Kirk Zeller , DBA

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"Financing and Beyond: The Role of Venture Capital in Silicon Valley Based Medical Device Companies"

VC Firm Selection, Method of Contact, and Due Diligence
In selecting VC firms CEOs seeking early stage financing seemed to be looking for VCs who had expertise in the area or complimentary companies in their portfolio. The background of the VC partners and their ability to add value also seemed to be a consideration and there was a definite preference for firms whose partners had significant operational experience and could add value in that area. In the later stages CEOs were more interested in VCs for their ability to provide follow-on investment as well as their connection to other VC sources and investment banks. In all stages the reputation and investment strategy of the VC seemed to be a consideration.

The most common means by which CEOs contacted VCs were through referrals and introductions from other CEOs, current investors, or law firms. VCs confirmed that introductions and personal contacts were the most common ways that they were approached. It seems that very few CEOs utilised cold calling, particularly in early stages, and the ones that did found it very unproductive. It was very clear that VCs in this tight knit industry did not seriously consider opportunities that did not come from referrals. Interviews with CEOs, VCs, and third parties confirm this to be the case and also suggested that with referrals meetings were just as easy to get now as in the past. Cold calling seemed to be more common in later stage financings, but there were no confirmed financing successes using cold calls among the CEOs interviewed. It is quite likely that cold calling is more common and perhaps more effective outside of SV.

Due Diligence
Interviews indicated that there is certainly disconnect between the opinions of VCs and CEOs on the amount of time due diligence takes. CEOs seem to believe the due diligence is taking substantially longer than previous years, while VCs seemed to believe that their due diligence is not taking any longer than past years. There was also disconnect in the perception of how demanding due diligence is for different stages of investment. Surprisingly many VC firms stated that due diligence was much easier and less demanding for later stage investments, while CEO interviews suggested that due diligence was more demanding and time consuming in later stages. Some comments suggested that there is less intuitive investing taking place and that in general due diligence is becoming more structured and methodical. Angel investors, on the other hand, still generally conduct very little due diligence relative to VC investors.

Interviews suggest that most VC firms due diligence on companies is done by partners and internal staff. Many VC partners in these firms are serial medical device entrepreneurs or industry veterans themselves possessing much expertise on the industry. Paid outside consultants are seldom used for due diligence, however, outside experts are often consulted during the due diligence process. It seems that in this interlinked community access to some of the leading experts is just a phone call away. VCs can gain quick access to market expertise, technology expertise, and medically specific expertise such as disease patterns and treatment trends. As there seems to only be a few degrees of separation between any two people in the SV medical device community, thorough human due diligence on founders and management team members is generally also only a few phone calls away if the subjects are not already well known to the VCs.

According to CEOs the due diligence process in the early stages seemed to focus most on the market opportunity followed by the management team, which is fairly consistent with VC investment criteria. While IP was certainly a concern it was more of a concern in later stage financings. Generally due diligence in the later stages seemed to focus most on IP with consideration also given to such areas as clinical data, regulatory approval and reimbursement, and the ability to drive adoption of the technology. VCs appear to have similar opinions and added that the potential of receiving timely approval and attractive reimbursement were also carefully considered. The most common aspects that were focused on during due diligence were IP, management team, regulatory approval and reimbursement, and technology. The seed stage investors did not seem to worry about the management team very much as they felt if the market opportunity were large enough and technology competitive enough they could recruit a solid team. One of the third parties also echoed the VCs focus on regulatory approval and reimbursement considerations and that IP becomes the main consideration as financing progresses to later stages.

Copyright 2004 Kirk Zeller, All rights reserved