Device Incubation: Challenges in Making the Model Work

Full article reprinted from Start Up - February/March 2010

Device incubators have their proponents and detractors, but remain a constant source of company creation. The big question: is this model sustainable? Read more...

Device Incubation: Challenges in Making the Model Work

Medical device incubators create companies with the goal of building enough value and reducing enough risk to make these companies VC-investable.

Dilution and long time horizons for portfolio company exits are perhaps the most prominent obstacles that incubators grapple with.

Although a number of companies created by incubators do successfully exit, incubators continue to face criticism by some in the venture community of inflated valuation expectations.

As medical device incubators and their companies progress, time will tell if their presence will be lasting.

The classical concept of new company creation is that of a one-time effort, where a collection of individuals come together, perhaps raising outside funding, in an attempt to develop and commercialize an idea. The founders may leave the start-up to create new companies as it grows, but on day one they seldom have a plan in place for serial entrepreneurship, or if they do, they are not formally organized to facilitate repeated venture formation. We know that medical device company creation frequently does not fit this traditional model. Instead, it incorporates, to varying degrees, a more systematic, deliberate process of venture formation that is applied repeatedly by the same individual, organization or networks of individuals and organizations to create and cultivate multiple companies, a process which has been described in general terms as institutional innovation.

Institutional innovation may describe the operations of an entity dedicated to the formation and spin-out of companies, the relationship between a venture capital firm (VC) and the serial entrepreneur it provides seed funding to, or a program within a large company to develop technologies outside of the focus of its existing business units. Further, the different forms of institutional innovation may be characterized more specifically in a number of ways, either as incubation, acceleration, or as an entrepreneur- or executive-in-residence program, or be given no name at all.

The purpose of this article is to examine the device incubation process, which is probably the most well-known of medical device institutional innovation models. Incubators have their supporters and detractors in the device community, with some believing in this as an effective means of bringing new technology to the market, while others believe the process has its shortfalls, particularly in terms of not adding sufficient value to and slowing down the company creation process.

This article provides an overview of the device incubation model and its challenges. Specifically, the article discusses what it means to be a medical device incubator, describes various arguments in favor of medical device incubation, and looks at common types of incubators and some of the critical tasks that incubators undertake for their companies. Finally, the article examines some of the key concerns regarding device incubators, both relating to the issues that incubators must manage in order to make their economics work and the overall value that incubators create. Dilution and long time horizons for portfolio company exits (i.e., by acquisition or IPO) are perhaps the most prominent obstacles that incubators grapple with and, although a number of companies created by incubators do successfully exit, incubators continue to face criticism in the venture community of inflated valuation expectations.

By Darius Kharabi and Stefanos Zenios

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Companies mentioned in this article:

Abbott Laboratories Inc.

Evalve Inc.

Boston Scientific Corp.

Boston University

Innovation Factory

Johnson & Johnson

Ethicon Inc.

Acclarent Inc.

Medtronic Inc.

Medtronic MiniMed Inc.

Purdue University

Sonova Holding AG

Advanced Bionics Corp.

SyneCor LLC

Technion Israel Institute of Technology

The Foundry Inc.

University of California

University of California, Irvine

University of Southern California

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No publication reviews leading edge companies and technology better than START-UP. Each issue of START-UP profiles the most important new product companies, identifies the hottest technology areas, reviews funds flowing into private companies and investment trends, and reports on university tech transfer licensing. Industries covered: pharmaceuticals, biotechnology, medical equipment & devices, and in vitro diagnostics.