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PowerPoint, both speakers (1.4 MB)

  1. 1. INVENTION TO STARTUP SOURCES OF FUNDING Trevor Moody – Frazier Healthcare Ventures Jens U. Quistgaard – LipoSonix, Inc.
  2. 2. Overview <ul><li>Observations on the current financial climate </li></ul><ul><li>Sources of funding </li></ul><ul><ul><li>Exercise – potential sources and their attributes </li></ul></ul><ul><ul><li>Quick case study: SonoSite, Inc. </li></ul></ul><ul><ul><li>Quick case study: LipoSonix, Inc. </li></ul></ul><ul><li>Venture funding in depth </li></ul><ul><ul><li>What is a venture capitalist? </li></ul></ul><ul><ul><li>Venture capital funding criteria </li></ul></ul><ul><ul><li>What has changed recently? </li></ul></ul>
  3. 3. World Market Conditions <ul><li>“ Fear” is high </li></ul><ul><li>Global credit crunch/recession </li></ul><ul><li>Uncertainty about size and extent of problem </li></ul><ul><li>Companies most affected have: </li></ul><ul><ul><ul><li>Operational leverage to GDP or </li></ul></ul></ul><ul><ul><ul><li>Balance sheet debt </li></ul></ul></ul>VSX Volatility Index Sept 2000- Sept 2008 Data courtesy of SV Life Sciences LLP
  4. 4. Effect on Private Companies <ul><li>Relatively limited impact on healthcare companies </li></ul><ul><li>Reduced access to public markets for exit or financing </li></ul><ul><li>Reduced availability of credit and increased financing costs </li></ul><ul><li>Potentially longer time period to exit and lower exit valuations </li></ul>
  5. 5. Performance of Healthcare Indices <ul><li>Health sector is driven by non-discretionary spending and therefore traditionally a safe haven at times of economic turmoil </li></ul><ul><li>U.S. healthcare indices have all outperformed the S&P500 over the last 12 months </li></ul><ul><li>S&P 500 down 30% </li></ul><ul><li>Medical device (DJUSMC) down 11% and biotech (NBI) down 10% </li></ul><ul><li>Healthcare services (IHI) down 17% due to HMOs’ reduced rates of growth, credit contraction and fears about reimbursement </li></ul>
  6. 6. Performance of Healthcare Indices 12 month performance of US Healthcare indices to 5 October 2008 Data courtesy of SV Life Sciences LLP
  7. 7. Healthcare Fundamentals Strong <ul><li>Recession resistant characteristics: </li></ul><ul><ul><li>Rapidly ageing population </li></ul></ul><ul><ul><li>~10% of world population is over 65 </li></ul></ul><ul><ul><li>Rising incidence of chronic disease </li></ul></ul><ul><ul><li>Rising healthcare costs </li></ul></ul><ul><ul><li>US healthcare spending $2.3 trillion in 2007, $7000 per person </li></ul></ul><ul><ul><li>Healthcare spending outpaces overall economic growth and inflation </li></ul></ul><ul><ul><li>Regulation creates high barriers to entry </li></ul></ul><ul><ul><li>Globalization and new markets </li></ul></ul><ul><ul><li>Innovation creates new markets </li></ul></ul>Forecast rise in chronic disease 2003-2023 Predicted population growth 19% Data courtesy of SV Life Sciences LLP
  8. 8. Healthcare Investing (USA) Equity into US VC-backed healthcare companies Pro-forma Data courtesy of SV Life Sciences LLP
  9. 9. So… <ul><li>Financial markets are a mess </li></ul><ul><li>Healthcare is a great place to be in these times </li></ul><ul><li>Funding is still available, but… </li></ul><ul><ul><li>Bar is raised for new investments </li></ul></ul><ul><ul><li>Valuations are down </li></ul></ul><ul><ul><li>Each type of funding is affected differently </li></ul></ul>
  10. 10. Sources of Funding <ul><li>What are they? </li></ul><ul><ul><li>Self </li></ul></ul><ul><ul><li>Friends & Family </li></ul></ul><ul><ul><li>Debt </li></ul></ul><ul><ul><li>Grants, contracts – NIH, SBA, DARPA, etc. </li></ul></ul><ul><ul><li>Angels </li></ul></ul><ul><ul><li>Venture funds </li></ul></ul><ul><ul><li>Crossover funds </li></ul></ul><ul><ul><li>Strategic (other companies) </li></ul></ul><ul><ul><li>Public markets </li></ul></ul>
  11. 11. Sources of Funding <ul><li>What are they? </li></ul><ul><ul><li>Self </li></ul></ul><ul><ul><li>Friends & Family </li></ul></ul><ul><ul><li>Debt </li></ul></ul><ul><ul><li>Grants, contracts – NIH, SBA, DARPA, etc. </li></ul></ul><ul><ul><li>Angels </li></ul></ul><ul><ul><li>Venture funds </li></ul></ul><ul><ul><li>Crossover funds </li></ul></ul><ul><ul><li>Strategic (other companies) </li></ul></ul><ul><ul><li>Public markets </li></ul></ul>
