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36 min reading time
Do you know what DARPA is? They have billions of dollars for R&D each year.
If the timeline to introduce a medical device is years, how much can an incubator help you?
If, as a sector, we’ve had negative returns over the last 10 years, a mediocre IPO market, increased time for return on investments, significant concern regarding FDA process, and payment issues, how can we attract funding?
Here for the answers, watch the “Creative Funding in a Difficult Medical Device Environment” video replay.
Amy Butler: Thank you Joe and it’s a pleasure to be here this morning. As Joe said my name is Amy Butler and I’m with Oakland University; that is the Oakland University in Michigan not in California.
I run a business incubator and Smart Zone Accelerator there. We focus in IT and energy and medical device because there’s an underlying connection between all three. I work very close with the school of engineering and computer science as well.
Michigan has a framework of incubator accelerators called Smart Zones and we work interactively together in order to help startup and grow businesses to be successful and to move along the continuum of growth.
Healthcare has become a very, very large portion of our industry sector in Michigan particularly in Oakland County. When we did an assessment just recently, we found that we had over 100,000 people employed in the healthcare industry in Oakland County alone.
We had to pay attention to that. We realized that this is a sector … we’ve always been known as the automotive belt of the world, but the innovations we were experiencing through the automotive industry were becoming readily adaptable in finding solutions for the healthcare industry.
With the aging population and challenges that we had, we had to find solutions. So this has become a very large focus for Michigan and I’m very pleased to be able to be here and talk about this particular subject of financing.
We have a diverse panel here with us today to give us several different perspectives on how does it mean? How do you get financing? What is financing?
Everyone that walks in the door of an incubator says, “I need money.”
But I haven’t found anyone yet that’s actually been ready to get the money that they think that they need at that time.
So it’s really being able to assess where are they in their continuum? Where are they strategically in their business plan and in their development? What is the right funding for them at the right time and how does this strategically (the finance strategy for them) work to get them to success in the market?
So we’re going to talk a little bit about that today. We’re going to have each panelist provide a few comments and then we’ll open up for questions.
We’re going to start with Jim. We’ve got four different panelists today: Jim Stauner, Steve Anderson, Allan Daisley and Joe Bjorklund. Hope I got that right.
Jim is an Operating Partner from RoundTable in medical device activities. Steve Anderson is CEO of Preceptis Medical, Allan Daisley is Executive Director of the Memphis Bioworks Foundation and then Joe Bjorklund is the CEO of Institutative.
Joe Bjorklund: Insituvue. (Chuckles)
Amy Butler: Say it again.
Joe Bjorklund: Insituvue.
Amy Butler: Oh well, sorry I’m going to have to practice that one. So we’re going to start a little bit with Jim and have him talk about the various types of financing tools that are out there. Then our other panelists are going to talk about what their experiences are.
Because it’s not just about everybody needs a bunch of capitalists. It’s not everybody needs an angel. It’s not everybody can walk in the door and get the $20 million they need right now. It’s how do you layer the tools that are out there in order to achieve your ultimate goal. How do you put that strategy together?
So with that opening, Jim, would you like to start us off?
Jim Stauner: Sure Amy thanks. Delighted to be here everyone.
What I thought I would do is start with the basics and then we can work through. I’ve got down six different scenarios of funding possibilities. There might be others that folks out there have and as a part of this dialogue, as Joe pointed out earlier this morning; I think it’s all about folks benefiting from others’ experiences.
So we’ll talk a little bit about that as a panel and then others in the room may have had specific experiences that would be very beneficial to share as well.
The first place I would start is folks come to us a lot as a private equity firm with great ideas. We’re positioned a little bit differently than other private equity firms in the space. So I’ll talk about that just so folks have an understanding.
Not everybody is into startups; some folks have different agendas relative to the commitments they’ve made to their limited partners as a part of the firm. No question from what we saw this morning, the first two sessions a very tough environment today versus even a few years ago.
You look at the reimbursement landscape, regulatory pathways, comparative effectiveness if you’re talking about new products, really difficult for a new startup or a new product to get into the market. However, I would tell you there are funds available for good solid products with a good business plan.
And that’s a cornerstone that I think all of us will come back to is you have to have a solid business plan.
You need to know where your product fits into the market landscape, who are the competitors in that landscape, how does a strategic (partner) potentially have interest in what you’re all about. Things of that sort.
And the other important thing is to really make sure you’ve got your business plan laid out into what I’ll call milestone events. Amy had said folks come in the door and saying, “Well I need $15 million.” Well guess what, we don’t have $15 million to give you.
But if you can break that down, “Hey, if I have a million-and-a-half or $2 million, I can get to this particular milestone.” Maybe it’s proof of concept. Maybe it’s getting to a certain clinical trial, a quality measure indicator.
Something that somebody can say, “Well I can hang my head on that because I know if you get there I can probably get you to that next level.”
So really make sure as you’re looking through your business plan, you’ve got it very detailed and concise around the dollars involved, what does it take for you to get to a particular milestone event. The chances of success will be a lot greater if you get into that granular of detail.
If you don’t have the expertise because I’m sure folks will say, “Well, I’m not exactly sure what it’s going to take or what I need to do to get to a particular milestone.” You need to probably work with an expert.
So sometimes that will take some upfront investment on your behalf to find somebody and maybe through networking in this room or other audiences you can find those individuals to really make sure they’re helping you lay that landscape out.
“We can probably get to this point with this level of investment, once we get there then maybe we can talk to people about adding on capital.” So on and so forth.
