Venture capitalists have learned their lesson.
The years spent chasing incremental advances in medical device technology yielded disappointing returns, meaning today’s funders are looking to put their money into something truly disruptive, according to panelists at yesterday’s Wilson Sonsini Goodrich & Rosati Medical Device 2012 Conference.
Medical device industry stakeholders, including entrepreneurs and industry leaders, gathered in San Francisco’s Financial District to discuss the challenges facing med-tech start-ups today. The dearth of funding was a common thread among the day’s presentations.
A morning panel of 5 VC managers broke down the harsh truth about the state of med-tech funding and why the model might be changing.
"We’ve got trouble with a capital ‘T’ here in River City, in Silicon Valley, in southern California, in Boston and New York," Easton Capital Investment Group managing director John Friedman told a morning audience at the Palace Hotel. "We’ve sort of been building on the same foundation for a long time and it isn’t working."
The problem, panelists said, is that VCs have for too long shied away from truly new technologies, relying instead on devices that might have an easier time overcoming regulatory hurdles thanks to similarities to existing products.
"We’re flogging dead horses," Friedman said. "We’ve moved away from what’s great about venture capital, which is innovation. We keep doing the same thing."
Funders have been putting more skin in devices that represented small improvements to existing technologies, assuming that the FDA path would be easier and cheaper and that the product would be an easy buy for a larger player that wants to cover its bases with what Friedman called "me, too" companies.
"We have funded, over the years, too much incremental stuff," Advanced Technology Ventures general partner Michael Carusi agreed. "The reality is the FDA doesn’t care about incremental stuff, patients don’t care about incremental stuff, strategics don’t care about incremental stuff."
The panel, comprised of VCs from around the country, agreed that the days of "incrementalism" were over and that funders had lost their patience with devices that ride the coat-tails of larger advances.
In the case of Ardian, which pioneered renal denervation technology for the treatment of drug-resistant hypertension, the trail of following technologies is precisely what the VCs don’t want to see. In 2010 Medical device giant Medtronic (NYSE:MDT) bought Ardian in a deal valued at more than $1 billion, spurring a stream of "me, too" followers.
"We now see 50-plus hypertension companies that have come along," Carusi said. "This is crazy, we’re doing exactly what we’ve done wrong for 50 years."
"We have regression, not to the mean, but to mediocrity, which is bad for everybody," Friedman added. "If you’re seeing more than 5, half a dozen, a dozen companies in an area, move away from that area."