Device Firms See No Correlation Between Series A And Exit

Article preview from Start-Up - December 9, 2013

Large or small, Series A rounds in the device sector don’t have a statistical correlation with exit value, but there is some evidence that initial runway has some influence.

 Device Firms See No Correlation Between Series A And Exit

Article preview from Start-Up - December 9, 2013

A recent debate in high tech circles called into question the predictive value of a large Series A financing. The discussion was sparked by venture capitalist Fred Wilson who posited in a blog that start-ups raising larger Series A financings failed more than those that raised smaller first rounds. Financial data firm CB Insights put this to the test, finding in fact no, or at the very best an extremely weak, correlation between the size of the initial fundraise and the robustness of the exit among US high tech companies. The analysis, however, excluded life sciences, clean tech, and energy industries so we sought to fill in the blanks, at least for biopharmaceutical and medical device sectors.

In the November issue of START-UP, we examined our own data and similarly found no correlation between biopharma Series A and exit or current valuation. This month, we looked at medical device companies (excluding drug delivery, diagnostics, and research tools) and also found no statistical correlation (R²=0.0856, y=11.743x + 17.829). But we did find evidence that suggest Series A size might have some influence.

To test the hypothesis, we reviewed device Series A financings over a six-year period, from 2002 to 2007, to give enough time for a company to have an exit value, which we define as the up-front plus paid earn-outs in an acquisition, or the current market capitalization if the company completed an IPO or reverse merger. Those firms that are no longer in business were assigned an exit value of 0, and ones still operating as privately held independent entities could not be included in the analysis. Acquisition prices for 10 M&As from these Series A classes weren’t disclosed, so those were also not included. As a result, we were able to determine the initial runway and corresponding exit for 38 companies, displayed on the scatter plot.

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