So I really want to make sure that one thing you’re hearing from me is that make sure that upfront before you go talk to anybody about money, have a good solid business plan that’s well-thought out, concise and it’s got a level of detail to it that you can stand behind.
And again from a competitive standpoint or folks that might be interested, I’m going to talk a little bit later about corporate venture funds and the like. Don’t be afraid to say, “Hey, maybe a Medtronic or a Covidien maybe they’re not a bad partner. Maybe they would work with my particular product area.
Not every company needs to go from say zero to “Well I’m going to be at 20 million ($) or 50 million ($) in three to five years.” Maybe that’s not the case, that’s okay. It might be a great opportunity for you to be doing something on a licensing deal with one of those corporate entities and the like.
So funding options that I’ve listed out here, I’ll go through them and then I’ll come back to each one.
Non-dilutive those will be like grants and loans by organizations maybe incubators that you hear a little bit about.
Angel investors their role, VCs and private equity, corporate venture funds, and what I’ll call corporate healthcare managed care funds. Those would be people like Kaiser Pamanente and Humana and I’ll talk about that in a little bit more detail.
First, non-dilutive financing. I ask people this a lot because if you’re looking for startups, these are great opportunities to get startup capital where you can get to one of those milestone events and maintain your own intellectual property rights.
Working with the government, people like DARPA. I don’t know how many folks out there have worked with the Defense Advanced Research Project Agency. But it’s a great organization in the medical device world to get started.
They have billions of dollars that they allocate towards R&D every year not as a total, every year. And they’re looking for new innovative technologies that would support what they need accomplished from a defense standpoint.
Now they first off most folks have, “My product is not oriented towards trauma in the battlefield.” It doesn’t have to be. That definitely is a sweet spot that they have. But think about the VA system. They’re taking care of all those veterans that out there in that environment. There is a whole host of different products and services that could benefit the VAs.
Or you’ll look at the service individual’s family they’re also interested in how that family could be protected because they always believe a good family support system in the military helps to make a happier more efficient warrior out in the battlefield.
So keep that in mind, it doesn’t have to be something that’s just trauma-related if you’re going to be working with the government. If you haven’t thought about that you can go online Google “D-A-R-P-A,” it’ll show you exactly what you need to do. Great place to start, no guarantees but they’ve put funding.
I’m aware of companies that I’ve tried to work with where they’ve got into in the teams to $20 million plus in R&D to get to those milestone events. Where then they’ve been able to take that and go out. And the government is not looking for anything in exchange outside of hopefully that product gets to the market and can help the government from the standpoint of the things that I’ve mentioned earlier.
So that’s a great one to keep in mind. And they’re a good clinical resource as well. They’ve got folks that have a lot of knowledge so when we talk about some of these quality measure indicators, credentialing they can help along those pathways as well.
Again a good opportunity if you’re in the startup situation. I think we’ve got other panelists here who will talk a little bit more about the incubators and some of that but those are all good non-dilutive ways to approach things.
Angel investors. Angels used to only do things in that quarter of a million, $500,000 range. Sometimes that was good depending on where you think you need to go but again going back to my earlier comment about know what that financial plan needs to look like to get to a milestone event.
Angels now are doing more like what VCs have done historically and that’s syndications. So maybe three or four angels will get together to make an investment in something where you could get $2 million from an angel group.
Once you do that then maybe those $2 million get you to a point where, “Okay, now we’re ready to go talk to a big person to get some add on capital or go talk to a strategic because that’s maybe a good exit strategy at that point in time.”
If you’re not familiar with angels a good place to start is there’s a website. It’s angelcapitalassociation. I don’t know if folks have tapped into that but you can go on there and it’s basically set up regionally around the country.
It doesn’t have to be, but usually if you’re working with an angel if you’re here in Midwest there are angel groups in the Midwest it’s probably best to work with one of those folks because they’re going to want to have some oversight maybe a spot on the board, things of that nature. So just keep that in mind as you’re looking at potentially working with angel folks.
Venture capital and private equity, ventures they’ll typically work across any level of funding. It could be through startups it might be growth capital down the road.
One thing that I point out to people is that most states major metro markets will have venture capital and private equity associations. You can go online you can check those groups out.
They have meetings like this that are great for networking opportunities because let’s face it most of what you do in this space is really about networking and getting to know people.
You can join those groups and they’ll basically have little booklets put together around the different partners that they have within that association and spell out well what is the level of interest that that particular VC or private equity group has.
What’s the range of investment profile, risk assessments that they do, risk tolerance, things of that sort? I’m in a private equity group that does growth capital for businesses that are already commercialized and now looking from going from say 20 million ($) to 50 to 100 million ($).
Totally different from a startup where you need that early money to get going. So if you get in, you can learn what those VCs and private equity groups do. They’ve all made commitments to their limited partners, and that’s something I want to point out here too because we get this question asked a lot.
We see a lot of neat companies, a lot of neat products that are truly startups. That’s not what we’ve committed to do with our limited partners. We’re a growth capital firm that’s oriented downstream.
It doesn’t make the product, it doesn’t make the business, a bad thing, it’s just something you need to know as you’re talking to folks around who invests and what type of company or product at what stage, so you have a good understanding to that.
Again you can go to associations and learn a lot more about who is who in a particular marketplace.
Corporate venture funds. These are the folks like Covidien, Medtronic, J&J, GE Healthcare, Novartis. They’ve got all their own venture groups that are looking to put money into some startup situations.
It gives them early market intelligence, visibility to maybe some innovative technologies. Quite honestly in the back of their mind if it really takes off they’re looking for maybe discount on a potential deal. But that may be okay and maybe that’s a good play for you and your particular product or your company as it relates to where you need to go in the marketplace.
