It’s a Great Time for Medical Device Venture Funding

[NOTE: This post was first published in AccountAbility Outsourcing newsletter. AccountAbility is a strategic consulting firm that provides onsite outsourced accounting, finance, tax, and human resource solutions]

Raising venture funding for medical device companies has never been easy. Given the current economic environment, a more conservative FDA, and uncertainty about healthcare reform, the gloom index is at an all-time high. Bijan Salehizadeh of Highland Capital blogged recently of shrinking fund sizes and fewer med-tech deals closed. In July, Mark Heesen, president of the National Venture Capital Association (NVCA), lamented the “Darwinian environment in which the venture industry is operating.” One might think that the venture capital window is practically closed.

On the contrary, it’s actually a great time to raise money for medical device companies. Trend data from the NVCA and PricewaterhouseCoopers (PWC) indicate an increase in medical device venture funding in over the last four quarters, back to historical levels. Several life science venture firms have recently closed new funds and are beginning to invest, while several more are fund-raising and expected to begin investing later this year or early next year. While there won’t be a repeat of the 2006-2007 bubble, the next two years are shaping up to be the best in the past eight years.

In Q2 2010, trend data from the NVCA and PWC (Fig. 1) showed a medical device venture bubble in 2006 and 2007, followed by a corrective dip in 2008, and a return to the trendline in Q2 2010.

Figure 1: Venture funding of medical device companies 2002 to 2010 Q2.

When looking at companies’ first financing events (i.e. seed or first round investments), the same trend appears (Fig 2).

Figure 2: First venture funding of medical device companies 2002 to 2010 Q2.

In May 2010, life science trade magazine Start Up reported that:

Since 2009, venture capital firms that invest in life sciences have raised more than $7 billion in capital from limited partners. Top-tier venture firms have allocated hundreds of millions of dollars for device investing in particular. Essex Woodlands has approximately $300 million to invest in the sector, New Enterprise Associates $250 million, and Domain Associates, which raised a $500 million fund last year, estimates it will spend $150 million on medical devices.

The fund-raising activities continue, including a $523M fund raised by SV Life Sciences, as shown in Table 1.

Table 1: Fund raising activities by life science venture capital firms, March 2010 to August 2010

With so many venture capital firms forming new funds, it’s no surprise that 2010 Q2 investment levels are back on track. What does it take for a medical device company to get funded? Salehizadeh of Highland says “Cost-effectiveness is clearly the holy grail.” In a 6/29/10 interview with PE Hub, SV Life Sciences Managing Director James Garvey states that 75% to 80% of his new fund’s investments will go to entrepreneurs they have backed before. No VC will invest without a clear value proposition for the patient, the physician, the provider and the payor. The hurdles are indeed high. Yet a company solving a real market need, with the right team and the right plan, can absolutely get funding.

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