  12. 12. Quick Case – SonoSite, Inc. <ul><li>ATL Ultrasound – parent </li></ul><ul><ul><li>Digital ultrasound pioneer </li></ul></ul><ul><ul><li>Core competence in ASIC implementation </li></ul></ul><ul><li>The hand-carried ultrasound vision </li></ul><ul><li>The internal funding reality </li></ul><ul><li>DARPA dual-use program </li></ul><ul><ul><li>ATL Ultrasound </li></ul></ul><ul><ul><li>University of Washington </li></ul></ul><ul><ul><li>VLSI Technology </li></ul></ul><ul><ul><li>Harris Semiconductor </li></ul></ul>
  13. 13. SonoSite – Getting Off the Ground <ul><li>Basic development 1996-1997 </li></ul><ul><ul><li>$12.6MM DARPA matching grant </li></ul></ul><ul><li>Handheld Systems Business Group 1997 </li></ul><ul><li>Spin-out as SonoSite, Inc. - April 1998 </li></ul><ul><ul><li>$17MM cash (+$13MM later) </li></ul></ul><ul><ul><li>Technology license </li></ul></ul><ul><ul><li>NASDAQ listed – distributed to ATL shareholders </li></ul></ul><ul><li>First working prototype – September 1998 </li></ul><ul><li>First follow-on financing – April 1999 ($33.8MM) </li></ul>
  14. 14. SonoSite – Lessons Learned <ul><li>Government grants are a wonderful thing </li></ul><ul><li>But… </li></ul><ul><ul><li>You need an impressive consortium to get large $ </li></ul></ul><ul><ul><li>There are some complications </li></ul></ul><ul><ul><ul><li>Government technology rights </li></ul></ul></ul><ul><ul><ul><li>Consortium member’s technology rights </li></ul></ul></ul><ul><ul><ul><li>Reporting requirements </li></ul></ul></ul><ul><ul><ul><li>Etc… </li></ul></ul></ul><ul><li>Being a pre-revenue public company, in my humble opinion, is not a wonderful thing </li></ul>
  15. 15. Quick Case – LipoSonix, Inc. <ul><li>Originally pitched to investors by two individuals </li></ul><ul><ul><li>Not successful </li></ul></ul><ul><li>Picked up by a medical technology “incubator” </li></ul><ul><li>LipoSonix, Inc. founded in late 1999 </li></ul><ul><li>Initial venture funding, January 2001 (1.4MM) </li></ul><ul><ul><li>IP licensing </li></ul></ul><ul><ul><li>Exploratory work </li></ul></ul><ul><li>Series-B, tranche #1, November 2001 ($4MM) </li></ul><ul><ul><li>More exploratory work </li></ul></ul>
  16. 16. LipoSonix – The Bothell Story <ul><li>First full-time employee and dedicated facility, August – October 2002 </li></ul><ul><li>Series-B, tranche #2, September 2002 ($5.9MM) </li></ul><ul><li>First human study, July 2003 </li></ul><ul><li>The joy of venture debt </li></ul><ul><li>Series-C, July 2004 ($27.0MM) </li></ul><ul><li>More debt… </li></ul><ul><li>Initial customer shipment </li></ul><ul><li>More debt… </li></ul><ul><li>Acquired by Medicis Pharmaceutical Corp., July 2008 </li></ul>
  17. 17. LipoSonix – Lessons Learned <ul><li>Top-drawer investors really help! </li></ul><ul><li>Be aware of capital structure issues associated with incubators </li></ul><ul><li>Be aware of capital structure and terms issues associated with venture financing </li></ul><ul><ul><li>Multiples requirements </li></ul></ul><ul><ul><li>Liquidation preferences (!) </li></ul></ul><ul><ul><li>Etc… </li></ul></ul><ul><li>Venture debt is a wonderful thing </li></ul><ul><ul><li>If you can get it, and use it appropriately </li></ul></ul>
  18. 18. Different money sources are likely to be involved as the company grows Funding Source Prototype Pre-Clinicals Clinical Proof IDE Approval Pivotal Trial FDA Approval Commercialization Angels, Grants etc. Venture Capitalists Corporate Public Markets (IPO)
  19. 19. Confidential Funding needs increase significantly as the start-up moves towards commercialization Typical Funding Requirements Through a Company Lifecycle 5% 25% 45% 15% 60% 100% 10%
  20. 20. Sources of Funding – Venture Capital <ul><li>What is a Venture Capitalist? </li></ul><ul><li>What criteria do VCs use to decide what to invest in? </li></ul><ul><li>What has changed recently? </li></ul>
  21. 21. What is a Venture Capitalist? Follow the Money The General Partner And the Fund Sources of Capital Investments in US Healthcare Portfolio Companies <ul><li>Retirement funds </li></ul><ul><li>University endowments </li></ul><ul><li>Families / high net worth individuals </li></ul><ul><li>General partners </li></ul>Update!
  22. 22. <ul><li>Typically small partnerships made up of a few General Partners (2-10) and other staff </li></ul><ul><li>General partners collect a percentage of the profits </li></ul><ul><ul><li>Payouts over several years </li></ul></ul><ul><ul><li>Lucrative but high risk </li></ul></ul><ul><li>Manage one or more funds raised sequentially over several years </li></ul><ul><ul><li>Fund sizes range from <$5MM to >$2B </li></ul></ul><ul><ul><li>Some firms have been around for >50 years but vast majority have emerged in the last 15 years </li></ul></ul>What is a Venture Capitalist?
