Kirk Zeller , DBA

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

Medical Device Venture Capital Investing
Most of these new, innovative medical device technologies which contribute to healthcare improvements are developed by private sector entrepreneurial ventures (Cain 1999). The endeavours of these entrepreneurial ventures are made possible through financing provided by venture capital (VC) firms. Each year between US$1.5 to 2.5 billion in venture capital is invested in US based medical device companies, with Silicon Valley (SV) receiving significantly more VC than any other region. SV based medical device companies generally receive between 30-40% of all venture capital invested in medical device companies and in the third quarter of 2003, medical device companies in SV received 44% of all the capital invested in medical device companies (PWC MoneyTree Survey 1995-2003).

Medical device investing is a specialised area which requires expertise for firms to excel (Chiruvolu 2003). Medical device investing, particularly early stage investing, seems to be becoming a more specialised area with less large diversified firms active in medical device investing (Stein 2003, Charmichael 2000). To validate this an analysis of a published list of medical device VCs found that approximately one-quarter of the firms on the list no longer had any medical device companies in their portfolios and 64% had three of less medical device companies in their portfolios.

It seems that medical device companies are currently relatively more attractive than other life science companies as they offer shorter time lines to approval, longer effective patent life, involve less risk, require less capital, have an active M&A market, and provide more consistent returns (Meisner 2003, Cassak 2003, Chiruvolu 2002, Knoesen 2003, Di Masi 2003). According to one survey this is the sector which offers the most attractive investment opportunities throughout 2003 and during the next three to five years (DuPont 2003).

Some VCs that also invest in biotech mentioned during interviews that another advantage of medical devices is that the nature of medical devices makes it easier to use such factors as laboratory and animal data to predict venture success or failure at earlier stages prior to investment of large amounts of capital. In the case of other areas of life sciences products often produce encouraging results at these stages, but fail in later stages after tens or even hundreds of millions of dollars have been invested. Interestingly the same VCs who invested in seed or series A stages in medical device companies often mentioned that they invested in later stages in the case of biotech for these reasons.

Seed and other early stage investors suffer when companies experience down rounds in later stages and to compensate early stage investors have started earlier syndication to ensure that collectively the investors have enough capital to take companies through to exit without bringing in new investors. Several of the VC interviewees indicated that now they are syndicating earlier than in the past. Five of the six VC interviewees mentioned that they syndicated as early as series A for this reason.

Copyright 2004 Kirk Zeller, All rights reserved