As we’ve talked about time and time again this morning, it’s a tough landscape and environment out there. Maybe working with a strategic at some point makes a lot of sense because they’ll have the horsepower and the wherewithal to maybe take that product to the market.
So maybe you end up with a licensing or you end up with that partner who’s got a majority control but at least you know your product’s getting in the market and you benefit from that downstream. So keep that in mind.
Then the other one on a similar vein, is these healthcare funds as I mentioned Kaiser Pamanente has got one. They’ll typically invest anywhere from five to seven million (dollars) or Humana they’re a little bit smaller, one to two (million dollars).
They’re looking again for visibility into some new innovative technologies. Things that could benefit their caregivers downstream as well.
And with that they’ve got obviously a lot of clinical expertise. So all these things like helping with quality measures, outcomes performance things of that sort, those types of groups can be very good and beneficial helping you get some of that put behind so you’ve got those credentials as you go forward in your strategy.
Okay, so I turn it back over to you Amy.
Amy Butler: Yeah, Steve, would you like to go next and give us a little bit of background on, you talked a little bit about angels and some of your experiences.
Steve Anderson: Absolutely. My name is Steve Anderson I am the CEO of Preceptis Medical. We are a startup company located in Minneapolis. Extremely small by purpose, trying to keep things frugal and trying to limit the amount of capital we need to raise which kind of ties to the stories we’re hearing today.
We have come up with solutions so the ear tube surgery for kids can be done without the risk of general anesthetic and without the need for an OR thereby significantly reducing cost.
So there is out pitch right there, our one-two is way safer, way cheaper. Luckily for us we don’t need different codes. The codes and the coding and the payment are already out there. So the question we had before about CPT really doesn’t apply for us.
We can go out right to the doctors and say we have a significantly safer therapy and to the providers and to the insurers we can say we have the significantly less costly opportunity.
So to a certain degree there’s one way you get started … trying to figure out how to raise money. You have to figure out an idea that fits into the sweet spot of where people are looking. So we’ve all heard don’t follow a level of technology and look for a market. That couldn’t more true today. You’ve got to figure out where this is going to go.
There is some really interesting stuff. I don’t know if people read the Money Tree Report but the numbers all came out over the last couple of days so this is put out by PriceWaterhouse and also in the NBCA.
Nationally funding fell 6.4 percent in first quarter. Funding for devices for VC funding declined 20 percent in first quarter nationally and the Dow Jones had the overall funding down 11.8 percent. “The Minnesota,” VC funding dropped 58 percent in first quarter compared to last year.
Nine deals, 37.5 million ($) none of them received capital. But the good news is of the nine deals, five were devices and equipment.
[Holera] [0:16:32] raised 10 million ($) but they had a pretty illustrious group of current investors at Morgan Taylor’s, [Split Rock, Versent]. [Celeration] raised 6.4 they are in [indiscernible], and Functional MR they raised 4.3. [Neocore] is also an MR they raised three and Mooncare Technologies raised 1.2.
These are the types of deals that are being done locally here.
So my thoughts on this are, we talked about limited partners, but they have been, why is VC funding for devices going down?
The limited partners are very bearish and you can’t blame them.
We’ve had negative returns over the last 10 years, a mediocre IPO market, increased time for return on investments, significant concern regarding FDA process. And then as we’ve talked about the big one, which hasn’t even really hit us as yet, which is payment and how this is all going to fit together.
So the results of Bearish LPs in the device sector, less VCs investing in devices, VCs that have been in device specifically are having a hard time raising funds.
Sometimes these funds may not, even if you think they’re good, your fund may not be able to make their cash call and you’ll be their last to know it. They’re not going to tell you until the last second.
There’s a lot of large funds that are still following the classic model. These are the big names these are the NEAs and the Orbits and they’re out there. But they have a lot of ideas to pick from right now.
What the other funds are looking at different opportunities. I mean they are looking at secondary and direct deals. A lot of them have moved to what they call Late Stage Investing they’re trying to reduce their risks.
Now five years ago late stage used to be you’re near a clearance, you’re near a PMA approval. Nowadays late-stage means that you are already generating maybe a significant amount of revenue traction. So things have really changed. So let me talk about a couple of alternatives.
One thing that’s come up and we’ve had a lot about as “crowd-funding.”
I just don’t see how that works in devices. I can’t, for the life of me, come up with one way that that’s going to work in the field we’re in. I actually had somebody from the Gray Sheet call me a couple of months ago and they’re all excited and they were going to write an article. By the time I got done talking to them I think I killed their article.
So I mean it’s great in other areas, consumer electronics, I mean you can give people something. What are we going to give people? A medical device? A prescription device?
Try to get strategics to come in early. There’s been a lot of discussion on this but the evidence isn’t really very clear that they’re doing this. Now there’s going to be more discussion on this at this meeting but it’s not easy. They’re not used to coming in extremely early.
You’ve got angel groups out there and angel groups can be good to work with, they can also be difficult to work with. They have a lot of cooks and you don’t have any direct staff and it makes it a little bit harder. Quite frankly they’re so worried about dilution in the upcoming rounds when the VCs come in that they’ll put together in the early rounds that would be considered onerous by anybody.
And then you have angels which can, you know, that’s where a lot of companies are turning to angels and as you talked about non-dilutive financing for grants. That can be a really good way to go, get that grant application in early because it’s going to take a while to get. First you’ve got to get through your phase one and then your phase two.
So a couple of suggestions that I have. For the Minnesota companies, how many people here have used the Minnesota Angel Tax Credit? One.
