Medtech Investing: A Survivor’s Game

Article preview from Start-Up - December, 2012

At Elsevier Business Intelligence's IN³ conference in October 2012, a panel of venture capital investors talked about the current difficult financing climate for medtech start-ups, although a ray of hope lights the future.

 Medtech Investing: A Survivor’s Game

Article preview from Start-Up - December, 2012

If today’s medtech companies can work around the current dearth of investment capital, they’ll find themselves ready to supply a future demand for innovation at a time of scarcity.

 

Venture capital investments have a certain natural life cycle. Nourished by capital, a healthy investment goes through the phases of seed, growth, and fruition. Just like a living organism, if the nourishment is withdrawn, or if a process stalls for too long at any point, the result can be stunting. The ecosystem upon which medtech start-ups rely is in disarray, and this environment is in fact stunting and even killing many start-ups. Do these environmental changes represent a rough patch of weather, or permanent changes? Will current conditions cause a future innovation gap? The answers are yes, yes, and yes, according to a panel of venture capital investors convened at the Investment in Innovation (IN³) Medical Device 360° Summit conference held in San Francisco in October 2012 (www.in3summit.com).

At the moment, almost none of the conditions necessary for medtech start-ups to flourish are present. First, there’s the dire shortage of venture capital. The PricewaterhouseCoopers MoneyTree Report just announced third-quarter 2012 numbers indicating that medical device companies received $434 million from 65 deals in Q3, a 37% decrease in dollar amount and a 27% drop in the number of deals compared with the second quarter. That’s the lowest level of investment in medtech since 2004.

Venture capital for medical devices has dried up because of poor investment returns over the past 10 years. An internal rate of return little better than 1% for many deals has caused limited partners to abandon the sector. Medtech venture teams are shrinking as well; since last year, Frazier Healthcare Ventures, CMEA Ventures, New Leaf Ventures, and Skyline Ventures have all lost medtech team members, and OVP Venture Partners has recently been discussing plans to close down.

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