By Katie Pfaff
SAN FRANCISCO While med-tech investment hit a low point about five to 10 years ago, venture firms are once again interested in the channel, though investments have taken on a different look than previously, according to a panel at the Redefining Early Stage Investment (RESI) meeting.
The session, "Medical device investors," offered advice and lessons-learned to entrepreneurs and investors.
Sam Ifergan, president and CEO, Igan Partners, of Toronto, led the panel discussion, beginning with getting a sense of the attendees. Most were entrepreneurs in the room, interested in understanding what investors are looking for and looking out for when beginning a relationship with a med-tech company. Turning to the panel, Ifergan asked about the current state of investment in med tech, and what each company may be focusing on.
Renee Compton Ryan, VP, venture investments, Johnson & Johnson Innovation, of Cambridge, Mass., said investment in med tech had come through a "dark time" between about 2008 and 2012 when venture was not investing in the space.
"We are very positive on the environment right now for medical devices companies," she said, adding that despite the dearth in funding companies had continued to operate in those years. "The great part is you, the entrepreneurs, have continued to invent, continue to be scrappy, to do more with less, and also filling that void of investment dollars are corporate investors like J&J."
J&J Innovation has been involved in the not-for-profit Med-tech Innovator, which awarded $700,000 across nine months, mostly to small, largely unknown companies which had a compelling product, she said.
Yao Li Ho, director, business development, Lyfe Capital, based in Shanghai, said their strategy differed depending on the market. In terms of investing in China, "with Lyfe Capital, we generally prefer it to be a later stage, commercial stage," he said, while "in the U.S., we are interested in things earlier." Chinese companies also may receive some backing from the government in early stages.
Randy Scott, partner, Healthquest Capital, of Menlo Park, Calif., suggested his firm goes after overlooked areas of the U.S. not traditionally thought of outside of the market beacons like California, Boston and New York.
"Innovation is spread widely across the country, and health IT is across the country," he said, pointing to Indianapolis, Salt Lake City and Orlando. Investment opportunity generally also has improved, though challenges remain, he added. "I would say this is certainly not the best time ever to be an entrepreneur raising money but definitely not dark days. There's more money out there," however, mid-level investments have become "more eclectic" with nontraditional strategic approaches. "As an entrepreneur, you maybe have to be a little more creative, but the money is out there," said Scott.
Digital health not revenue builder
Z. Haroon, chairman and general partner for Julz Co., of Chapel Hill, N.C., echoed that investments had tapered off in past years, but has now rebounded. He noted there was significant interest and excitement around digital possibilities, but we "have not seen real identification of a revenue model for digital health."
When asked about the impact of tax changes, Scott suggested many large med-tech companies may choose to repatriate money and invest, which could be a boon for small startups or could instead bypass external companies and be funneled into their internal R&D structures.
Ryan commented, "We're not changing our strategic lens in terms of investment 50 percent of our pipeline comes from external innovation," she said whether that was through purchase of a company, collaboration, or agreement.
Pluses and minuses
Panelists were asked what characteristics they look for in a med-tech firm, or avoid at all costs.
Ho said they look to quality of management and their relationship with investors. Scott added the story behind the product needs to ring true. "We get pitched early on they focus on the product," he said, but their main concern is the business opportunity. A device that is liked by patients and doctors does not necessarily translate to revenue, Scott said. Management, reasonable expectations and a good fit among those who are tasked with bringing a product to market are important.
Companies that have unrealistic timelines for closing of financings or commercialization are a red flag as well as those who do not directly answer questions about a potential pitfall. "Don't be evasive; answer questions and don't try to hide warts," said Scott. "All companies have warts, but if we know them early on we can address and deal with rather than finding about them later." That also can include management teams unable to bring a product forward.
"Any level of evasiveness is a put off," said Haroon. "Any time we ask a question and we don't get a straight answer, it's a time-waster." In early stages the two firms are trying to build trust so evasive responses, overly positive outlook, or information that does not match would lead investors to walk away. Ho added firms should be upfront about a product and problems, including personnel since they may also be able to suggest a person who could be a good fit.
"View the venture capital [company] across the table as a possible connection," he said.
On the other side of the discussion, med-tech firms may want to be wary of requests being made of them by investors. Ho suggested "there is dumb money and smart money" the former tied to requests that are unreasonable, and likely cannot be met. He suggested firms "tread carefully" in these instances.
Published January 16, 2018