That’s actually not really a good thing because it is really a wonderful incentive. Now you’re going to have a hard time getting a deal done strictly because of the credit. But it’s a very nice sweetener on a deal.
The investors can get up to within certain terms of the deal. A 25 percent rebate. You don’t have to be within the State of Minnesota and it’s not immediate rebate, it’s on the next year’s tax returns. So if you’re in Minnesota it will reduce your tax burden by that amount, if you have no tax burden it is an immediate rebate.
So I would advise people to look very carefully into that. The popularity of this program is really increasing. A couple of years ago the money ran out in November, last year it ran out in June. This year they’re looking at kind of a May-June timeframe. In Minnesota they have 12 million ($) dedicated towards this.
Look for smaller funds that they’re doing early stage. There’s a few out there. Michigan actually has a number of nice little small funds that are willing to go early stage and they’re starting to show up at some of the meetings here locally. Medtech Investment Conference, which is on May 8th coming up. That’s a good idea.
Again, obviously I said this before, the idea is geared towards reduction of cost. You want something obviously that you can go right to peers and talk to him about reduction of cost. You want strategics to be hovering over that space.
You need to be frugal with your use of capital. We talked about this already. You need to be willing to go without a safety net the days, again 25 million ($), and just thinking, you know, if you have a few hiccups you’ll work through it. Those days are done, you’re going to have to take the minimal amount of capital you need, get to a milestone and then do it again.
Network with other entrepreneurs, be at the meetings. You’ve got to talk to the people that are out there. And then finally I would say make sure your pitching idea works.
I mean, I swear every pitch that I’ve ever had no matter how many times I look at it; I’m always constantly trying to improve it. Had experts look at it, have other people look at it. Make certain that what you’re saying, that your value proposition rings true to the people that you’re trying to talk to.
And then I do want to just remind everybody we had the Representative Paulsen and Senator Klobuchar. The problems that they’re dealing with may not impact you today but they will impact you in the future. Work with them on the repeal of the excise tax. Using an excise tax as a tax apparatus is a horribly bad idea and also improve efficiency of the FDA process.
Amy Butler: Thank you, Steve. Now Steve mentioned a couple of things and so did our first speaker about making sure you get a strategy and looking at those different components.
And one of the ways that you can get those resources is working with an incubator or working with an organization that helps those companies walk through their steps, look the milestones, help you figure out some of the different tools and financing strategies that can be used.
Allan, you want to talk a little bit about your role now, and how you play into that kind of a strategy?
Allan Daisley: Yeah, sure, I’ll be happy to.
So I’ve worked at the Memphis Bioworks Foundation which is a local 501(c)3 non-profit, as you probably guessed, based in Memphis, Tennessee. Our focus, we were formed back in 2001 with a mission to promote economic development through the biosciences.
Specifically we look at trying to attract and retain talent in the Memphis area, trying to grow businesses. What we’ve done is we’ve sort of taken our focus on look at the areas where we have strength and basically double down on those.
You know Memphis we have a good core base of medical device activity. There is Wright Medical’s headquartered there, there is Smith & Nephew, Medtronic, there’s a lot of orthopedic and spine activity going on in the area. And then you also have St. Jude’s Children Research Hospital, Lebonheur, Methodist Baptist. There’s a whole medical center and activity there.
This has been an area of core strength for us so we’ve been looking to build infrastructure and specifically my responsibility is on the entrepreneurship side to really build those businesses that we think have a chance of changing the landscape of this city going into the future.
So on the entrepreneurship side what we found is that there are lots of issues and specifically as the device which is near and dear to my heart we looked at companies that were trying to take root. And obviously financing has been a huge issue. You all know it, it’s in your town and it’s in mine.
So we just thought, well what can we do to try and change that whole landscape? We set up a business incubator which we’ve been running for several years. It’s one very effective way for companies to come in in the early stages, go through the initial formulation of your business plan, growing your business.
It’s a friendly environment where you can come in and sort of be nurtured through the process of getting your pitch straight, getting your business plan straight. Even we have services where we can help you in terms of guidance through the FDA process as well as hiring and building your team, connections in the community.
So what we found is that that’s a good option for companies that are in their very nascent stages because it’s a really tough out there if you’ve ever done this before. The FDA process trying to get your approvals or clearances, trying to do your product development all at the same time trying to build your team. Manufacturing, where should I start? Should I start here or abroad?
There are all these questions that an incubator environment can really surround you with the experts who know and can help you through that process.
Lately what we’ve done and we’re in the second year is we decided that we would look at a different model which is… now there’s a very popular model the accelerator model that’s popular in the IT and internet space where they bring you in and they sort of take you through a three-month high intensity bootcamp-style program. There is some famous ones like Y Combinator, Tech Stars and so on.
What they’ve done is they’ve managed to kind of combine the investment and the training all in one. So it’s a way to sort of turn out in a rapid fashion, high-potential high-growth companies.
The premises that you invest a little money in them and that will help take them through the early stages, help them to do the things that you would normally take about a year to do, cram it into three months, put it on steroids if you will.
And then at the end with a heavy focus on mentorship you have a company that’s much more ready to be invested in. And by the way you have investors actually waiting on the backend to look at that.
So we thought that was a really good model except that it’s really really hard to accelerate devices. I mean devices take five, seven, 10 years and about a gazillion dollars to get to market so how could you accelerate something like that?
So what we decided to do what we really like that model but let’s see what we can do. Is there any sort of way that you can accelerate part of this process? So we focused in on the 510K and the 510K if you’re really good about them you can get significant milestones to happen in about a year.
