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Venture capital may not be best for early stage medical business

on June 1, 2011 Source:

Venture capitalists sure do look good in suits. Ask anyone who attended the recent IBF MedTech Investing Conference at the swanky Graves Hotel in downtown Minneapolis.

But external beauty aside, do they bring any real value — read money — to early stage medical technology firms?

In one conference session last week, a venture capitalist made this rather gloomy prediction: Only 10 startups with products requiring pre-market approval from the U.S. Food and Drug Administration would obtain venture capital funding this year.

That’s 10 PMAs nationwide.

There were more people developing PMA products in that very room.

So, when I met executives from two such firms — one based in Minnesota had already raised money two years ago and has applied for an FDA approval; the other in Wisconsin was much earlier stage than that — I asked them if they were worried.

Not only were they not, they were dismissive. The later stage company executive said it’s just the view of a few VCs on one panel; the other said there were plenty of other sources of capital.

So, what other sources of capital are there for fledgling companies?

A Twin Cities medical technology business development executive who advises early stage firms named a few: angel and super angel investors, strategic partners like corporate acquirers, strategic partners like distributors and suppliers, and finally, early stage funds that states have created with public dollars.

For instance, for a medical device firm that requires a lot of inventory available, a deal could be structured where a manufacturing partner could make the parts for the startup in return for debt or equity.

“That’s as good as raising money,” said Peter Bianco, who advises early stage firms, especially in the orthopedics space. (Bianco is also the state-appointed observer at Miromatrix Medical Inc., which was commercialized from University of Minnesota technology, and to which the state loaned $500,000.)

A strategic partner may also help to bring in other money into a deal because they have credibility in that space, Bianco said.

Bianco noted that VCs say they will invest in early stage firms, but in most cases their definition of an early stage firm is in stark contrast to firms in need of capital that are pre-revenue and/or have recently formed.

“A lot of times I see these early stage companies struggling to figure out where to raise money and the last place I would send them would be into a venture capital deal unless they have something that’s really unique with a perfect business model, a perfect management and a really short path to market, and there aren’t very many deals like that,” Bianco said.

In Minnesota, venture capitalists have declared their intent to raise early stage funds, but some have either failed — Upwind Capital, which sought to raise up to $8 million — abandoned their efforts —Affinity Capital Management and Triathlon Medical Ventures, which was planning to raise $10 million — not been heard from since — Coordinate Capital, which was raising $25 million — or been extremely delayed —Steve Burrill’s long-awaited $1 billion fund for the Elk Run real estate/biotech park project in southeastern Minnesota.

The state finally stepped in last year to pass the angel investor tax credit bill and entrepreneurs have loudly cheered that. And in another boost to entrepreneurs nationwide, more states are creating or pumping in money to seed funds. New Hampshire recently created a fund that may have up to $6 million to invest, Wisconsin is considering setting up a Wisconsin Venture Capital Authority that would oversee two funds worth $400 million, and Maryland recently pumped $18 million in the Maryland Venture Fund.

So, there are a lot of options. As an entrepreneur, you need to figure out where to look for it given your specific situation, Bianco said, instead of rushing off to a VC. He noted that VCs will listen to pitches to keep a pulse on what innovation is happening on the ground, but they won’t invest.

“There’s this mindset where the first thing that entrepreneurs think is that ‘I have got to go to a VC’ and they start going down that path and the likelihood of them succeeding at that is very remote, so they waste a lot of time and energy and money and lost time to market pursuing VC dollars,” he said.

Which brings me back to my original point about external beauty. All that glitters may not always be gold.

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