Every venture firm claims to be looking for great companies to support. The reality is that many have no money for new investments, having reserved their remaining cash for their current portfolio.
How can a medical device entrepreneur find the firms that have the capacity for new investments? How can an entrepreneur find fresh money? Wouldn’t it be great if someone created a list of life science venture capital firms that have recently raised money?
A great coder with a great idea can start an amazing web 2.0 business. In the web startup world, college dropouts create billion dollar businesses by their mid-20’s. In the medical device industry though, experience counts. You’ll need a VP Regulatory Affairs that has several FDA approvals in the last 10 years. Your head of product development should have driven several products successfully to market. Your head of marketing should be a creative product launch veteran. I hope your manufacturing team has built many medical device products before.
“Ramen profitable” doesn’t work for medical device companies. Medical device companies need experienced talent. Experienced talent deserves fair compensation.
According to the Boston Globe, the top New England venture-funded sector in Q1 2011 was medical devices and equipment, at $145 million. That’s great news and a testament to the local medical device innovation economy.
On the other hand, life science venture capitalists in New England closed no new funds in Q1. That’s not great news. There has been some fund-raising activity, so we can hope for a better Q2. In fact, Bessemer Ventures closed a $1.6B fund in early April, which will include medical devices as a target investment sector, so Q2 is off to a good start.
One of my most popular posts concerns employee stock options (see Stock options – everybody in the pool). Last week, Fred Wilson of Union Square Ventures described his formula for granting employee options, on his blog AVC. Everyone gets options, according to his transparent formula. Makes a lot of sense to me, and I’m sure it will for you. Read his post here.
Wow – two big medical device exits were announced in the past week: Boston Scientific bought Sadra, and Medtronic bought Ardian. Most successful medical device startups are ultimately acquired, enabling their investors to achieve a financial return and reputational enhancement. (With sufficient return and reputation, the investors will be able to raise another fund and keep their jobs.) Relatively few medical device startups remain standalone businesses, earning a return for their investors by going public or throwing off profits. Still, it’s usually better to build your company to be successful standalone, as it puts you in the best negotiating position vis-à-vis acquirers if and when they come.
Earn-outs – tying part of the acquisition price to the achievement of future milestones – have become increasingly common in medical device M&A. In April 2010, Start-Up Magazine reported that earn-outs were used in 9% of the medical device acquisitions in 2008, 13% in 2009 and an astounding 31% of deals in the first quarter of 2010. As an example, in August 2010, Hologic completed its acquisition of Sentinelle Medical for $85 million, plus an earn-out tied to a multiple of incremental revenues over the next two years.
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.
My friend and serial CEO Dan McNulty encouraged me to write about stock options. My experience is that stock options encourage employees to “think like an owner. ” I have always found that my colleagues are motivated by the potential of their options, and are interested in the drivers of their stock’s valuation. So it’s an important subject and I appreciate Dan’s suggesting it.
Stock options are a subject that has been extremely well covered on the web, particularly by VentureHacks and Mark Suster of GRP Partners. So, in this post, I’ll mostly point you to other blog posts. Read them. I’ll also try to provide some helpful information specific to medical device companies, and share a couple of thoughts from my experience.
You need a great slide deck to raise funds for a start-up medical device company. If your presentation would be right at home in a scientific or medical meeting, it’s not the right deck. A great deck tells the story of how investors in your company will do well (financially) by doing good (improving medical care). It’s all about the business, and only briefly touches on the technology.
VentureHacks totally nails the deck template for tech companies. If you haven’t already read http://venturehacks.com/articles/deck, do it now. Read the comments too. Even better, read the whole VentureHacks archive, and buy their book at http://venturehacks.com/pitching. Pay attention to their sage advice: “Put pictures in the slides and text in the notes,” so that your deck can be used as both a presentation and a handout.
Medical device companies are different, so the VentureHacks template isn’t quite right. Today’s post provides a slide deck template for a company developing a single medical device product to address a single unmet need. Later posts will describe a slightly different template for “platform” companies, where the company envisions several new products addressing multiple market needs based on a core technology platform.
I’m posting this template and asking for your feedback. Convince me that you have an improvement, and I’ll update the template. Let’s get started.