Of course you have to pick technologies that are not going to take you two years to prove out and things like that. And so what we’ve done is we’ve put together an accelerator program for medical devices as far as I know it’s the first one and only one that’s out there.
What we do is we bring up to six teams in and we take them through. It’s a three-month process.
We would work on their entrepreneurship skills; we surround them with some classroom activity so we bring in experts in FDA, regulatory, reimbursement, compliance. The basic business building things like marketing, finance, accounting, insurance, all these sorts of things.
So we put together a curriculum of pretty high intense activity as well as we get a group of mentors that’s experts in all of these areas and specifically we look for mentors who have done it before, who have been there, done that, and can really help get them through the pitfalls of this business building experience.
And then the sort of icing on top of the cake is that we provide up to $150,000 in seed funding. And this is as a couple of the other panelists have said before; it’s tough money to get. Matter of fact, the seed money is tough to get, the follow on is tough to get, but really who is going to help you get that startup funding?
There are a lot of VCs we deal with as well and as Steve rightly noticed is that late sort of growth stage has now become, “What’s your revenue?” And at this point when you just have an idea or a first prototype, there is no revenue.
So we feel like we fill a good niche and we do it from a pre-revenue stage and it’s a really early stage. What we do is we structure it such that you’ve got $50,000 on entry. We go through that first three-month period. And then we have another phase, phase two, where you’ve got to pitch to us, and then there’s another $100,000 that’s in it for you at that point.
We find this as a good way … $50,000 is nothing in device, but at the same time it might be what you need to get your act together, get a plan. It’s really hard to get any kind of funding without having a regulatory path for example, how are you going to take this to clearance?
Typically nobody is going to put any money into you if you don’t at least have that. Well we actually help you get that.
So we do some pretty intensive evaluation of the companies before we bring them into the program. And then when they come in we walk them through we set milestones. At the end of the first phase your pitch to us is what have I done with my milestones and what would I do with another $100,000?
We also have the flexibility to say, “Well, if $100,000 is not going to help you really?” Last year we did a two-and-a-half million Series A and that’s one of the things that we have the flexibility to do is invest as it makes sense.
Now the way we structured it is I have two local VCs that I work with. One’s actually under our umbrella. This is one of the things we realized a couple of years back was there is no really good seed funding so we created a fund. It’s a long story but we actually ended up creating a fund.
And so we actually do invest in a number of early stage companies and that we sort of palled into a relationship with another local VC. This VCs also invest a lot with angels. As a matter for every dollar we invest, there are about $3 that we bring in off of the sidelines through angels.
Angels they’re here and they’re there and they’re everywhere, you just have to find them. Angels they tend to invest in what they know and so you really need to be in that sweet spot a lot of the times and having that network that you can call on if you have an orthopedic device or if you have a catheter or something. You need to find those VCs, those angels who are in that space, and that’s what’s going to be really important as you go forward.
Anyway, so we managed to bring all this money on the table and as we go forward those two VCs are the ones that make the investments.
After that first phase of the program then we have another phase which is more, not so much a time-bound phase but a milestone-bound phase. You’ll hear me hopping on milestones, milestones, milestones all the time because it’s one of the things that you really have to look at. I mean Jim mentioned this earlier as well.
If your product is going to take you $10 million to get to market, that’s a tough ask at the beginning so you may want to look at breaking that down into phases that you can put funding together based on milestones. And VCs like to have the little trapdoors that they can exit if you don’t meet the milestones.
So it’s a sort of sharing of the risk with you and we strongly believe in that. So we traunch the funding. You’ve got $50,000 first you pitch to us for another hundred or whatever it might be and then we can set you up on a new set of milestones that will be… it might be that you proved the concept, it might be that that 510K is a milestone.
It just depends every device is different but we strongly believe that one of the best ways that you can really approach this is by looking at it from a milestone basis, an approach that makes sense for both you and for who’s funding you.
So that’s all of the program in a nutshell and we believe that this really fills a niche in the market that is really needed. Not everybody is going to be able to take a product from beginning to end on their own.
And sometimes a little help is what you need and whether that’s in an accelerated format or whether it’s sitting in a business incubator where you sort of take your time and do it over the course of a year or two, there’s a really big role that institutions and programs like this have to play in the development of medical device companies.
Amy Butler: And Joe, as President and CEO of Insituvue, and recently being involved in a recent sale of a major company, what can you add to the strategy that we’ve talked about so far that you think would help people in understanding how to put together a financing strategy that would get them to their goals?
Joe Bjorklund: Yeah, I think it starts … just there’s a lot to piggyback on here that has been talked about and I’ll give you hopefully some real life examples of what you can utilize.
First of all, this is the exercise of trial and error.
Anyone who claims they’re an expert at funding I want to talk to that person for a long time because I come out of the imaging world, the ultrasound world.
Insituvue makes a device that is particularly geared towards vascular access but is living in an existing paradigm of ultrasound that brings up all kinds of expectations and connotations in people’s minds.
To piggyback on one thing said earlier on DARPA grant. Actually that is a good avenue there is a company I was involved in in 2000 called Sonosite that you may have heard of and all of the initial R&D for that product was done on a DARPA grant. I believe they got 12 to 14 million dollars.
Was spun off from ATL which his now Philips Ultrasound, that company just sold to Fujifilm last year for $995 million so that’s certainly a success story on that.
The other thing is that there’s a lot of talk in the room today about how government gets in our way. The government can help you, remember that too.
Insituvue got a quarter million dollar grant under the Federal Stimulus program that we got simply because we were paying attention.
We were able to show, when you talk about milestones, we were able to show very very clearly what that money was going to be used for.
