportion to the need, sales force is maintained at small level until product and market are demonstrated.  It is assumed that delays are inevitable and cash is king.

 

Allen talked about his experience and learnings from leading ChemTrak from seed stage to IPO exit, with 6X return.  ChemTrak was a diagnostic company, with a single use diagnostic kit to measure Total and HDL cholesterol and other non-instrumented quantitative tests.  He also shared lessons in leading Metrika, another diagnostic company that was sold to Bayer, with 1.5X return plus ongoing royalty deal.  Metrika’s several products included A1C test, giving patients with diabetes on the spot feedback on their A1C number and e.p.t. pregnancy test.   They had some good patents, but mixing electronics, optics, and chemistry was very challenging, said Allen.  Allen’s next company Xlumena, is medical device company with products aimed to advance image guided endoscopic therapy.  These products allow minimally invasive alternatives for diseases of the organs that surround the GI tract.  Summarizing some of the learnings, Allen said, CEO is responsible for everything, no matter who makes decisions.

 

Allen’s current company, Vascular Designs offers a new treatment option for people suffering from life-threatening illnesses like cancer, through targeted drug delivery, as opposed to systemic approach.  Through transfemoral catheter, drugs can be delivered directly into the tumor cells and block the blood supply.  It allows for high concentration of drugs delivered, while at the same time, reduces systemic exposure, thus minimizing caustic side effects.  This procedure can be performed as an outpatient procedure, takes only about an hour, and nothing is permanently implanted.  For success of a venture, Allen stressed, it is very important to hire the right people.  He discussed hiring process he follows and also emphasized the importance of spending time and writing a good job description.  The talk was followed by Q&A.

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2012 WSGR Annual Medical Device Conference – opening panel


Each year, Wilson Sonsini, Goodrich, and Rosati Medical Device Conference, brings together industry CEOs, venture capitalists, industry strategists, investment bankers, market analysts and other professions to understand the challenges and opportunities facing the medtech industry. The conference this year, focused on gaining insights and a deeper understanding of the challenges facing the Medtech start-ups and the strategies that can be effective in responding to these challenges.

The opening panel was moderated by Marty Waters, Partner at WSGR and focused on where the medtech investment is happening. Despite over $2.8 billion invested in medtech venture deals in 2011, clearly the major common agreement among panelists was that medtech funding is significantly down. Mike Carusi, General Partner with Advanced Technology Ventures explained, “we have investors too” and they are not investing significantly in medtech funds. When they do invest, Carusi elaborated, they look for opportunities addressing a drug market and his advice was that entrepreneurs figure out ways in leveraging the ecosystem. Yuval Binur, Managing Parnter at Orchestra Medical Ventures, advised that entrepreneurs focus not only on unmet clinical areas but also focus on unmet strategic needs. As VCs, he elaborated, “we need to fund strategic partners who can help with commercialization” and he advised that entrepreneurs pay attention to and build relationships with strategic partners. Using anecdotes, analogies, and terminology from Hollywood, John Friedman, Managing Partner & Founder with Easton Capital, said, “we need to go back to the future”, and if VCs see many companies being funded in the same area, they need to move away from it. Voicing a slightly different opinion from Binur, Friedman said, VCs should invest in companies that focus on fundamentally unmet needs or are developing standard of care at 10-20% of the cost. He said VCs are moving away from early stage and are looking at deals which are capital efficient. Strategically, it is much more important to dominate the region locally, which is also easier and more effective, said Friedman. Opining on emergence of wireless technology, he advised that in more of a serviceable model, the leaner the IP, more protectable it is.

Bill Harrington, Managing Partner with Osage University Partners, agreed, the age of incrementalism and me-too’s is gone. Basic, hypothesis based research is happening in Universities and their fund focuses on capturing that. They have an increasing database of university partners with access to participating companies. Harrington added, that while device companies mostly have one formidable asset, with pharma companies, there is more of a possibility to do licensing deals or license assets. There is greater interest in late stage deals because with market traction, there is some indication if it is strategically advantageous and how it is doing, said Harrington. A lot of companies highly underestimate the risks and costs of commercialization. Speaking on emergence of wireless technology, Harrington said that outside the medical field, technology is rapidly moving ahead but they still lack intelligent ways to use the data and there are opportunities in that area. Dirk Kersten, Partner with Gilde Healthcare Partners, said, they are looking at companies with reasonably good products serving real market needs. With wireless technology, there are huge opportunities in home health care, to provide better care, cheaper and for longer duration, said Kersten.

The blogs that follow will focus on other discussions.

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