Navigating the dire straits in medtech and biotech investment
The 2008 collapse of the US financial market changed venture capital investment strategies in a way that has left medtech and biotech startups out in the cold, Allan May, founder of Life Science Angels, said at his QED talk Thursday, December 1 at UCSF Mission Bay. May described those changes, which have rocked biomedical entrepreneurship in the last few years, and suggested some future strategies for securing funding. Download his slides
Venture capital funds have dwindled considerably since 2008. The number of venture firms in the US has dropped from over 1,100 to under 450, and the total budget of the VC industry has dropped by two thirds. Only 30-50 firms remain that invest in medtech or biotech, and of those, even the largest are pulling out.
Why? The answer is threefold, says May. The cost and time to exit has increased (estimated at $30-80 million in 4-7 years), while profits upon exit have decreased (<$125 million). By contrast, the Web 2.0 and digital media industries, which require almost no capital to begin with, have decreased cost and time to exit and increased profits. Given the chance to invest in cancer or video games, VCs are choosing video games, May says.
May blames the FDA for these problems. The amount of time and capital spent on studies and in bureaucracy is out of control, he says, and even then the chances of approval are risky. The business model is unfinanceable.
Those still interested in biomedical innovation and investment are going overseas. Review times in Europe are less than one quarter of those in the US (time from first communication to clearance is 11 months vs. 54 months for PMAs, and 7 months vs. 31 months for 510Ks). Approvals are also more forthcoming, with the most advanced cancer therapies, newest minimally invasive surgeries and latest implants all available offshore years before they are in the US. Medical tourism is growing at more than 35% per year. Even some US hospitals and insurance companies are sending patients oversees for cheaper and more advanced treatments.
May suggests rethinking biomedical entrepreneurship to fight the offshore trend. New business models that highlight cost-effectiveness will have to replace old models that are no longer viable in today’s marketplace. This means using less capital to provide better patient outcomes while lowering the cost of quality healthcare. Innovators themselves will have to put as much thought and creativity into their business strategy as they do into their science. A positive business model should be used as the selling point to angel investors.
Angel investors are the best financing pathway for medtech and biotech entrepreneurship, May says. They have been picking up the slack left by VCs. While venture firms have dwindled, angel groups have tripled in the last ten years. Angels favor early stage investments, providing 90% of outside equity for seed-stage funding at approximately $20 billion/year (VC seed-stage investment is only $0.3 billion/year). The interests of angels are also more aligned with those of founders and entrepreneurs. May suggests networking with angels to best formulate your business model and to find the right angel for your venture.
Resources provided by May:
www.angelcapitalassociation.org
www.angelresourceinstitute.org
www.pwc.com/innovationscorecard
Trends in Life Science Investments and Exits, Oct 2010, SVB analytics
Medical Device Investing: 2010 and Beyond, Start-Up, Vol 15 No 10, Dec 2010
FDA Impact on Medical Innovation, Nov 2010, Meer and Makower
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