And so you’ve got to be really careful about, “Give me $10 million and I’ll rule the world.” It’s, “If you were to give us this, this is exactly what we would do with it. If you were to give us that, this is exactly what we would do with it.”
And be prepared to be flexible as entrepreneurs too. No one in our company has drawn a salary for six months. And part of the reason we do that is not because we like it, but because we think it’s such a good example to potential investors.
So that sort of goes to the think ahead.
Another example I’ll give you is be willing to listen to anybody. We can get very jaded, I’m part of that world too where you say, “Well, here’s someone inquiring about our product and jeez, we’re not even FDA-approved yet,” which we’re not. And actually that’s our next milestone.
But I got a call from a gentleman who was a resident in a military hospital. And my first impression be, “This guy doesn’t have any money. I mean he’s a resident. He wants to use our device for a study blah blah.” I took his phone call and we talked for about an hour.
As it turned out, he is closely tied to the Colonel who runs all the Special Forces for the US Army. And we’re in active discussions now with Special Forces about could we do some validation with our device pre-510K. Obviously not on patients, it would be cadavers and phantoms and so forth.
But because we believe that, as I thought about it more, I think we want to go down this route because if we can prove we’re definably the best at something, without question, that goes outside the existing paradigm, then the doors, we believe, open up a little bit.
That even if it’s a five to 10 million dollar limited market, if you can dominate that space, everyone knows it’s going to flourish from there. It can be applied to other applications.
So we’re very focused on what can we dominate and not getting too hung up on the how big a market is in but show investors a definable pathway of how to get there.
Let’s see, what are the mistakes have I made that you can learn from? (Laughs)
Oh, have comparative examples. One comparative example, one of the interesting things is I came out of the ultrasound industry and when I was first hired as CEO, the Founder saying, “I’ve got this industry guy. He’s going to come in and tell us all about the ultrasound world.”
My first recommendation to them was to tell them, “You’re not an ultrasound company.” And they said, “What are you talking about? We utilize ultrasound technology,” I said, “That’s the technology you utilize. Don’t get too hung up in technology but the moment you say the word ‘ultrasound’ it conjures up all kinds of expectations of an existing paradigm.”
And so what I felt was we need to find concrete examples not so much of what we are, but what we’re not and how that changes the paradigm. And so without getting into a big technology discussion about it … and then give comparative examples as to why are certain comparative companies getting huge investments?
One of the spaces that you hear a lot about the vein illuminators these days. They basically use infrared to illuminate veins so you know where they are.
A company called [AccuVein] got $23 million in venture funding, in what to me, is a crazy idea. It’s cool technology but we feel we can be extremely disruptive to that technology if we don’t market ourselves as an ultrasound company.
And so I think that helps us in terms of when we’re talking to potential investors to say a technology that we can clearly cannibalize just got $23 million dollars … and that can help your argument.
But I think my big take from what all gentlemen said here is it’s all about milestones. You’ve got to be very, very clear on what you’re going to be able to accomplish with various levels of funding.
The final thing I’ll say is that in my mind as we navigate this tricky road, I’ve become much more open to; we’re sort of a tweener in that we’re looking for about $2 million of series A funding right now with an option of series B for $2 million more. And we believe that gets us through all the milestones we need to get through to start looking for an exit.
That leaves us in kind of in-between; I actually wasted a fair amount of time talking to venture capital companies. We just don’t need enough money from them, to be honest. If we’re not looking for 10, 12, 15 million (dollars), it’s really not worth the administrative cost of them doing the deal with us.
And so I’m looking to increasing I think where a lot of the money is going to come from going forward is from collaborative companies. Where, even, I have a friend who is actually in town talking to a major medical manufacturer here in Minneapolis today about the startup they’re trying to work a deal where they make an investment in the company, the existing expertise gets it to certain milestones, and then there’s a predetermined exit price, once they reach those milestones.
So again that just leaves it, and there’s a lot of collaborative companies out there that are looking to diversify because one of the things that was said in the meeting on payors and so forth is they are looking for standardization.
Well getting someone to standardize on your little corner-of-the-world product is going to be very difficult. If you can tie to an existing product line that has clout with all the group purchasing organizations and all the regulatory bodies and all those types of things and slide into their portfolio, you’re going to have a much faster path.
You’re going to have to give up some control but I think in the environment we’re in it’s something you have to be open to.
Amy Butler: You have a question?
Joe Hage: I do.
Amy Butler: Okay. I was going to give the panelists one opportunity to add anything now that they’ve heard from each other if there’s anything that you want to add and then we would open it up to questions.
Steve Anderson: Again think about incubators as you talked about, you’re in a spot where you’re too small. I mean you can’t move their needle on their fund. So you either have to figure out a way to get into one of their incubators or you have to figure out how to get with a smaller fan.
But the incubators is a good option. I know some of the larger VCs have done a nice job with setting those up and I think Versent, in effect, has a new office here in Minneapolis with the express goal of trying to get more Minnesotan investment.
Amy Butler: Michigan also has put together, we do have a growth capital symposium that’s in May where all of our venture capitalists actually come together and you can compete, you can look at opportunities to pitch.
We also have a major international medical conference in the fall called Innovations. Last year was the first year we did it. We had over 400 people but we had over 40,000 live streaming in from across the world.
We get a lot of venture capitalists there and angels there. We talk about a number of different things so it would be a good follow-up to this.
One of the things that Joe has talked about is the networking and the opportunity to really get to know each other.
So look outside your state, look outside your region. Michigan has a whole set of tools that have been layered together that look at the milestones along the way. And one of the things the investors look at is have you taken advantage of some of those tools? Did you apply for that initially business accelerator fund? Did you apply for an SBIR?
