Creative new concepts that launch medical device companies from concept to market have addressed the paradigm shifts in medical device funding; such as short and quick utilization of venture money and the use of a certified manufacturing facility on a rental basis. Conventional venture capital investments in medical device start-ups may no longer be filling that much needed finance-to-exit strategy, according to John Lonergan of March Ventures, as published in PEHub. The conventional venture-backed business model is now challenged as to whether (or how) venture investments can still provide a value-added path to launch new products & companies.
With IPO’s hardly an option for start-ups, acquisition by a major corporation is the primary goal for both the start-up and venture capitalist. However, over the years, venture funds have grown so much that in order to meet the return expectations of their partners, they need to make larger and larger investments—often larger amounts than start-ups need or want. For venture groups to make many “skinny” investments would require a lot of manpower to manage the large number of companies that they would have to guide. What’s often left for an acquirer company is a bloated OEM with duplicative resources for which large corporations do not want to pay a premium price.
On the other side of the equation, large medical device corporations are readily aware that innovation comes from the outside and they depend on filling their expansion needs by acquiring companies with novel products. However, since cost is now king in medicine, they do not want to purchase an entire company or any duplication of resources at all. They want the product, and not necessarily the company.
With these shifts in tides, I wonder what options now serve the needs for large medical device corporations, venture capitalists, and start-up companies? On the venture side, a strategy like the one Mach Ventures has adopted may work. “Early in, early out,” where they sell the medical devices just after they have been proven to work, or after FDA approval—no infrastructure, no management, and no duplication that the acquirer needs to get rid of.
I started Life Science Outsourcing, Inc. (LSO), almost 14 years ago as a full service contract manufacturing business and have served over 240 different companies. The total value of acquired companies that I have worked with is over two billion dollars now and still growing. I have seen the trend and the need for alternative form of alliance and that is why we have created our newest division, LSO Incubator Services within our company. At LSO Incubator Services, start-up companies have access to our quality system, equipment, certifications, industry expertise, office space and supplier networks so that they can enjoy the benefits of a larger corporation without investing critical resources in dedicated facilities or personnel.
For the start-up company that prefers to stay lean and mean without much outside money and the strings attached to it, a full service incubator facility such as ours, complete with labs and personnel may be the way to go. I believe this first-in-kind alternative to doing it on their own offers a way to remain lean, utilize as few resources as possible, and still have value to offer an acquirer.