Medical Device Daily Executive Editor
Two venture capital firms have reported the closing of new funds that feature a significant focus on medical technology.
Split Rock Partners (Minneapolis), formed in June of last year by the healthcare and software investment teams of St. Paul Venture Capital (Eden Prairie, Minnesota), said its first fund was oversubscribed, raising $275 million from a targeted group of institutional investors.
And Canaan Partners (Menlo Park, California) said it has closed on Canaan VII, a $450 million fund that will invest in medical devices, diagnostics, biological sciences and pharmaceuticals, as well as Internet infrastructure, com- munications, software and services.
Split Rock’s focus is on emerging opportunities in healthcare, software and Internet services. It continues to manage St. Paul Venture Capital’s healthcare and software portfolio.
Managing director and co-founder Dave Stassen, former managing general partner at St. Paul Venture Capital, said the $275 million fund would be equally distributed between the healthcare side and software side of the company’s areas of interests. “We’re anticipating a 50-50 split,” he said, “but we’re not tied to that.”
He told Medical Device Daily that of the funds allocated to healthcare investments, “80-plus percent will go to devices.”
Stassen said that geographically, Split Rock, which also has offices in Menlo Park, “is really focused on two markets – Northern California and Minnesota,” adding, “We believe these are at least two of the top three sectors for medical technology in the country.”
In healthcare, the firm specializes in medical device and specialty pharmaceutical investment opportunities. In software and services, its focus is on enterprise software and business and consumer services that leverage the Internet.
With a majority of its healthcare funds earmarked for investments in device companies, Split Rock generally is eyeing large segments such as cardiovascular, orthopedics and respiratory.
“Clearly cardiovascular is a big space for us,” said Stassen, “but we also have lots of experience in orthopedics – particular spinal – respiratory and a number of other sectors.”
The group’s orthopedics credentials include Stassen’s former status as CEO of Spine-Tech, which was acquired by Sulzer Medica (Zurich, Switzerland), which then became Centerpulse and subsequently was itself acquired by Zimmer (Warsaw, Indiana). He rejoined St. Paul Venture Capital in 2000 after leaving the firm in 1991 to lead Spine-Tech from formation through to its sale to Sulzer Medica.
Split Rock partner Allen Will, who operates out of the Menlo Park office, said that the firm “has a strong bias tow-ard therapeutic devices, rather than diagnostic devices,” although he cited as an exception to that rule of thumb its investment in DexCom (San Diego), which is developing an implantable glucose monitor.
While noting the attractiveness of the cardiovascular and orthopedics spaces, Will said the Split Rock partners “have looked at a number of [other] areas,” among them respiratory, where companies with a focus on emphysema or sleep apnea are particularly capturing their attention.
As a key philosophy, he said, “We really believe in investing in products, not technology.” If it’s a technology, it has to be one that can form a strong platform from which clinically sound, highly marketable products can emerge, he added.
Another key qualification, chimed in Stassen, “is the time to market. We like to be involved with companies that have a four- to five-year horizon in getting their products into the marketplace.”
Asked if venture capitalists in general, and Split Rock in particular, now see themselves involved on a longer term with the companies in which they invest, Stassen said: “Longer relative to the 1999-2001 period [a time when initial public offering markets were on fire as a means of exit for venture investors] perhaps, but not really so in terms of traditional timelines.”
If venture funding runs “a little longer” than in the past, he said that’s due to a number of factors, including the fact that clinical trials – information from which is key to earning product approval from the FDA – “are more difficult to do now, with more information being required.”
Considerably more financial and human resources are being committed to such trials today than in the past, Stassen said. “The clinical path is longer and more expensive,” he acknowledged.
And it goes beyond gathering data to support FDA approval of a product. Now, virtually all approvals carry with them requirements for post-marketing studies. “There’s a good side to that,” he said. “You need good follow-up data in order to compete in the marketplace.”
Another area of added focus that has moved from the back burner to the front of the stove in recent years is reimbursement. Rather than being an afterthought that follows reaching the product-approval stage, companies – and those who invest in them – now are finding that approval and reimbursement are paths that need to be followed in tandem.
“The better companies have all been anticipating that they need to do good science all the way along,” said Will. “Reimbursement should come without having to think of added studies that need to be conducted.”
He added: “You have to anticipate CMS [Centers for Medicare & Medicaid Services] and third-party payers’ requirements for data – you certainly don’t want to have to do two separate clinical trials” covering the approval and reimbursement processes.
Along with the $275 million dollar fund, Split Rock also reported its first investment in a start-up company formed in collaboration with The Foundry (also Menlo Park), a premier medical device incubator that was founded by Will. Describing it only as “Foundry Newco 9,” he said Split Rock is “pleased to continue this longstanding relationship,” adding that the venture firm “believes that The Foundry’s nine companies represent some of the finest medical device opportunities in the nation.”
For its part, Canaan Partners did not disclose the breakdown of where the $450 million in its latest fund will go. In conjunction with the announcement of the closing of Canaan VII, it also reported the promotion of two general partners with the firm, Brent Ahrens and Maha Ibrahim.
Ahrens focuses on life sciences investments, having worked for General Surgical Innovations and Ethicon Endo-Surgery before joining Canaan in 1999.
Ibraham’s focus is on infrastructure, software and data communications investments.
Founded in 1987, Canaan Partners has invested in more than 210 companies. It has taken 45 companies public and completed 52 mergers and acquisitions.