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Should healthcare startup owners play "small ball"?

Brian O'Connell on June 2, 2011 Source: Kauffman Foundation

To a healthcare startup owner – at least one who’s a sports fan – the term “small ball” might bring to mind how Major League Baseball teams like the Oakland A’s and Colorado Rockies have fielded a competitive ball club over the years: stocking up on young pitching and smart players who knew how to squeeze a run out of a mediocre lineup.

While the Yankees, Phillies and Red Sox were fielding all-star teams with loaded contracts, the A’s and Rockies were trotting out lineups whose average salary was well below what the big boys were paying. Often, the “small ball” clubs stole their fair share of games against the large payroll clubs.

Now entrepreneurs may be looking at their own version of “small ball” these days. Take Seattle-based Mirador Biomedical.

The company recently won FDA approval on several fronts, most notably for a digital pressure sensor device that tells physicians and medical staffers exactly where they are inserting a catheter, and for another device that measures lower-back pressure before inserting a catheter in spinal tap cases.

In its own words, Mirador “addresses a critical area of healthcare by seeking to improve patient safety and reduce costs associated with preventable medical errors that occur during many common medical procedures, like central line insertion and spinal taps.”

Mirador recently wrapped up a $1.5 million financing deal. The Series B deal caught the attention – and the checkbooks – of multiple investors, who were impressed by what the medical device developer accomplished on a shoestring budget.

“We chose to lead Mirador’s Series B round based on their impressive progress and highly efficient use of capital.  With less than a million dollars, they obtained FDA clearance and early sales,” said Loretta Little, Managing Director at WRF Capital. “Both the Series A and Series B rounds were oversubscribed, which isn’t too surprising given their great market feedback and clinicians’ enthusiasm for the product and its many potential applications.”

Loose translation? Little likes the way that Mirador plays small ball, and isn’t above getting WRF into the game with its own brand of small ball on the funding side. Venture firms like WRF know full well that a $1.5 million investment won’t yield $500 million in returns, but as Jim Anderson, Chief Investment Officer at SVB Asset Management, points out, the prototype for small investments that can lead to small, but less risky, payouts is from a small ball-funded company that went on to hit a grand slam.

Anderson writes that Facebook reached one million users with an initial investment of under $1 million, making it perhaps the most celebrated example of small ball in recent memory (although that one did yield huge profits for early investors).

Nowadays, Anderson adds, more venture funding groups are turning to small ball – figuring that it’s more likely to build wealth on a series of Oakland A’s and Colorado Rockies-like small investments rather than counting on one New York Yankee-sized one.

Writes Anderson:

What that means in a roulette game metaphor is that the size and risk of the bets has changed. Instead of betting on numbers, some are moving to even money bets on red-black or odd-even with smaller amounts deployed. This is evident in the lack of seed investments in recent years with more money assigned to larger, stable later-stage companies where the downside is smaller and the upside limited.

Healthcare startups will likely have to get used to small ball. In this economy, expect more and more funding sources to spread their bets around in smaller increments.

After all, swinging for the fences is so 2005.

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