Norwich Ventures Sticking to Early-Stage Medical Device Deals Amid Late-Stage Trend

6/18/09

On the landscape of medical devices investing, much of the venture capital herd is running for later-stage deals nowadays. Norwich Ventures, on the other hand, is holding tight to its strategy of investing in early-stage medical device companies and preferably creating startups from scratch. In fact, there are several other uncommon traits of the Waltham, MA-based firm that I thought could be appealing to medtech entrepreneurs.

For one thing, the small firm is unlike many of its venture peers that pressure portfolio companies to seek a sale or some other exit within five years of accepting venture dollars. Aaron Sandoski, a founder and managing director of Norwich, tells me that his firm can be more flexible about how long its companies take to be acquired or complete an IPO because it has a limited partner base of wealthy families that understand the industry. (Typically, the five-year-ish exit horizon strategy is tied to how long venture firms tell their own investors, such as pension funds and endowments, it will take for them to get returns.)

Norwich, formally launched in early 2005, is not as well known as the larger and more established venture firms that invest in medical devices. But market forces are pulling more and more big-named venture firms from the early-stage investment game, as those firms place what they think are better bets on existing portfolio companies or businesses with products either close to or already on the market. Those more mature device firms, by the way, are in some cases asking for more venture money because the public markets are largely closed to them and the chances of being acquired at an attractive price are less than in years past. These factors may raise the profile of firms like Norwich among entrepreneurs looking for cash to kick-start a company.

“Most venture firms are gravitating away from early-stage financing,” Sandoski says. “We had a core belief that innovation and great returns are linked and driven by that early stage of the business.”

Norwich, which makes investments from its first $50 million fund, is run by an interesting group of medical devices veterans. A founder of the firm is Marlin Miller, the former long-time CEO of Arrow International, a Reading, PA-based developer and maker of specialty catheters and cardiac devices. Miller, a director of Norwich, retired from Arrow a few years before the company was sold to Teleflex (NYSE:TFX) for $2 billion in 2007, but Sandoski tells me that Miller was still among Arrow’s largest shareholders at the time of the sale. Miller operates from the firm’s Wyomissing, PA, office, which is within range of the firm’s portfolio companies in the Mid-Atlantic region and in Ohio.

Then there’s Sandoski, a former executive at DEKA Research and Development, the Manchester, NH, technology development firm founded and led by inventor extraordinaire Dean Kamen. Kamen is an inventor of a robotic prosthetic arm and a wheelchair that climbs stairs, among other medical innovations. (Sandoski says he was in charge of finding markets for DEKA’s inventions, but he is unable to talk about which specific products.) Here’s a link to the Norwich team bios.

Perhaps the best representation of a fund’s investment goals is to look at its portfolio companies. And when I did that, I realized that one of the reasons Norwich has flown under my own radar for so long is that most of the six startups it is backing are young firms operating quietly as they develop their products. In fact, Sandoski declined to talk about one of the three Boston-area startups in the firm’s portfolio because it’s in stealth mode. The firm also doesn’t list its portfolio companies on its website, but we did talk about two of the three Boston-area firms. Those firms include Intelligent Bio-Systems, a Waltham developer of next-generation DNA sequencing technology, and Rhythmia Medical, a Burlington, MA, startup that is quietly working on technology to provide 3-dimensional electrical mapping of the heart.

It’s been challenging in this economic climate to build syndicates of investors to back young medical devices startup, Sandoski says, because many venture firms continue to shift their investment strategies to adjust to changes in the market.

“I think what’s most challenging is that folks you might have gone to six months ago, who still have a lot of capital, may not be interested because they’ve changed their focus [to later-stage deals],” he says. “Likewise, people who you’ve never thought about going to before may now be very interesting partners.”

Part of the investment thesis for backing early-stage medical devices firms now, he explains, is that the window for IPOs is largely closed now but will probably open within the time that it will take for younger firms to become viable candidates to go public. And those younger firms have the potential to build a lot of value between now and then.

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