Medical Device Daily National Editor
MINNEAPOLIS — While venture capitalists are expected to be calculating in making decisions on how and where to invest the monies they manage, they're also known for being pretty passionate about the spheres within which they operate.
Both were in evidence during a session of the 7th annual IBF Med-Tech Investing Conference on Tuesday that featured four VCs responding to "Lightning Round" questions posed by one of their brethren.
Behind deft prodding by moderator Bill Harrington of Three Arch Partners (Portola Valley, California), the panel hewed to the "lightning" aspect of its theme, with quick, brief responses the order of the day.
On the optimistic/pessimistic question, which he posed at the end of the hour-long session, asking the panelists for their views toward the sector over the next couple of years, Harrington made the "optimistic" straw poll unanimous, telling the overflow audience: "You've heard a lot of concerns [about the state of the sector], but the consistent theme for this panel is that they're optimistic."
There is, he said, "a general buoyancy among those doing these deals."
As the panel discussion got under way in the wake of a previous session that bounced between cautious optimism and substantial pessimism for the sector (Medical Device Daily, May 14, 2008), Harrington's panel featured a dash of the latter, but a whole lot more of the former.
"We just heard a sobering overview of our sector," he said, asking the panelists if they were doing more, fewer or about the same number of med-tech venture deals in light of the overall struggling economy.
Two — Rich Ferrari, co-founder and managing partner of De Novo Ventures (Palo Alto, California), and Gordie Nye, general partner in Prism VentureWorks (Needham, Massachusetts) — said they were doing about the same number of deals, with Ferrari adding, "but we're much more selective" about which deals his firm does.
The other two panelists — Kristine Johnson, president and managing general partner of Affinity Capital Management (Minneapolis), and Mark Brooks, managing director of Scale Venture Partners (Foster City, California) — said their firms are doing fewer deals these days.
Noting that in such uncertain times, VCs are finding that "there's too much money chasing too few good deals," Harrington asked the panel the key factor applied in deciding which deals to pursue.
For Nye, familiarity breeds comfort. "We like to talk with people we know well," he said.
Brooks said, "The clinical pathway and regulatory pathway are not getting any shorter, so you have to be willing to put $15 million or $20 million into a company" to see it through those processes.
Johnson said that a lot of focus at her firm has been on reimbursement, while Nye added: "We spend a lot of time on setting milestones. We have a bit of a 'taffy pull' over time to exit."
Harrington chimed in with the observation that at Three Arch, "we spend a lot of time finding answers for the question, 'Why is this technology going to be adopted?'"
For Brooks, the key question to be answered is, "How are you going to raise the next round of financing?"
Ferrari said the most important element "is time to exit, the amount of money needed to get there and how risky it is to get there."
Saying that "at the end of the day, how we get there is the most important specific factor," he drew laughter and knowing nods from the audience in declaring: "I hate PMAs [pre-market approval applications]."
Noting that really game-changing technology has to take the much more rigorous and costly PMA route to FDA approval, Harrington asked Ferrari, "Can you afford to ignore PMAs?"
The firm doesn't ignore PMAs, Ferrari said, just favors those firms going the less-stringent 510(k), or "me too" route. With PMAs, he said, "you don't have predictability as to the outcome, and the risk factor is huge. It can take $30 million to do your clinicals."
Johnson also isn't big on having to take the PMA route. "PMA companies make sense only if the [potential] markets are huge. Part of the judgment we make is really understanding the degree of unmet need. If there's an unmet need, there's room for novel technologies that address it."
Nye said management teams at companies his firm and other VCs invest in "need to have the ability to manage these long trials. The experienced ones know how; the inexperienced don't know what hit them."
Ferrari agreed, adding: "Most management teams tend to underestimate the time needed to complete trials." So, "I'll always back experienced guys."
He said that, particularly in today's economic climate, "You need to be extremely capital-efficient. CEOs need to run the leanest, tightest ship possible."
After hearing Ferrari's observation that "throwing money at some of these problems is not going to solve the problem," Brooks added, "That can be as true of 510(k) companies as PMA companies."
After Ferrari noted that the average time to market now is in the 7- to 9-year range, Johnson chimed in: "And the amount of money has gone up accordingly."
Nonetheless, she added: "There still is opportunity to get good returns" on a firm's investment.
The panel discussed changes in M&A strategies, especially among the traditional "big company" acquirers who for the most part are on the sidelines now.
"We're seeing some unusual acquirers step up these days," said Harrington.
Nye noted that "we used to see company plans based on being acquired by Johnson & Johnson, Medtronic or Boston Scientific — Boston Unscientific, or whatever they're called these days."
Now, he said, development-stage firms eyeing the exit have to "make yourself bite-sized in order to be acquired — make sure it works for a more modest exit."
The good news, Ferrari said, "is that M&As are not going away. What is drastically changing is the premium involved."
With large companies having been stung by deals that went bad, he said, today's buyers tend to be smaller. But, said Ferrari, "there are a lot of mid-cap companies out there" doing deals.
"Some 75% of deals now are $150 million and under," he said, "but that's still a good outcome."
The annual conference, co-presented by International Business Forum (IBF; Massapequa, New York) and LifeScience Alley (St. Louis Park, Minnesota), drew just over 200 participants to the Radisson Plaza Minneapolis Hotel downtown.