  23. 23. Medical Device VCs are looking for the most exciting new technologies <ul><li>Opportunities of great interest to medical device companies </li></ul><ul><li>Innovations that will be rapidly adopted by physicians </li></ul><ul><li>Incremental improvements </li></ul><ul><li>“ Products, not companies” </li></ul>A typical large healthcare VC may see 1000-2000 plans per year and invest in only 10
  24. 24. The Medical Device Investor’s checklist <ul><li>Management / Founder Teams </li></ul><ul><li>Big Markets / Rapid Adoption </li></ul><ul><li>Regulatory/Reimbursement pathway </li></ul><ul><li>Early Clinical Proof-of-Principle </li></ul><ul><li>Patents </li></ul>
  25. 25. Management/Founder teams <ul><li>Most startups won’t have a CEO who has taken 3 companies public </li></ul><ul><li>Experience in other successful ventures </li></ul><ul><li>Have recruited top-tier mentors, board members and advisors </li></ul><ul><li>Open to adding other great executives to the team </li></ul><ul><li>Deep understanding of the target market and technology </li></ul><ul><li>Just want money, don’t want a partner </li></ul><ul><li>Unrealistic expectations of how hard it will be </li></ul><ul><li>Looking for a quick win </li></ul><ul><li> </li></ul><ul><li> </li></ul>
  26. 26. Big markets/Rapid adoption <ul><li>A very large existing or potential market is critical for generating investor interest </li></ul><ul><li>Physician specialty has demonstrated that they will rapidly adopt new technologies </li></ul><ul><li>$1B + potential market </li></ul><ul><li>Targeting procedurally oriented specialties e.g. cardiologists, orthopedic surgeons, etc </li></ul><ul><li>Challenging physician referral patterns </li></ul><ul><li>Requirement for large upfront capital outlays </li></ul><ul><li> </li></ul><ul><li> </li></ul>
  27. 27. Regulatory/Reimbursement <ul><li>FDA and CMS challenges are often underestimated by founders </li></ul><ul><li>Clear FDA approval requirements </li></ul><ul><li>Compelling economic argument to key decision makers e.g. physicians, hospitals </li></ul><ul><li>Physician community excited enough about technology to lobby for reimbursement </li></ul><ul><li>Trials requiring long follow-up </li></ul><ul><li>Great macro-economic argument but no-one incented to adopt </li></ul><ul><li> </li></ul><ul><li> </li></ul>
  28. 28. Early Clinical Proof-of-Principle <ul><li>A rapid path to clinical proof-of-principle greatly increases the fundability of a company </li></ul><ul><li>Rapid, ethical path to early clinical feasibility testing </li></ul><ul><li>Early clinical data that is highly suggestive of likely success of the pivotal trial </li></ul><ul><li>Need to run large, lengthy clinical trial to see if it works </li></ul><ul><li>Mediocre efficacy results </li></ul><ul><li> </li></ul><ul><li> </li></ul>
  29. 29. Patents <ul><li>Strong patent protection is essential in a technology-driven venture </li></ul><ul><li>Very strong protection around key innovation </li></ul><ul><li>Building a “patent thicket” to cover other related inventions </li></ul><ul><li>Broad early patents (an added bonus) </li></ul><ul><li>Sloppy patent strategy / disclosures that have limited patentability </li></ul><ul><li>Freedom to operate concerns </li></ul><ul><li> </li></ul><ul><li> </li></ul>
  30. 30. What is the impact of the economic crisis on venture capital? <ul><li>Limited impact in the short term – in 95% of cases, funds will continue </li></ul><ul><ul><li>Quality VCs raise money from quality, long-term Limited Partners (LPs) </li></ul></ul><ul><ul><li>VCs have not typically used debt … fortunately </li></ul></ul><ul><li>Potentially dramatic impact in the long term </li></ul><ul><ul><li>Exits – Definitely delayed significantly </li></ul></ul><ul><li>LP appetite for VC investments will decline over time </li></ul><ul><li>VC investment criteria will be more conservative </li></ul><ul><ul><li>Early-stage VCs will still invest in early-stage companies but hurdles will increase </li></ul></ul><ul><ul><ul><li>More sensitive on capital needs, time to market etc. </li></ul></ul></ul>
  31. 31. Wrap-Up <ul><li>Healthcare - Perhaps no better place to be driving innovation </li></ul><ul><ul><li>Buyers less affected by acute economic turmoil </li></ul></ul><ul><ul><li>Insatiable demand </li></ul></ul><ul><ul><li>Demographics </li></ul></ul><ul><li>Lot’s of money still out there … the bar is much higher but great opportunities and great teams will get funded </li></ul><ul><ul><li>Take a strategic approach to fund raising. Target the best sources of money given your opportunity and stage of development </li></ul></ul><ul><ul><li>Expect to spend a lot of time raising money </li></ul></ul>