The state has a matching fund for SBIRs. We also have an incubator that has a DAPRA grant. So there’s a number of different tools. Then when you get to the angels there’s a matching capital grant for angels and then there’s a matching capital grant for ventures.
So there’s a number of these small incentives that they’ve built along the way to encourage you and take you through some of those stops.
So with that let’s open it up for questions.
Joe Hage: Actually I want to build on what you just said. I’m curious personally to know for Amy and for Allan. I don’t remember what your state you’re based out of, Joe.
Joe Bjorklund: Insituvue was developed at the University of Pittsburgh, in our corporate offices in Pittsburgh.
Joe Hage: Okay. So you represent Michigan and you’re in Memphis. Does Joe have a chance working with you or is it very state-specific? He’s based out of Pennsylvania. Should he overlook anything by Pennsylvania or are you are you open for him?
Amy Butler: There are some tools that are Michigan-specific that we’ll be looking for if they’re offered through the state that they will be looking for you to set up office in Michigan. But our investors are not specific to just Michigan so being involved in the Innovations conference or the Growth Capital Symposium are great opportunities.
I am an international incubator. I have three companies. I do IT, medical device, and energy. So I actually have companies that are coming from other countries and getting established.
So there are some tools as outside of Michigan, there are some tools you’ll be able to take advantage of and there are some that won’t. But you can still be associated with an incubator; you can still look at some of those tools and use them as access to get to know some of the investors in the network.
And as I said there is a huge medical device and healthcare network being established over Michigan because of the amount of demand and the amount of employment that we’re finding.
Joe Hage: Allan, anything to add?
Allan Daisley: Likewise we have companies here and everywhere. Our investors more look at the technology and we’re early stage so there’s no geographic boundary. There are a couple of little kinks, one is depending on the bucket of funds they invest, you may just have to register to do business in the state because some of it is from the state but that’s a small hurdle I mean it’s just the registration.
Joe Hage: I don’t like to play favorites but I will admit that I am partial to Joe’s company Insituvue. I was speaking with Gary, a member of your team and we wrote a post a few months back called “Medical Device Dead Zone” which is this little area of two to four million (dollars) which is too small for these guys and too big for these guys.
Wouldn’t it be a dream if collectively we could find a way to help this guy?
But you have clinical trials, you have vast demand every time you go to a trade show, you’re clogged with interest and it’s been 18 months and you’ve been close and then it fell apart and then you almost … and then it’s like, “Urgh!”
You represent a lot of people in our group who are in a similar situation that have a technology that solves real problems, you may even have clinical trials, and you’re still not funded.
Give us, in TV land, who are watching this later, say, “Hey, I’m in a situation with you. Here’s what … I tried don’t bother this. This was a grand waste of my time.” You indicated earlier if you shoot too high they’re not interested.
Are there some things that, “Boy if I had known 18 months ago what I know now…” And I’ll leave that with you Joe.
Joe Bjorklund: Yeah, boy there’s a whole bunch.
I think it really is, think everything through. We tend to have… I came out of the business development and sales world so really coming into the company, my strength was going to be taking this product to market. And the bottom line is until we get 510K there is no product to take to market.
And so it’s been a crash course in understanding my own limitations. And so I think our tendency as startups is any chance at money we tend to jump at it without really understanding the landscape.
I’ll give you a good example of, we’ll spare the guilty here, but there was a venture firm that was all hot to talk to us, “Hey, we’re on this thing.”
And we didn’t do our due diligence on where all the connections. Well this connection had come to us through an industry person and we didn’t put two and two together that these two are related.
So we got our two founders, myself, everyone’s on a plane … keeping in mind no one’s drawing a salary here. So we all buy our plane tickets and we head out there.
And the long and short of it is what this meeting was all about is the brother of the venture firm executive runs a big distribution outfit and wanted some say and access to our product line. He was helping out his brother, is what it amounted to.
And we caught onto this very early in the meeting. And so it’s easy to get mad at, but shame on us … where you’ve really got to look forward not … we’re so ingrained in the world of selling things that what are the customer’s needs … that especially in the world of investors you’ve got to understand what is their business?
What is this investor’s business ultimately and do we fit into that? Do we fit that paradigm at all?
And I guess that would be my best advice is there’s been wasted time in meetings and so forth chasing things that really weren’t there. So that’s probably the best advice I can give. And then missing opportunities of things that might have actually been there that we just didn’t prioritize appropriately.
Amy Butler: And on behalf of Alan and myself I’m going to add that’s one of the… every state has different kinds of incubators and accelerators. And one of their jobs is to understand the investment landscape and understand the tools that are in the region.
And that’s why making that connection with them can sometimes help you look at that issue upfront and understand that business of that investor. For example, I might have a client looking in energy I’m not going to send them to an investor that I already know focuses on medical device. But if I have a medical device I have some investors that really have no interest in that, their model is more in IT.
So as an incubator accelerator that’s something that I have to stay on top of. It’s difficult sometimes but we do the best we can but it’s just one step, it’s one more additional resources. It’s one more additional person that helps you understand the local landscape that may save you some time in the long run.
Joe Bjorklund: And I think that one other thing occurred to me in Joe’s question that is one thing to always be clear on is the bottom line is you don’t definably change the economics of healthcare your product, if you don’t neither do that or you don’t definably how healthcare is delivered nobody is going to care.
They don’t care how cool your technology is. Coolness doesn’t sell anymore, I’m sorry, unless you’re selling apps to … (chuckles) which is where all the investment money is going.
