MC3, With Six Spinout Companies, Navigates Challenging Terrain of Medical Device Incubators

2/7/11Follow @xconomy

Medical device incubators are like low-carb donuts. They sound like a good idea on paper, but no one has really been able to create a successful one.

Scott Merz is certainly trying. Since 2000, MC3 in Ann Arbor, MI, the accelerator Merz co-founded and currently leads, has spun off six companies, all of them still in business and in varying degrees of development.

MC3 boasts some important advantages. The firm enjoys a strong relationship with the University of Michigan, specifically its technology transfer operations.

In fact, Merz founded MC3 in 1990 to commercialize a blood pump he had been developing with a university surgeon while a graduate engineering student. Medtronic eventually acquired the technology and then sold it to Edwards Lifesciences.

But the taste for entrepreneurship never left Mertz’s mouth. In 1999, he decided to convert MC3 into an incubator because “we had some experience that could benefit other people.”

At the time, Merz says, the university’s tech transfer office was only starting to ramp up.

“There were a number of technologies in the lab but the office had a hard time getting interest from investors and companies,” he says.

The big problem: the technologies just weren’t developed enough to convince an investor to risk cash.

MC3 helps by offering a complete package of services, on both the technical and business sides. The company assists startups with concept and feasibility studies, design, and manufacturing, and also helps them attract government grants and pitch to investors.

However, MC3 faces an uphill climb, says Peter Bianco, a former executive with Johnson and Johnson Development Corporation who studied medical device incubators.

Incubators need “superstar” talent and lots of capital, Bianco says, who is now leading efforts to create a science park next to the University of Minnesota in Minneapolis.

And talent and money may not be enough even in the Twin Cities, he says, which is home to one of the largest medical device clusters in the country.

In 2007, Mike Selzer, Dale Spencer, and Mike Berman, three well-known and successful entrepreneurs in Minnesota, launched a medical device accelerator called ConcepTx. Despite winning a $4 million investment from venture capital firms Versant Ventures and Advanced Technology Ventures, largely based on the entrepreneurs’? reputations, ConcepTx quickly flopped.

Incubators “are just extremely hard to do,” Bianco says.

What would help is a successful exit or two, which could provide the incubator with a strong reputation and much-needed cash to reinvest into business, he says,

So far, MC3, which holds equity in its startups, has not seen an exit, though all of its companies are still in business, no small feat in this weak economy.

Here’s a look at some of the MC3 companies:

  • Accord Biomaterials, which is developing a diagnostic sensor and device coating, has attracted $1 million from Arboretum Ventures in Ann Arbor and won a $1.3 million Small Business Innovation Research Grant from the National Institutes of Health.
  • Novalung, a German-based startup that makes artificial lungs, now boasts 50 employees and generates international sales.
  • Exatherm, headquartered in Kentucky, won NIH money to conduct a clinical trial this year of its hyperthermic device to treat cancer.

For now, MC3 survives on the fees it charges the companies for its services. Merz is also exploring other financing strategies, and has been speaking with angel groups about some sort of equity investment into MC3 in exchange for a first look opportunity at the technologies the firm is incubating.

But Merz says the idea is somewhat difficult to explain to potential investors.

Bianco agrees. Angels want to invest in the startups themselves; it would be hard to convince them that they could earn a return on the incubator, he says.


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