Venture Capital in Healthcare Today

It seems the medical devices industry is constrained by a number of factors which end up constraining innovation by smaller businesses.

In the past the VC business has helped free up new devices from the stranglehold of the major players, but the new economic environment results in a lack of appetite for new businesses.

Have Device VCs Bet Too Big?

Article preview reprinted from IN VIVO – August/September 2009

Medical device investors in recent years subscribed to a bigger-is-better philosophy when it came to investing. VCs were eager to pour more capital into start-ups of all stages, believing it was shrewder or simply necessary to carry companies further along in development. However, a review of data from several sources suggests that bigger bets may not have been better.

Have Device VCs Bet Too Big?

Article preview reprinted from IN VIVO – August/September 2009

** The average size of medical device investment steadily rose over the past five years, climbing to $14 million per company financing round in 2007, as compared with $9.66 million in 2005.

** The large capital infusion might have made sense at the time, but a non-existent IPO market and critically weak M&A environment has since put a lot of that capital at risk.

** Strategic buyers—particularly those named Medtronic—are willing to pay handsomely for device companies with potentially game-changing technology. But most other start-ups and their investors are having a hard time finding lucrative exits.

** Device investors committed to putting fewer dollars behind individual deals may be poised for better returns in the long run.

Venture capitalist investing in the device field often takes what appears to be a strange, counter-intuitive approach in down markets. When common sense might suggest slowing down, venture capitalists often apply more pressure to the gas pedal. When initial public offerings are impossible, VCs invest more capital, hoping to carry their companies until the markets return. If the appetite for strategic acquisitions collapses, venture capitalists similarly take the responsibility upon themselves to keep the lights on and development moving forward until the buyers begin buying once again.

Certainly in today’s environment we are seeing VCs and corporate boards more willing than they’ve been in the past to question the wisdom of continuing to fund a troubled project, manifesting itself in a willingness to close a company down early if investors feel the amount of money needed to bring the technology to commercialization will be much more than originally anticipated. Still, investors generally remain committed to helping their portfolio companies manage through the current economic crisis if at all possible. Indeed, one reason often cited for the fact that fewer new investments are being made today is that VCs are also putting more money into reserves for their existing portfolio companies.

– Tom Salemi

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