It’s really a matter of locking in, “How are we going to do that?” And that’s where you can really take a lot from the earlier presentations on the landscape of how are these hospitals under healthcare…? Again this is using the government to your favor.
Under healthcare reform what’s going to be punitive to the market if they don’t certain things and where can we slot into that and help the cause? Because you’re changing the course structure of how care is delivered, you are. If you’re saving them money you don’t have to be necessarily driving revenue you can be saving them money too.
And so it’s really, focus on those two things. We tend to get too wrapped up in our own technology too for technology sake. And if you can’t change the landscape of care. it’s not going to matter.
Allan Daisley: It’s a really good point. I’d also suggest as you take a look at your business just think about a couple of things. There’s enough scarcity of money but also look at yourself, I mean if you show up to a presentation and you don’t have your business plan in order, then that’s a problem. If you show up and…
…You don’t have a path to get anywhere. I talked about the regulatory path there’s other things too. You customer acquisition path, there’s all of these things. A lot of business plans really are just unrealistic right now.
And so really check yourself and have somebody else check that as well just to make sure that when you show up you really are able to put your best foot forward.
Terry Mandel: Thank you. This was a great overview thank you so much. I’m really curious about to what extent any of you incubators or any of you innovators are looking at emerging markets.
And how much you think, whether it’s frugal innovation, I mean I’m talking perhaps about really end of the distribution chain not necessarily the biggest hospital in Ethiopia.
I’m just really curious about how you are seeing the investment landscape responding to a huge trend, an explosion really, in innovation in that space.
Steve Anderson: Well I can go first. We’re actually not, we’re in an unusual situation we have a very reg bar. So we don’t need to accelerate our activities by going outside of the US and we have an extremely large market with, as I said before, coverage coordinate payment already in place.
So a unique situation for us we haven’t had to do that. We’ve thought a lot of about it, we feel like we should be doing it but there’s really no impetus for it.
Jim Stauner: I was just going to say as a private equity firm our last couple of investments there’s more business for both of those outside of the US than within the US. So kind of plays it a little bit different angle.
But yes, we look at things where we think they’re applicable to today’s marketplace globally, so we’ll get those investments differently than maybe we did a few years ago.
The other thing we’re looking at partnering with private equity firms who have a similar strategic vision as we do in certain markets i.e. like in Brazil so we’ll work with partners to say, okay, maybe there’s a syndication or a co-op opportunity … something that they’re very knowledgeable about in the local market that we think we can bring somebody from an operating perspective.
Joe Bjorklund: Yeah, we actually have generated a large amount of interest in the international market. We get regular inquiries from distribution all over the world. We’ve mainly focused in the US out of the gate as well. The main reason for that is healthcare reform because we have a device that very directly we believe can impact the infection rate.
So we’re sort of following that path because it’s really the one that’s got momentum right now and we feel we can change outcomes in that space. And then usually what happens, now if that wasn’t the case we probably would be looking more immediately internationally.
But what we anticipate will happen is if we can get adoption based on the drivers under healthcare reform here the outfits like NICE which is kind of like the CDC of Europe, they will usually adopt similar things if outcomes are proven to be favorable.
So we’re saying all the momentums in the United States if we can prove concept here it will translate. But it’s a good question because we keep our ears open to that. Good example is the company I came from was called Ultrasonics we just sold to Analogic, you’d be amazed where your pockets of success are.
When you look at a map where they sold the systems sometimes it was all the strength of distribution and what that particular healthcare environment they’d sell 18 systems in Vietnam and five in Mexico. (Chuckles) So a lot of it is just keeping your ears open.
Amy Butler: This is going to be our last question because we’ve got to conclude the panel.
Carl Rosner: You’ve done a great job to summarize all of the sources for funding. I’ve been actually looking for funding for the past several years and have been unsuccessful in the US. Because we are looking for something in the 25 to 50 million-dollar range after already having spent 30 million ($) in developing a really disruptive technology in cardiac diseases.
What we’re finding because of the timeline it takes to get that into the market, US investors are reluctant to provide funding even though I find it interesting. But we’re in the process of doing right is to finding a lead investor who will put up five million (dollars). That’s what everybody else is looking for as well.
Lead investors are, “Have somebody else do all the work then we’ll come in,” and we actually have promises for the rest of the money if we can find this lead investor.
The interesting part is this story has now got to China. We have actually had a Chinese investment company visit us because we’d already sold two systems to China and they’re excited about the noninvasive technology that we have focused on can save literally tens of billions of dollars in healthcare cost.
In fact, addressing an earlier speaker, we can avoid the limitation of reimbursement on hospitals because our technology addresses early detection of heart disease and the statistics are such that people with chest pains arrive at hospitals and 70 percent of them don’t have heart disease. And yet they get taken into hospitals and then causing this reimbursement problems.
With our technology in 15 minutes can decide whether the chest pain originates from heart disease or chest pain or indigestion or something else so they don’t have to be admitted.
So anyway, it’s an interesting story, but keep in mind larger types of funding needs as well as the readiness of foreign investors to come in now and take over the technology.
Joe Hage: Was there a question there?
Amy Butler: I think it was more of, it was an additional experience and what he is finding that he was sharing with all of us which is something that we were asking the audience to do is share what those real life examples are.
Agreed, sometimes the United States investors aren’t willing to go there and sometimes it is offshore investors that help bring in. Sometimes it is going to be your first sale is in another country.
So I think that the message there is keeping a very open and flexible mind and understanding that you might have to change your pathway in order to get to market the first time.
Would you please join me in thanking our panel and they’ll be around so they can answer some questions if you have them.
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