Kirk Zeller , DBA


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


Role of VC Beyond Capital Supply
The VC firms interviewed did much early stage investing and consistent with studies considered themselves actively involved in portfolio companies (Elango 1995, Fried 1994, Rosenstein 1993, Sapienza 1992). Some firms even considered themselves an extension of the management team. What was surprising is that many CEOs said they thought VCs would be more actively involved and would provide more value add. This was particularly true in cases of CEOs experiencing VC financing for the first time. It is not clear if the VCs are not proactive enough in offering support or if the entrepreneurs are not proactively asking for support. There were some comments suggesting that not only are they not as involved overall as expected, but that they were not providing proactive support in difficult times when it was really expected and studies have shown that it is generally provided (Lerner 1995, Mouis 2000). The upside was there were only a couple CEOs who had one or more board member VCs that could be described as micromanagers. VC, CEO, and third party interviews consistently suggested that lead VCs are far more involved than non-lead VCs, which is also consistent with publications to date (Gorman 1989).

CEOs felt that current VC value add was closely related to their traditional financing roles, while VCs see themselves serving more of a consultative role assisting with strategy and planning, serving as a sounding board, and helping to monitor performance. Overall the top rated areas of VC value add among CEOs, VCs, and third parties in the comparison to both the Gorman and MacMillan studies was related to facilitating financing and serving as a sounding board or helping to formulate business strategy. These items were also ranked highly in other studies as well (Mouis 2000, Fried 1995, Timmons 1986, MacMillan 1989, Gorman 1989, Spapienza 1996).

As the surveys were designed for direct comparison to the results of studies by Gorman and MacMillan, they did not seem to capture VC roles specific to the medical device industry. Interview questions, however, did capture some of these factors. Interview results suggest that VC value add specific to the medical device industry would include regulatory approval and reimbursement strategy. In addition as many of the partners at these VC firms are serial medical device entrepreneurs who have much experience selling companies to the major medical device companies M&A strategy and the strategic involvement of corporate VC could also be considered areas of VC value specific to the medical device industry.

Building an investor group consistently ranked in the top two across all surveys. The Gorman study and CEOs ranked building investor group first, while VCs and third parties ranked it second. This was consistent with interview results as CEOs mentioned that this was most critical. The feeling seems to be that CEOs can manage without other types of support, but without capital and an investor group the company cannot survive.

Helping to formulate business strategy was in the top two of the VC, CEO and third party surveys, but was third in the Gorman study. CEOs ranked it second, both VCs and third parties ranked it first and the Gorman study ranked it third. The Gorman study ranked filling management team gaps second, while CEOs and third parties ranked it third and VCs ranked it fourth.

The results of this study were fairly consistent across the different survey groups with helping to formulate business strategy, building an investor group and filling the management team gaps the top three choices for all but the medical device VC surveys.

The surveys compared to the Gorman study exhibited more consistent results than the surveys compared to the MacMillan study. Overall, however, the CEO, VC, and third party surveys did not suggest that VC roles beyond capital supply were significantly different between the medical device industry and a broad range of industries. As both the Gorman and MacMillan study populations consisted largely of technology companies it can be suggested that perhaps all technology companies require similar VC support whether they be medical device companies or IT companies. The unique attributes of SV based medical device company financings were more evident in the interview results.

Overall published studies are inconclusive regarding the impact of VC value add services on company performance (Helmann 2000, Steir 1995, Spienza 1992, MacMillan 1989). While most of these funds do not disclose their performance, increased specialisation of medical device investing, particularly for early stage investing, and success of many of these funds in raising new and larger funds suggests that these specialised medical device funds may be producing better returns which could potentially be attributed to their ability to add value. As CEO interviews suggest that there are opportunities for operational VCs to provide further value add there may potentially be additional upside for these firms to further improve portfolio performance. This would be a very interesting area for future study that would require access to information on each fundís performance.


Copyright © 2004 Kirk Zeller, All rights reserved