Medical device angel investments jump in 2012

Funding

The medical device industry isn’t being left behind when it comes to angel investing, according to data provided to MassDevice.com from the investment data firm CB Insights.

Angel- and seed-round financing (typically $1.5 million or less) jumped dramatically in 2012, accounting for about 27% of all investment in the medical device industry. That’s a 50% increase compared with 2011.

In 2012 there were 457 medtech angel- and seed-round deals worth a total of more than $187 million, for an average deal size of about $1.1 million. The year-over-year increase in the number of deals is a positive sign, easing away fears that early investors had fled medtech since the economic collapse of late 2008.

The medical device industry’s gains come amid an overall uptick in seed rounds in the broader technology sector, where angel investments were up 65% from 2011.

The good news was, somewhat, tempered by slides in later-round investments. Series B, C and E rounds all declined in medtech, according to CB Insights. The number of Series E rounds, or mega-deals for medtech companies, fell by 7% during 2012.

We asked Anand Sanwal, CEO of CB Insights, about the trend and what it means for the health of the industry.

"If there is only activity in the early rounds and fewer mega-deals, [Series D and E], then you can start seeing some problems with orphan startups," Sanwal told us.

Orphan startups are companies that raise money initially but eventually die on the vine when they’re unable to raise follow-on cash.

A December CB Insights report on all seed round investments in technology companies from 2009-2012 showed that only about 4 of 10 startups raise follow-on cash.

"The process of natural selection that will happen with seed companies (and which we’d argue should happen) will result in over 1,000 recently funded seed companies being orphaned, i.e. unable to raise follow-on financing. This will result in over $1 billion of investment into these companies being incinerated, but again, this is nothing new," the authors wrote. "Seed investments are the riskiest bets an investor can make and the reality is most will not return money. Again, the death of start-ups and the loss of investment dollars is part of the process of separating the best companies and investors from those which aren’t. The eventual death of many of these companies may also help the tight labor market for other start-ups who are looking for capable and driven talent."

The dearth of follow-on investments isn’t new to medical device startups. Many investors are treading more carefully when determining where to place their bets.

Robert Rabiner, founder and president of IlliminOSS Medical, which raised $28 million in a Series C round last fall, told us that the Providence, R.I.-based company faced a much tougher follow-on environment when raising cash to bring its bone angioplasty device to market in Europe.

"Financing these days is more difficult than it was years ago. Regulatory questions abound, the [FDA] defines the path and that becomes a valuation issue," Rabiner told us "People want to make sure they’re going to get something for their money and, as a result, you’re seeing a little more diligence and a little more skepticism and a little more, ‘Let’s go over that one more time.’"

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