Medical Device Daily

Money invested in med-tech firms isn't as much as it once was. One can look no further than BioEnterpise's (Cleveland) most recent venture investment study to see that venture capital financings aren't at the levels they used to be. The BioEnterprise Midwest HealthCare Venture Investment Report shows that while funding for the number of med-tech companies is high, the total dollars invested are down as compared to recent years. This is also resulting in the rise of Angel funding for many of these companies.

The report covers the first half of 2011 and reveals that healthcare startups reported $315 million in total investments across 86 companies.

“In the Midwest in particular you have a bias toward device and software companies during these economic times,“ Baiju Shah, President/CEO of BioEnterprise told Medical Device Daily. “Those companies tend to raise fewer dollars than biotech companies. And you're probably seeing more Angel-led financings than venture led financings.“

Shah said that many venture capital firms are moving toward funding companies that are further along in the development path.

“The number of companies and entrepreneurs remain strong,“ he said. “I think the sources of capital have diversified because there are fewer venture firms that have investment capital available for early stage opportunities. So these entrepreneurs are seeking capital where they can find it. Angels are increasingly stepping into that void where venture use to tread.“

He added that companies in the development spectrum are turning to angels and federal grant sources to help migrate their development to the point where venture capital companies become interested.

Shah's observations about Angel funding don't just apply to the Midwest area. In an interview with MDD, Michael Riedlinger, director of the Rochester BioCenter (Rochester, New York), echoed similar statements regarding the availability of venture capital for these early stage companies.

“About five or six years ago venture capital was much more prevalent if you were talking to an early stage medical device inventor,“ Riedlinger told MDD. “They really thought they could capture millions of dollars through a traditional VC investment in their business.“

Riedlinger said that now companies are singing a different tune.

“They are not thinking of venture capital as the first source of funding for what they are doing,“ Riedlinger said.

A tougher regulatory process has in some cases made it difficult for companies to rely on venture capital.

Speaking specifically about the Rochester area, Riedlinger said that “because the FDA process has looked less clear and there has been exactly less clarity around what is going to be required; and how long the process was going to take,“ new med-tech companies are having a difficult time.

“That's not to say folks don't want to go through with the process,“ he said. “But having clarity around it helps them build plans and helps them understand what they need to raise capital, and that's become a big challenge. There are some companies that have adopted a model and said there are other things we can do with this technology to raise funds that don't necessarily require regulatory approval.“

Shah said that the very structure of Angel investors is changing and becoming more complex and organized.

“Angels are also becoming more sophisticated in their organization,“ he said. “So we've seen over the last three to 4 years a real growth in Angel Capital funds – not just Angel investors as individuals. They are banding together to form official funds and they are looking at deals not only as an individual fund but as syndicates.“

Last year Midwest healthcare startups attracted $737 million in new investments across 159 companies according to the 2010 Midwest Health Care Venture Investment Report from BioEnterprise. While the total numbers of investments are comparable to 2008 and 2009, the total dollars invested are down 5% from the prior year.

Since BioEnterprise began reporting on the investment numbers across the region's healthcare sectors, a few years stood out as particularly good.

In 2007, for instance, Shah called 2006 the “breakout year“ for the Midwest as a whole as $792 million was raised across 135 companies, a 25% increase over 2005. That year was also highlighted by a number of public offerings and several significant exits through acquisitions, the firm noted (Medical Device Daily, Jan. 24, 2007).

But that was nothing compared the following year when Midwest healthcare startups attracted a record $1.2 billion in new investments in 2007, representing a 55% increase over 2006 and still outpacing the national venture industry growth (MDD, Feb. 5, 2008).

The numbers from 2008 were also pretty good for the region, but didn't quite break the previous year's record. That year Midwest healthcare companies attracted $1.1 billion in new investments across 166 companies (MDD, Jan. 9, 2009).

“The total dollars per company are down and the total dollars invested are down relative to last year,“ Shah said. “When we've gone back and analyzed our data there isn't any pattern that we can discern that would allow for us to predict where we would end up at by the end of 2011. Of course with the events of the last couple of weeks with the global financial market – that also cascades down into the venture world.“

Omar Ford, 404-262-5546

omar.ford@ahcmedia.com