Vantage Point – Will medtech venture capital return to early-stage investments?

The startling size of the series A round raised by G-Therapeutics last week shows that while venture capital firms have been slow to invest in early-stage medical device companies they have not abandoned them altogether. And, with two European VC groups having raised funds partly or totally dedicated to medtech in the past couple of months, it is possible that the funding crisis might soon start to ease a little.

“VCs follow the trends,” Damien Tappy, president and managing partner of Endeavour Vision, tells EP Vantage. “It’s a pendulum – it goes back and forth. Today many VCs are going late-stage, but there will be a time when they return to investing early-stage.” Many industry players will be hoping that that time comes soon – but such a profound change will not happen quickly.

Endeavour Vision believes that there are tempting investment opportunities in the medical device sphere. Last month, the Geneva-based group raised a €250m ($275m) fund solely for medtech, and with many other VCs pulling away from this sector it might have a greater choice of technologies and companies to fund.

Another VC, Forbion, has also just raised a healthcare fund, this one worth €183m. Around 30% of this is earmarked for medical device makers, says Martien van Osch, a partner at the company.

European appeal

What is interesting is that both firms are European, and venture investment in Europe, particularly in the newest medtech start-ups, significantly lags the US (Risk-averse European VCs drive medtech start-ups to crowdfunding, April 21, 2015).

Mr Tappy says European medtech companies have been slower than their US counterparts to adapt to the harsher VC climate. European technologies are as good as US technologies, if not better, he says – the problem is that Europe-based groups tend to be slower to hit commercial milestones.

“In terms of path to commercialisation, the European companies are too slow to conduct FDA approval and large clinical trials. European companies are still doing things the way they did five or six years ago.” US companies are not perfect, he adds. They often see Europe as a single territory and try to sell their devices in all countries at the same time, which tends to mean spreading themselves too thin.

There is some suggestion that for now Europe might be a safer bet after the bursting of the biotech bubble, which wreaked particular havoc on US-listed stocks. Mr van Osch says he does not expect Europe to follow the US into a slump, if only because Europe did not see “the very high volatility and run-up”.

While both Endeavour Vision and Forbion are keen to invest in medtech, they are following the usual pattern of larger, later rounds. “That’s where we feel more comfortable now,” says Mr van Osch. “We invest very close to market launch or after market launch.”

In on the ground floor

Another venture group, Gimv, is taking a different tack. It is specifically Europe-facing and, unusually, is willing to put money into medtech start-ups. The company demonstrated this nicely with its participation in G-Therapeutics’ series A round ($29m for prototype-stage G-Therapeutics, April 21, 2016).

“We were always quite early,” says Patrick Van Beneden, a partner at the fund. “That’s always been part of our strategy.” He says the criteria often used by VCs to define a good investment – already having CE mark, seeing initial sales and beginning to conduct US approval trials – can make it “difficult to find any investment opportunities at all, and if you find them they might be very expensive”.

Gimv’s tactics, by contrast, give it a way of building a company from the ground up. “It’s going in quite early, but with the right people and technology we believe you can build an attractive company,” Mr Van Beneden says.

Perhaps Gimv is at the forefront of an early-stage investment revolution. “The larger and larger financings – there is an end to that,” Mr Tappy says. He points to mitral valve developers as an example of companies that obtained early financing and were bought while still fairly young companies, proving that VCs can make money from early investments if they choose wisely.

If there is a revolution it could take time to manifest itself. Forbion’s Mr van Osch says that compared with biotech it is still much harder to sell medtech companies when they are pre-market.

Pharmaceutical groups acquire their targets relatively early in the value chain, he says, often when a company is still preclinical or only just in the clinic. By contrast, if a medtech player is seeking a buyer it usually must not only get approval but drive early adoption and be able to report significant sales.

The pit and the pendulum

And, though he believes that there will come a time when early-stage medtechs find it easier to drum up funding, Mr Tappy says that for now Endeavour Vision too is staying later-stage for its medtech investments. “The path to FDA approval and superior clinical evidence are the golden keys to a successful exit – there’s no question about that.”

The future might bring increased willingness on the part of VCs to invest in medtech start-ups, but for the time being early companies still seem to be mired in the valley of death. There are some sources of cash for these groups, Mr Tappy says.

“If you take the US you have very early-stage medtech companies financed by early VC funds or incubators, and some are extremely successful. You also have a very strong community of business angels, and you have large mixed funds and late-stage crossover funds that may sometimes deploy their money in early-stage companies.”

There is also the potential involvement of large medtech companies. Two weeks ago the sequencing company Illumina became majority limited partner in the first fund raised by a firm called Illumina Venture. Illumina invested $100m in the firm, which will be independently managed and will invest in early-stage companies focused on new applications of nucleic acid sequencing and genomics.

Alternative funding sources are useful, and hints that things might improve in future are reassuring, but what start-ups are waiting for is for traditional VC firms to see the advantages of investing at the earliest stages. If the pendulum is going to turn back it is to be hoped that it is already on the downswing.

To contact the writer of this story email Elizabeth Cairns in London at elizabethc@epvantage.com or follow @LizEPVantage on Twitter

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