Monday, May 03, 2010

Starting a medical device company? You are better off without some of these "VC"s!

When I first learned about "entrepreneurship" and "venture capital" it didn't make much sense to me. Over time, I thought these "VCs" would be respectable old ladies and gentlemen with graying hair and gold-rimmed spectacles full of worldly knowledge just waiting to share that with young people.

What can I say? I was 23.

A few years of "schlepping" business plans of varying sizes and forms later, I don't think so. Oh wait! Am I losing any future opportunities to beg around for money with quaint little PowerPoint presentations?

Well, let's put it this way. No one who cannot take some criticism is considered grown up and I really don't want to share my future business ideas with over-grown Peter Pans. I am sure there are good VCs and there are bad VCs. Good VCs look for returns from functional business plans...

Surveys gone wild

What got me riled up anyway?

Apparently VCs local to New England responded anonymously to a survey conducted by MassDevice. Their fundamental rant? Healthcare reform is not the problem, the FDA and it's reform is! And I am not singling out this survey, I have seen such "responses" before as well.

Apparently, the FDA is considered so risky that some of these "anonymous" VCs don't even invest in companies that have FDA "exposure".

What the hell kind of a medical device company does not have FDA exposure?

Maybe, the ones that make tongue depressors and bike helmets. I gotta tell you, there's not much margin in tongue depressors - China's got it covered anyway, and I still worry that we don't check Class I devices enough to make sure they don't end up with a fun cornucopia of Lead, Cadmium and Melamine.

If we scare people enough, they will make the FDA back off...

First things first. If any of these glorified pawn brokers look at your business plan and say they are "concerned" because of your "FDA Exposure", step away slowly and gently.

A venture capitalist who does not understand the approval process is not worth anything for you regardless of how many buckets of money they promise will show up on the term-sheet. It is not just the entrepreneur that needs to understand the importance of an FDA approval to your very existence.

FDA approval is not a "risk management" issue or a "price pressure" issue or any of the pretty little CYA-terms they teach you at the MBA-for-real-dummies school.

The entrepreneur who founds the company, brings in angel and VC money should know this. The CEO planted by the VC firm needs to know this. The Board of Director needs to know this. The people you hire need to know this.

The Right Perspective - Interview your VCs before you take their money

I don't want to poach MassDevice, so I want you to read about these VCs yourself. Unlucky for you, you don't know who they are so that you can avoid them like er, we will just move on.

You plan to interview your VP of R&D right? You plan to interview the M.E. interns and the engineers and the clinical folks and the assemblers and such, right?

You will talk to Joe and Sarah before you hire Vinny to help you with V&V correct?

Well, do the same thing for the VCs.

Interviewing the VCs - The questions to consider

Tough times can lead to good change. Be part of the change. Until you stare the horse in the mouth, you won't know if she is a gift-horse. To help weed out the unfavorable horses, here are some things to consider:

1. Try to have a frank conversation with your future investors. Be respectful, but assertive. Watch for signs of gentle prodding to "cut corners" on the regulatory side or the ethical side.

2. Snoop around - talk to other organizations that have taken money from these investors. Find out how the board meetings go. Find out what kind of pressure they have been under.

3. Well before you get the term sheet, your VCs will do a background check on you. Don't hesitate to do the same. You really need to know where your money is coming from.

What the hell am I saying? Isn't this 2010 where money is scarce and because of price-pressure and R&D profit ratio blah blah...

Yeah, right. Look, for all the things these guys say about how pharma and biotech are winners and how running around naked "exposing" yourself to the FDA is making you look bad (don't actually expose yourself to the FDA, it won't help), trust me, who are they kidding?

Understand the real game

First off, if you have been paying close enough attention, investing in pharmaceutical and biotechnology plans have moved into a rather complex arrangement. Nowadays no one does the classic angel plus A through F rounds that you learn in MBA schools.

Sometimes, companies get lucky and rather do single large rounds of $100 - $150 million. That is more than what a good, ethical medical device company would ever need to raise on it's way to profitability.

Other times, smaller pharmas enter into "milestone agreements" simply because the clinical trials needed for their success make them so hot, that even the VCs cannot handle them. So, really, ask again, who are they kidding?

I read all these surveys and by gosh, will medical device investment ever return again?

Ever since the healthcare reform looked like it would pass, a whole bunch of folks have taken to this notion that we are all idiots. They keep throwing tea bags and dumb rationale at us to foist their empty threats.

In truth, the economy will recover - the recession ended some time late last summer or thereabouts. Good ideas will get funded. Then the bad ideas will get funded. Everyone will want their hand in the cookie jar(yes, I am all about those cliches). And that is why these VCs want to be "anonymous".

If you have been in the funding scene recently at all, you might have noticed a few changes. Primarily, you might have noticed some very competitive and knowledgeable VC firms from China. Yeah, they hurt us from below and from the top. And remember, it's not just the Chinese. The Venture Capital business is one of egotistical trust in one's own ability to spot the next "Google" or "Provenge" or "tiny plumbing fragments made of metal".

Do you really think our friendly, neighborhood, anonymous VCs will simply sit around with their hands tied?

So to you I say: you should keep writing those patents, keep working in those labs, keep bootstrapping your business (look at my old posts, or talk to me if you want to know more about DIY-bio) - simply, keep at it!

Good investors, and once the bad ones have thrown their money on video game companies, there will be more good ones left than bad ones, will continue to invest in plans. They will not throw childish tantrums about reform. If the 510 (k)process takes longer, they will wait.


They know that as the entrepreneur, you will do the right things. You will plan for the delays. You will plan for the changing landscape. You will contact the FDA well ahead of time (refer to my post immediately preceding this) and set up a channel of communication. They know you will hire people focused on Bayesian methods to assess clinical trials and have an ethical stance towards the regulatory process.

They know, that the rules of the game may change, but the game remains the same - profitability and public health, not the tea party agenda.

Health Reform - Are the American Public Losers?

Unfortunately, we all tend to get carried away at various points in time. So, there are a lot of people sitting around drinking tea while the Democrats are too busy being chicken and not explaining things in perspective. Of more relevance to us, we have seen regular scenes like this play out:

1. Companies like 3M say they will stop making medical devices due to the "high" cost of reform. You can read my response to such pearls cast upon us here.

2. Companies like Caterpillar and AT&T have taken "charges" blaming health reform for their higher costs. Funny, the "charges" are actually tax benefits...

3. And now, this. Firms making "anonymous" statements about how the FDA went from being a regulatory agency to an anathema.

The magic formula

All it really takes is for entrepreneurs, investors, more importantly the pressure applying politicians (ReGen anyone?) and federal employees to be more responsible, and ethical of course.

Any business person or entity has a choice. Move with the wind, or go into oblivion...


It is all and well to talk about price pressures, time lags in reimbursement and how much the Americans tend to lose by being healthy (huh, you say?).

How will you feel if you went along with this song and dance and later find out that the FDA has yet again bowed to pressures and approved another sub-standard device?

How would you feel if that device was used to operate on you, or worse still left in you? Or someone you love?

How would you feel if you later found out, you have no way to recover any of your losses because of "Federal pre-emption"?

That, my dear friend, is the day you would have lost...

See, I can scare you too. It is only too easy, if you are willing to scare.

To my anonymous VC friends lurking around the dark back alleys of New England and elsewhere, let me tell you, most entrepreneurs are street smart, and in the case of medical device firms, school smart as well. If you think we are dumb enough to join you in leaving "health reform" hatred graffiti across the internet...


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