Funding a Medical Device Startup in the Current Economy

Michael J. Weickert, PhDPresident and CEO

S.E.A. Medical Systems, Inc.President, Wit Creek Consulting

Who Am I?• Michael J. Weickert• PhD Genetics, UW Madison, NIH, NCI• Biotech Industry since 1992

– Bay area since 1998; Nektar, CBO StrataGent, CBO Corium• President and CEO S.E.A. Medical Systems, Inc.

– Medical device company in Sunnyvale, CA• President Wit Creek Consulting

– Business strategy, business plan consultancy• Member Life Science Angels

– Member medical device and Bio screening committees• Start-up Advisor

– Lypro Biosciences, NanoBioSciences• Venture Partner Kranenberg Fund• Limited Partner Quantum Technology Partners

Agenda

• What has the current economy done to investing?– How bad is it?

• What can a medical device company do to raise funds now?– Is there any hope?

We have fallen off a cliff: 1Q09 dollars down 61%, deals down 45% from 1Q08

Quarterly investment activity was down 47 percent in dollars and 37 percent in deals from the fourth quarter of 2008 when $5.7 billion was invested in 866 deals. The quarter, which saw double digit declines in every major industry sector, marks the lowest venture investment level since 1997.

Q1 2009 US Report; www.pwcmoneytree.com

Steep declines across all industries

The Life Sciences sector (Biotechnology and Medical Devices combined) experienced a 40 percent decline in terms of dollars and a 31 percent drop in deals with $989 million going into 133 rounds. Investment in Medical Device investments fell 27 percent to $412 million.

Q1 2009 US Report; www.pwcmoneytree.com

Deals down all over the countryDrop >61% in Silicon Valley

Silicon Valley continued to garner the lion’s share of venture capital dollars,capturing 39 percent of the $3.0 billion invested in US-based companiesthroughout the quarter. The New England Region maintained its customarynumber two position despite a 51 percent decline in dollars and a 36 percentdrop in deals from the fourth quarter of 2008.

Q1 2009 US Report; www.pwcmoneytree.com

Venture-backed IPOs disappeared and M&A activity declined

Not the best of times• IPO mkt weak

– 6 VC backed IPO’s in US in ’08, lowest since 1977, raised $0.5B vs $10.3B in ‘07

– 0 VC backed IPO’s in Q2’08 & Q4’08– 1 VC backed IPO in Q3’08– 28 IPO’s in China

• 2002-08: 19,300 companies received funding, 351 IPO’s• Time to IPO: ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08• # Years from Series A: 4.5 3.3 5.7 5.7 5.6 6.2 7.1 8.3• M&A weak

– 260 deals (down 27%), $13.9B (down 51%) in ’08 vs. ‘07– 40% drop in ’08 to $300B– 32 deals >$1B in ’08 vs 80 in ‘07– Median M&A about $80M

Q4 2008 US Report; www.pwcmoneytree.com

Summary/Facts/Predictions• VC’s stop funding many portfolio companies• More layoffs/cost cutting, unemployment up• New Deals must be perfect• All Deals Series A, lots of down rounds• Fewer Deals per fund, higher reserves• VC syndicate quality more important• VC’s fear capital calls produce LP defaults• VC Fundraising problematic• More Government regulation

Q4 2008 US Report; www.pwcmoneytree.com

Sequoia Capital Oct 2008

Sequoia recommends SURVIVAL

Sequoia Capital Oct 2008

What can a medical device company do to raise funds now?

First things first • Are you ready to raise funds? • Are you incorporated?• Have you set your equity (stock) pool?• Do you have a business plan?• Do you have a budget to key milestones?• Do you have your complete team?

What can a medical device company do to raise funds now?

• Friends and Family• Grants• Angels• Venture Capital Firms• Strategic Partners• Product Sales

$1-300k

$100k->1M

$300k->1M

$1M->20M

$200k->20M

??

Friends and Family $1-300k

• Investors (even Angels) expect you to raise $200-500k from friends and family before seeking professional investment

• Lowers risk– Fund early, often riskiest milestones– Shows people are willing to trust you with

their money

How do you raise friends and family funds?

