A year and a half after the September 2008 collapse of Lehman Brothers and the official start of the economic recession, a panel of venture capitalists and other financiers in the medical device industry came together at the IN3 meeting in Boston. We asked them if they've had to change the way they look at deals. What is the trade-off between expensive, de-risked later stage deals and the kinds of returns that can be achieved by backing a winning company from start to finish? Where would they place their bets: cost-effective technologies for tried-and-true markets or novel products for unmet clinical needs, the "evolutionary vs. revolutionary" debate? And what can one do about tired syndicates? Our panel lets us in on the kinds of discussions they've been having around the table at weekly partners' meetings.
Medtech Risk Capital? Anything But. A VC Roundtable from IN3
Article preview from Start Up - September, 2010
At a recent medical device meeting in Boston, VCs let us in on their thinking about the future of investing in medtech.
Saving for a rainy day; sticking it out through thick and thin; these phrases were recently uttered, not by someone's depression era grandpa, but surprisingly, by venture capitalists assembled at a recent medtech conference in Boston. The Investment in Innovation (or IN3) conference sponsored by Elsevier Business Intelligence called upon a panel of financial types – four venture capitalists and one debt investor – to tell us where they most likely will be investing their capital in the short- and long-term future. An air of optimistic caution hung over the room. Speaking on the panel, Paul LaViolette, the former COO of Boston Scientific Corp. and now a venture partner at SV Life Sciences, described his firm as conservative, noting that the notion of conservative risk capital, as oxymoronic as it sounds, does speak to the uncertainties facing the medical device industry today.
The foundation of the medical device industry is rock solid. Population increases, aging baby boomers, and 32 million additional insured lives coming into the health care system provide growth opportunities for the medical products industry. Large medical device companies will still need to rely on innovative start-ups for the products that will drive their growth. But the pillars resting on the foundation are a bit shaky. Almost two years into the economic recession, and as the provisos of health care reform begin to take shape, VCs are strategizing on how to craft investments around some of the new fundamentals in device investing. As has been frequently discussed, we are now seeing longer regulatory time lines as the FDA demands more from PMA products and rethinks what was once the expedient and less expensive route for getting products to market, the 510(k); cautious acquirers are making fewer, more selective acquisitions each year with the goal of rapid accretion. Start-up companies thus are spending more time in development and in building a presence in the market place to impress potential strategic acquirers (in the absence of the IPO exit alternative), which cause investors to carry companies a year or two longer than they initially anticipated. A resetting of valuations that has Series B investors looking for Series D rounds at Series B prices, and a crumbling of the resolve of limited partners, some unwilling or not able to support additional rounds, are feeding back into VC's thought processes about what kinds of companies they are willing to fund at the early stages, and whether they might not be better off investing in less risky, later-stage deals.
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Elsevier Business Intelligence announces the publication of a new Special Report "Bigger, Tougher,Faster"- Preparing for the New FDA. When the inspector comes calling ... will you be ready?
This 16-page report originally published in "The Silver Sheet". Learn more...
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