Medical Device Entrepreneurs Converge on Wings, a New Angel Investing Network

2/16/10Follow @xconomy

People who make a living creating medical devices, like ultrasound machines or stents to prop open clogged arteries, have lived through a crummy 18 months. But that’s not discouraging a group of prominent medical device entrepreneurs from Seattle who are building the region’s first dedicated network of angel investors who have the money and expertise to bankroll new med-tech startups.

This nascent nonprofit, called Wings, is transforming from an idea into an operating entity inside the Washington Biotechnology & Biomedical Association. I heard what this is about while meeting last Friday with several key players—WBBA president Chris Rivera, Endogastric Solutions founder Stefan Kraemer, Pathway Medical founder Tom Clement, and Bob Wilcox, an entrepreneur in residence at the University of Washington. They were joined by Stephanie Barnes, a commercialization associate at WBBA who is devoting half of her work time to organizing this network.

It might not seem at first glance like the most auspicious time to invest in medical devices. The industry has been caught in a downward spiral over the past 18 months, as unemployment has risen, people have lost health insurance, and hospitals have been applying greater scrutiny than ever before to purchases of new equipment and tools. Many entrepreneurs have screamed bloody murder over a proposal to raise billions of dollars through new federal taxes on medical devices.

The Wings volunteers know that all too well. Still, they say there is money to be made in the industry, and they are filling a void by helping better connect entrepreneurs to the right people who can help them financially and operationally. Many of the people in this budding angel network are thinking hard about how devices can thrive in a more rigorous era of cost-effectiveness studies (beyond the existing requirements that devices are proven safe and effective). That’s why getting the right people engaged is so important.

“If this is going to be successful, it has to be the medical device community that drives it,” Rivera says. “If it were just the WBBA doing it, it probably wouldn’t work.”

Stefan Kraemer

Stefan Kraemer

The main activities of the Wings organization are to help screen business plans for medical device companies, help connect entrepreneurs with investors, and provide mentorship. Unlike more established networks like Alliance of Angels, it doesn’t have its own pot of capital to invest. Instead, it will host invitation-only investment forums for about 80 wealthy individuals who also happen to have expertise in medical devices, software, or some form of medical technology. It will be up to those individuals as to whether to put their own money to work in the startups.

The group plans to hold investing events four times a year, invite three or four entrepreneurs to give their best pitch, and hopefully spark investments in four to six new companies annually, Rivera says. Investors will vet companies in four main subsectors of medical technology—therapeutic and diagnostic devices; healthcare IT; healthcare delivery; and unregulated biotech development tools, otherwise known as scientific instruments. Once the Wings group has put its stamp of approval on a startup, then it hopes to form syndicates with other established networks like Alliance of Angels, Keiretsu Forum, and Zino Society, who have long been interested in this field, but lack members with the expertise to properly screen these business plans, Rivera says.

Wings has already moved past the concept stage. It has articles of incorporation written up. The first investment event is scheduled for April 14, and the deadline to submit a business plan for consideration is March 1.

Despite some of the storm clouds hanging over the medical device field, these are still the kind of investments that can appeal to angels. It generally takes much less capital, and much shorter development cycles, to develop a new medical device than it does, say, to create a new biotech drug for cancer. Wings foresees its angels making seed investments of anywhere between $500,000 to potentially $3 million to provide some early proof of the concept, which will spark venture capitalists to carry the torch further along in development.

Success will be judged in a number of ways—like the number of deals generated, the number of members who get involved, how much follow-on financing flows in later, and how much the Wings investors can generate in returns.

The big fear? “Nobody shows, or the deals suck,” Wilcox says. “If we don’t get good deals, it won’t work.”

The fact that three busy people like Kraemer, Wilcox, and Clement have volunteered significant time for several months to get this going is noteworthy. But they stressed that they aren’t the only ones involved. Wings has a 12-member board. The group includes: Rivera; Dick Rohde of Perkins Coie; startup consultant Janis Machala; Adam Fountain of Broadmark Capital; Michael Hovanes, a medical device and imaging entrepreneur; Loretta Little of WRF Capital; H. Stewart Parker, the founder and former CEO of Targeted Genetics; Jens Quistgaard, the former CEO of Liposonix and general manager of Medicis operations in Bothell, WA; and Wayne Wager, a medical device entrepreneur and CEO of Confirma. Kraemer is the board president, and Wilcox is vice president.

The idea to bring all these people together started to coalesce at a pair of meetings last year, in May and September. The first, a private dinner at the Rainier Club in Seattle, brought together about 15 medical device CEOs. Momentum built up then, when the assembled CEOs agreed that it was not just a good idea, but that they would be willing to participate in screening companies, and maybe even invest their own money.

The next meeting, a dinner at the Woodmark Hotel at Carillon Point in Kirkland, WA, drew about 45 wealthy individuals to discuss the idea in some more detail. That group also heard about best practices from Mark Klopp, a managing director of Coronis Medical Ventures in Sunnyvale, CA, and a member of the Life Science Angels in the San Francisco Bay Area.

The Life Sciences Angels bills itself as the premier angel network for biotech and medical device entrepreneurs in the country, and has some numbers to back it up. Since 2005, that organization has invested $26.5 million in 30 companies which have received more than $500 million on follow-on funding from venture capitalists.

Based on what he’s seen so far, Klopp says Wings has a shot at becoming legit.

“There is a critical mass of experienced, smart and financially capable medical technology angels and entrepreneurs in the Seattle area. The Wings leadership group that has emerged is particularly strong,” Klopp says. He added that there are a lot of other tech-savvy angels in Seattle who might be interested in investing in great new medical treatments, but need someone with expertise to lead the way.

But when I asked what Wings must prove early on, Klopp provided a long laundry list. The group needs to offer startups not just money, but also mentorship; focus entirely on seed-stage medical technology; screen deals in an objective, non-political manner; communicate regularly with members; and syndicate effectively with other angel groups and VCs. So far, Klopp says he’s been impressed with how Wings is taking “a clean sheet approach,” borrowing best practices from other organizations, and trying to learn how to avoid the usual pitfalls.

Dan Rosen, the chairman of the Alliance of Angels, said he sees a role for Wings in the local innovation community. AoA has invested before in medical technology companies like Healionics and Impel Neuropharma, but most members lack med-tech expertise, and the due diligence phase was “difficult.”

“If the Wings group can attain critical mass of active members, sufficient local deal flow, and establish efficient processes to help their angels and entrepreneurs, they can be successful,” Rosen says. “It is our intent to work with Wings to help them be successful.”

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