• Most should qualify as “Accredited Investor”• Treat as professional investors

– Provide Business Plan, presentation, prospectus, investment contract

• Investment is opportunity for people to participate in an exciting company with tremendous growth potential– If you don’t believe this, don’t ask ANYONE to invest

Type of Friends and Family Investments

• Priced round– Equity (stock) sold at set price – investors receive a

percentage of the company– Pros: investors like clear stake in the company– Cons: sets price that can be difficult to increase in

subsequent investment rounds• Convertible debt

– Investors loan money which can be converted into equity at the first professional venture round, often at a discount

– Pros: professional investor(s) set the price– Cons: cash is owed to the investors if no equity

conversion takes place

SBIR, STTR Grants $100k->1M

• SBIR (Small Business Innovative Research) is a federal set-aside program aimed at supporting R&D in US owned small businesses (companies with less than 500 employees)– Success rate on first time SBIR Phase I grants ~15%

• NIH and NSF are among 10 federal agencies which set aside 2.5% of the total funds they award for research grants to be distributed through SBIR/STTR

• NIH solicitations are published on its website and are used to support research in a well defined scientific area and/or in a high priority program. – In 2003 more than 80% of the awards allocated were unsolicited

(investor-initiated research grants). The investigator initiates the research and submits a grant application within an area that is relevant to the NIH

– http://grants.nih.gov/grants/guide/index.html

Top 10 recipients of NIH SBIR and STTR Funds in fiscal year 2007

(millions of dollars)

Angel Investors $300k->1M

• “Accredited Investors” who provides capital for a business start-up

• Some angel investors organize into angel groups or angel networks to share research and pool their investment capital

• Angel investment accounts in total for almost as much money invested annually as all venture capital funds combined, but into more than ten times as many companies (US$26 billion vs. $30.69 billion in the US in 2007, into 57,000 companies vs. 3,918 companies).

• Average angel funding in 2007, ~$450k. Range from a few thousand, to a few million dollars.

Angel funding is down too• Angel investing dollars dropped by 26.2 percent

last year ($19.2 billion vs. $26 billion in 2007)• Entrepreneurs receiving funding was relatively

unchanged from 2007 (55,480 entrepreneurs last year vs 57,120 in 2007)

• Angel investment 2008 sectors:– Healthcare-related businesses = 16%– Software = 13% – Retail = 12%– Biotech ventures = 11%– Energy = 8%– Media = 7%

2008 Angel Market Analysis by the Center for Venture Research at the University of New Hampshire

Angelsoft* deal funnel from last 12 months

Only a small number of companies who apply get funded. This chart shows how many make it through the different stages of the Angel Group process, based on data from our most active groups.

21112 Submitted

1718 In Screening

1185 Invited to Present

679 In Due Diligence

444 Invested

*As the exclusive deal management tool to 451 angel groups and VCs and 17,551 investors, Angelsoft processes over 3,200 funding applications a month. This live access to investment data allows us to report trends in the early stage investment market.

Venture Capital• Provide private equity capital typically to early-

stage, high-potential, growth companies • Generate a return through an eventual

realization event such as an IPO or trade sale (M&A) of the company

• Venture capital investments generally made as cash in exchange for shares in the invested company

• Venture capital investors invest primarily in companies in high technology industries such as biotechnology and ICT– VCs fund ~2% of companies they review

Even now some VCs are investing: most active venture investors 1Q2009

Q1 2009 US Report; www.pwcmoneytree.com

Strategic Partners

Who has…• Expertise to develop your product• Markets similar/related/complimentary

product(s) to the same customer(s)• Competes with a product inferior to yours• Has aspirations to sell to the same

customers you are targeting• Might be a potential acquirer of your

company/product(s)

Engaging Strategic Partners

• Technology conferences for related industry scientists

• Partnering conferences for medical devices

• High level introductions to strategic partner management

• Contract Business Development professional

Strategic partnership models• Support for technology/product development• Feasibility = modest cash for Proof-of-principle

demonstration ($100k-1M)• Option = first right of refusal for license/acquisition of

technology/product ($100k-2M, may include equity purchase)

• Partnership = development support for defined product/technology effort (≥$500k up front, development costs, milestones, royalties, may include equity purchase)

• Structured buy-out = pre-priced acquisition in which shareholders receive cash when pre-agreed milestones are achieved

Reasons for optimism for medical device companies

• Medical device is a strong industry in California and the bay area

• Less affected by downturn than other biotechnology - viewed as: – More conservative investment than drug

development– More capital efficient

Michael J. Weickert, PhDPresident and CEOS.E.A. Medical Systems, Inc.President, Wit Creek Consulting

www.seamedical.comwww.witcreek.net

mweickert@gmail.com650-218-1840