The proverbial Valley of Death is the most feared geography in the emerging medical tech and biotech industries. So much promise, so little data. Huge vision, tons of risk. Game changing technology, but man that is a lot of money to get the company to the next meaningful milestone. But if you slog through and successfully get to the other side, you are a hero (and sometimes a rich hero).
The Valley of Death is not uncharted territory in the innovative healthcare world, but a number of forces have grown the acreage and turned up the heat over the last several years. The economic downturn caused our humbled VCs to pull back from early stage healthcare investing (early defined as having any risk other than force majeur, e.g. earthquakes and floods disrupting device shipments). Investors were also scared off by the increasing length, cost and uncertainty of US regulatory approval for medical devices, which previously had enjoyed return-multiple-expanding shortcuts to clearance compared to their pharma and biotech counterparts.
The void created in early stage med tech investing has brought to the forefront a number of new (and not so new) modes of transport through the Valley of Death. For entertainment value, the pluses and minuses of each option are summed up draftology lingo.
Incubators: Once the rage, then out of favor, and now the rage again. Incubators (a.k.a. “Accelerators”) aspire to smooth the rough edges on very early technologies and and their founders, while getting in on the equity ground floor. The new incubators are modelled after the wildly successful Y-combinator in the IT world, whose wins include Scribd, reddit, Airbnb, Dropbox, Disqus, and Posterous (if you haven’t heard of any of these companies you are dating yourself). Hot new healthcare focused incubators include Rock Health, Blueprint Health and Healthbox. With their slick websites and social media savvy, these entities provide seed money (often measured in $10’s of $1000’s), mentoring programs, connections to investors and even shared space for the bi-coastal set and a few select cities in the middle.
A proven performer in the tech sector, but can they successfully translate in the medical technology arena?
Angels: Angel and super-angel investors remain a popular source for early stage funding in med tech, although the life sciences have not seen as sharp and increase in angel investing as IT has. A few angel groups specifically focus on life sciences, for example Mass Medical Angels here in our Boston backyard. However, our clients’ Angel investors are not so much organized groups, but rather tend to be high net worth individuals who have made their money in everything from cattle ranching to automobile manufacturing (which explains their frustrating lack of healthcare market understanding). These Angels may be moved to invest by a compelling healthcare need, a desire to support a local economy, or the potential for high returns. Let’s hope they don’t look too closely at the poor returns on early stage tech deals.
Safe pick, sometimes their play is over hyped but expected to continue to be a solid contributor.
Non-Profits and Government Agencies: Early stage medical device companies have long turned to grant-funding agencies for cash to get through pre-clinical development, though this “free” money is not without its downsides (see our S2N blog on the hidden cost of non-dilutive funding). When the problem you are solving aligns squarely with the funder’s mission, this is often a good place to turn to help you secure funding through the Valley. Interesting med tech funders include the Bill & Melinda Gates Foundation on the non-profit side, and DARPA and In-Q-Tel on the US government side if you can imagine your technology used in combat or espionage (definite room for creativity here).
Solid motor, but known for off-field distractions.
Academic Institutes: Traditionally universities declare victory when they out-license their IP at a very early stage, hoping to have some big hits that earn some licensing revenue down the line (though they may have to sue to get them, as in the recent University of Michigan vs. St. Jude case involving royalties on heart valves ). Universities increasingly want to participate in more of the upside on their promising IP, nurturing them longer in-house and/or spinning out companies that can move the ball further down the field. At the well-endowed Wyss Institute, Harvard is attempting to move technologies from bench to prototype to company, while MIT is trying something similar at the Deshpande Center.
Raw talent with high upside, but has yet to show consistent significant wins.
“Corporate” VC: This may be a category of one, but Allied Minds claims to be a bridge across the Valley of Death for promising academic IP by founding and funding early stage companies that are consequently owned 100% by… Allied Minds. The ownership structure is what differentiates Allied Minds from other early stage “we know how to pick winning university IP” venture investors, such as PureTech Ventures.
Unique in its approach, could be a sleeper.
Crowdfunding: The passage of the JOBS Act will soon allow a wider pool of smaller investors with fewer restrictions to invest in companies. Kickstarter has already pioneered this method or raising money for creative endeavors allowing 24,000 projects to raise over $250 million. Expect to see many websites enabling individual investors to take equity in startup companies; two that are focusing on med tech are Return on Change and MedStartr.
Still very young in its maturation process, but if it clicks it could become a franchise player