Financing for Med Device Startups in an Uncertain Economy

I attended the SVASE (Silicon Valley Assoc. of Startup Entrepreneurs) sponsored event entitled "Financing Strategies for Medical Device Startups in an Uncertain Economy" the other week. The panel consisted of Frank Rahmani from Cooley Godward Kronish, Ted Driscoll of Claremont Creek Ventures, Albert Cha of Vivo Ventures, and Michael Bates of Life Science Angels and Band of Angels. There were a lot of interesting conversations, but the discussion on different financing opportunities is important to highlight. I've listed some of them below:

• Government - SBIR grants are a great way to finance a startup without diluting equity, but the grant process can be time consuming and competitive.
• Incubators - For a stake in your startup, incubators provide lab space, administrative assistance, strategic guidance, etc. Although incubators usually don't provide direct capital, they will assist in finding angels and VCs to invest. Attending the meeting was Mike Partsch, entrepreneur and former VC, who has successfully launched a few medical device companies from his incubator. The Foundry is another medical device incubator with a number of companies that have been financed.
• Angels - Angels typically provide seed-stage financing to startups that are "too early" for most VCs. Raising money from Angel groups is like "herding cats" to paraphrase Michael Bates, but the members are usually seasoned entrepreneurs, who can provide very valuable advice to early-stage startups. Angel networks commonly work closely with VCs and can also assist in obtaining VC financing.
• Venture capital - In addition to providing cash, VCs offer strategic guidance, help recruit management, etc. When trying to raise money, "VCs are not all the same," as one panelists stated. Some firms focus on early-stage companies, while others invest in only health care IT startups. It's important to identify the right match. Also, make sure that there are no conflicts in the VC's current portfolio, i.e. companies with competitive technologies.
• Corporate investors - Corporate investors usually wait until most of the risk is removed from a startup before investing. Depending on the deal terms, a corporate investment may limit the number of potential acquirers in the future.

Other financing options not listed above might be available. For example, private equity might be an option depending on the stage of the company. Keep in mind that this was not meant to be a comprehensive summary of the event. I just wanted to highlight some of the important topics discussed.

Compensation for Management at Startups

If your interested in the compensation for executives for life sciences/medical device startups, check out the 2008 Compensation and Entrepreneurship Report in Life Sciences at Altgate. The survey provides data about cash and equity compensation split by a variety of parameters (e.g. position, geography, biopharmaceutical vs. medical device company, etc.). For example, the average base salary for a CEO at a company with one or less financing round ranged from $220,000 to $325,000. Equity owned by the same CEO ranged from 4.9% to 7%. As the company raises additional rounds of financing, the CEO base salary would generally increase, but equity would become diluted. If the CEO was a founder, he/she would usually have considerably more equity in the company but a lower base salary. Total cash compensation (base and bonus) for CEOs at biopharmaceutical companies was a little better than for their counterparts at medical device companies, $410,000 vs. $371,000, but equity holdings were slightly better for medical device CEOs, 6.04% vs. 5.12%.

David and Goliath

VCs often tell entrepreneurs that they're looking for "game-changing" technology and a solid management team. It's become a cliché, but investors believe that having the right management team is even more important than the technology. A great article in The New Yorker by Malcolm Gladwell, author of Tipping Point, Blink, and Outliers, reinforces why the two investment criteria mentioned above are so important to VCs. Gladwell's article talks about how basketball teams that are smaller and have less athletic ability can beat much better teams. He also gives an example of how a small military force with fewer resources can overcome a larger army, as in the case of Lawrence of Arabia against the Turkish army. Again and again, throughout history, Davids beat Goliaths. What the Davids often have in common are two things: unrelenting effort/persistence and an unconventional strategy. For health care startups to succeed, the same can be said. Genentech and Amgen are good examples. These companies developed innovative technologies at the time, and management had the insight to recognize markets that were overlooked by Big Pharma. Management also had the dedication to overcome many years of setbacks and challenges. Becoming a successful startup is much more complicated than just working really hard and having technology, but one can see why it's necessary to start with them.

The Entrepreneur's Guide to a Biotech Startup

Being a former scientist, I find entrepreneurs' passion and intelligence inspiring. They are part of the reason why I enjoy working in venture capital so much, and I have the utmost respect for entrepreneurs. It is extremely difficult to raise venture capital, and very few entrepreneurs/scientists are successful at it. Unfortunately, the developing a drug therapy is capital intensive. Some people, such as Johnny Stine, are developing drugs without any VC funding - he's pretty amazing, and I hope he's successful. Johnny Stine is a great example of doing research on a shoestring budget, and he exemplifies the entrepreneurial spirit. For most entrepreneurs however, raising money is a necessity. Entrepreneurs/scientists that have never had to raise before need to be prepared and understand what investors are looking for - especially now, since it will be more difficult to find capital. I usually refer people to The Entrepreneur's Guide to a Biotech Startup, Fourth Edition, by Peter Kolchinsky. It's available for download for free at Evelexa.com. Although it's a bit dated - it hasn't been updated since 2004 - it remains a great resource for scientists thinking about taking the plunge into entrepreneurship. Even to this day, I use it as a reference every once in a while.