Medtech Start-Up Financing Strategies: Where’s The Money?

It’s an awkward time of transition for medtech venture capitalists and for entrepreneurs looking for the funding to get their ideas developed and into medical practice. What worked as recently as five years ago no longer works today, namely, venture capital syndicates supporting a company from concept to exit. Taking into account lengthy research and development phases for disruptive technologies, a long clinical path to approval, an uncertain regulatory environment, and increasing amounts of data needed to support reimbursement and commercialization, many medical device companies in venture capital portfolios have turned into decade-long propositions. Financing risk – the ability to fund a company from start to exit – is perhaps the biggest uncertainty that venture firms and their portfolio companies face today, especially as limited partners have migrated away from the under-performing medtech sector to information technology and health services, where the time to exit is shorter and the returns greater. In the US, there is generally one-third less venture capital (available for investing in any industry) than there was five years ago and the number of venture capital firms and the sizes of funds dedicated to life sciences are shrinking. The medtech industry is looking to large corporate strategic buyers to support the growth of the future products they’ll need but they haven’t quite stepped up, at least not at the early stages. Most of the medical device financings in which corporate investors have participated over the past five years were Series C rounds. (SeeAlso see "Device Start-Ups Reap More Corporate Venture" - Medtech Insight, 21 February, 2013..)

There are some stalwart venture firms that continue to focus on the life sciences and some that are still doing early stage deals have been successful in raising new funds with that strategy. In December 2012, Sofinnova Partners in Paris raised Sofinnova Capital VII, a $312 million fund dedicated to life sciences, and Abingworth Management Ltd., which remains focused on life sciences recently did a first close on a new fund, Abingworth Bioventures VI LP, which has a £200 million target. Both firms invest in both biopharma and devices, Sofinnova at the early stage, and Abingworth in early and late stage companies, but recently, with a greater focus on later stage deals. Third Rock Ventures launched a $516 million fund dedicated to biotech in late March 2013. (See[A#2013900074]