What Now, Medical Device Entrepreneurs?

2/17/09

Years ago, new medical device companies were often formed by a small group of people who came up with an idea for a new concept and started the company by working on it nights and weekends in someone’s garage. Often, this new company had little or no real financial backing other than the money that the founders were able to put into it themselves from their own savings.

The product concept would be developed evenings and weekends to a point where it could then be shown to investors, often individuals, who would put up meager amounts, relative to today’s standards, of money to take it to the next level. Then, venture capitalists or other larger firms would step in and fund the later stages of the development.

The rewards for the entrepreneurs were sometimes quite large because so little capital went into the company at the start and their ownership percentage was so great. As time passed and both entrepreneurs and angel investors made large amounts of money for their early efforts and risks, venture capitalists realized that, if they were to step in earlier, they could take larger shares of these new companies for smaller amounts of cash. This enabled them to make bigger financial returns, as well as have better control over the trajectory and management of these companies.

So, venture capital firms started funding entrepreneurs at even earlier stages, providing enough funds to pay the entrepreneurs a full- time salary while working at the startup. New companies were often even started in venture capital offices by entrepreneurs with the venture firm providing the space and office support that would otherwise rob needed cash from the creative development efforts. Sometimes these entrepreneurs started the company with no real product in mind, except the desire to seek out and find a large market with a substantial clinical need. This position is presently referred to as an “entrepreneur in residence” within the venture capital firm.

Eventually, venture firms even went so far as to fund “incubator” companies with a small group of salaried entrepreneurs and enough capital to take an as yet undefined concept to a level where it would be fully funded by them and perhaps one or more additional venture capital firm. These incubator companies would then spawn one or more companies using the seed funds provided to them. As might be expected, this all served to accelerate the formation of companies and sped up the early stage growth of the ones that were funded in this way, a real boon to the entrepreneurs and investors alike.

Of course, it wasn’t all roses. The early bite taken by venture firms cut into the founders’ equity and the larger amounts of early money made those same entrepreneurs less cautious about how they spent their cash. It put a premium on speed. The result was that it generally cost more to get a company going than it had in those early garage shop days. Still, it saved on the wear and tear of the entrepreneurs and their families by removing the day-to-day worries of making the mortgage payments.

Fast forward to today, when money is tight and most venture capital firms are hunkered down waiting for an upturn in the economy so that it once again makes sense to take the risk of investing in new startups. Some firms are reportedly making no investments at all, saving their precious cash to support the companies already in their portfolios. Other firms are making investments, but are being very selective on which companies to fund. For example, they might invest in companies that are near to or in the market or have a short pathway to market, good reimbursement from health insurers, and present little overall risk to the investment.

Clearly, the fresh new startup with a new idea or new technology that requires a rigorous premarket approval application (PMA) to the FDA for novel products, needs to establish new reimbursement standards, and clinical proof that it provides the proclaimed benefit does not meet these stringent benchmarks for funding. Even startups with a short timeline to market or a relatively easy pathway through the FDA are finding venture capital funding difficult, if not impossible. So, what are these entrepreneurs to do?

The shared characteristics of company founders typically include passion for the concept and determination to see it through to success. I believe these characteristics will prevail and guide these entrepreneurs to new pathways to success. Garage shop operations may come back into vogue. Shoestring budgets funded by insightful and inspired angel investors or perhaps even large corporations may be the norm. The overall result may, in fact, be a return to bigger eventual financial returns for entrepreneurs as was seen in the distant past, and the satisfaction of creating something from hard work and perseverance. That’s my hope anyway, and hope is the word to use these days, right?

Clif Alferness is the co-founder of six medical device companies that have collectively raised more than $300 million. Follow @

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  • http://www.mediligence.com Patrick Driscoll

    Excellent inside view of how this process has evolved. I may be idealistic, but I believe that every market shakeout has a tendency to jolt the process to be more efficient. Thanks for sharing your views.

  • Justin Hicks

    Cliff,
    I enjoyed reading your post I don’t know if you can contact me throught this post, but if you can I was hoping you might be able to help me out with medical device industry. Thank you in advance for your help.