Wilson Sonsini conference
Meeting focuses on capital investment for med-tech
By LARRY HAIMOVITCH
Medical Device Daily Contributing Writer
SAN FRANCISCO — The 20th annual Medical Device Conference, sponsored by the law firm of Wilson
Sonsini Goodrich & Rosati (WSG&R; Palo Alto, California) was held here at the historic Sheraton Palace
Hotel in downtown San Francisco.
This meeting, the “granddaddy” of venture capital (VC) oriented gatherings, draws from a variety of
groups, including VCs, medical device entrepreneurs, patent attorneys, accounting firms and other
service providers to the medical device industry. As usual, attendance was robust, with more than 600
attendees.
Whereas last year’s meeting focused heavily on the “F” word (the FDA) this year’s meeting delved deeply
into how medical device companies could raise money in a very challenging money raising environment.
The first session, titled “Venture Strategies,” featured several venture capitalists who engaged in a lively
discussion with moderator Marty Waters of WSG&R. Responding to the question “Why has VC med-tech
investing declined so sharply in the past few years?,” Mike Carusi, a general partner at Advanced
Technology Ventures (Palo Alto, California) responded by saying simply: “VCs have less money to invest
now than in the past.”
Carusi pointed out that in five of the past six years “VCs have invested more money than was invested by
their limited partners.” In essence, the inflow of funds has declined so much so that VCs are unable to
keep pace with historical investing norms.
He kiddingly blamed the VC’s limited partners, who he called “the villains.”
Yuval Binur, managing partner of Orchestra Medical Ventures (New York City) flatly stated that “the VC
investing model, which was developed many years ago, is broken.”
He went on to opine “there is no shortage of innovation, the issue is simply that there is a lack of available
funding.” His firm’s approach is neatly summarized on its website: “Orchestra immerses itself into
selected high-value, high need clinical sectors in order to identify and analyze important unmet clinical
needs that provide significant opportunities for technology innovations that can improve outcomes while
reducing costs and complications.”
Binur emphasized that it is crucial to identify unmet clinical needs, and then develop credible clinical data.
He fervently stressed the latter point, saying “it’s all about the clinical data.” He further commented that
entrepreneurs and investors should seek to solve “fundamental needs and avoid ‘me-too-ism.’”
Regarding good clinical data, Binur noted that it does not mean that FDA approval has to be secured but
that “Level 1” clinical data must be developed.
Bill Harrington, formerly a partner at Three Arch Partners (Portola Valley, California), joined Osage
University Partners (Bala Cynwyd, Pennsylvania) in early 2012 and explained that his new firm’s
philosophy is well suited for today’s environment, as it can gain access to early stage med-tech
opportunities through its relationships with universities.
As noted on its website, Osage’s “unique model, through which it manages the co-investment rights held
by its affiliated universities . . . (allows it).. contractual access to invest in the future financings of some of
the most promising startup companies that have licensed technology from those universities.”
An additional key point that was consistently expressed by the panelists was “be cautious about your
commercialization efforts and investments.” John Friedman, managing partner and founder of Easton
Capital Investment Group (New York), proposed the idea of “dominate locally” when your company
introduces a new product. That is, do not hire a nationwide sales and marketing team, which is very costly
and also risky but rather focus on creating success in a small market area. A potential acquirer or
strategic partner can easily extrapolate that narrow market success into a successful national sales effort.
Friedman’s sentiments were strongly supported by Binur, who said “early stage companies are not skilled
in commercialization and therefore should not do this” Rather, he again lobbied for gathering convincing
clinical data.
Another interesting panel, titled “M & A, IPOs and Strategic Partnerships,” delved into how to deal with
the very challenging times in fund raising.
Rich Ferrari, a co-founder of the VC firm De Novo Ventures (Menlo Park, California) wistfully recalled the
“insanely robust” IPO market in the mid-1990s. Ferrari was CEO of Cardiothoracic Systems, a minimally
invasive cardiac surgery company that went public in 1996 with a market value of $300 million. At the
time of its public debut, it had virtually no revenue.
There were two med-tech IPOs in 2011 and none so far this year. One of the two 2011 IPOs, Zeltiq
Aesthetics (Pleasanton, California; Medical Device Daily, Oct. 11, 2011), was described recently “as one
of the most disappointing IPOs of 2011 for all industries,” having plunged about 70% from its IPO price.
With the IPO window virtually shut and VC funding sharply lower, Ferrari’s prescription for financing was
“angels, friends, families and grants.”
Amir Belson, a highly successful med-tech entrepreneur, presented his thoughts and concurred with
Ferrari. His latest startup, Zipline Medical (Campbell, California), has been financed with minimal venture
capital funding but has relied mainly on small investor and friends.
One of the most successful VCs in recent years has been Ned Scheetz, the founder and managing
director of Aphelion Capital (Mill Valley, California). Since its founding in 2005, Aphelion has closely
adhered to a model of supporting the growth of innovative medical technology with an emphasis on fast to
market, low capital intense products that also can reduce the cost of delivering quality healthcare.
Aphelion does not invest in companies that require an FDA pre-market approval (PMA) and has invested
mainly in very early stage companies, which require a modest amount of capital to reach
commercialization.
Scheetz cited the example of Orthoscan (Scottsdale, Arizona), which was acquired by ATON
(Halbergmoos,Germany) in September 2011 as a model of his investing style. Aphelion originally
invested in Orthoscan in September 2007, joined the board and helped to restructure the management
team. On a modest amount of capital, Orthoscan successfully launched a mini C-arm for orthopedic
imaging and annual sales ramped quickly to about $25 million.
ATON, a large German conglomerate with annual global sales of more than $2 billion, was attracted by
Orthoscan’s innovative technology, which affords significantly better diagnostic accuracy. Although the
purchase price was not publicly disclosed, Aphelion’s rate of return was outstanding.
Scheetz said that a key point in considering an investment opportunity “is there a clear path to the
market.”
He also commented that he expects merger and acquisition activity from the larger, slower growing medtech companies to continue and perhaps even accelerate as these companies are flush with cash and
seek innovative, more rapidly growing companies to add to their portfolios.