The Medtech Match Game

It’s a drumbeat we’ve heard ad nauseam lately it seems. Investments in the U.S. medical device sector are a tad soft (if one is feeling a little more optimistic) or virtually non-existent (if you’re perhaps not as bullish and given to hyperbole). There are regulatory challenges with the U.S. Food and Drug Administration. There are reimbursement challenges. There is a lack of available venture capital, and the capital markets for emerging medtech firms have shrunk.

Chris Fair has spent 23 years in orthopedics and medical technology. He claims that while conditions may not be as ideal as they once were, there’s money out there interested in backing startups with promising technology, but it’s coming from non-traditional sources. Fair began his medical device career at Johnson & Johnson’s DePuy Spine, then served as vice president of sales and marketing for St. Francis Medical Technologies Inc. (which was sold to Kyphon Inc., which in turn was bought by Medtronic Inc.).

After St. Francis, Fair served as the chief operating officer of MedShape Solutions, a shape-memory polymer and nitinol company, where he remains an advisor and investor. Today, he is managing director of Medtown Ventures LLC, an Atlanta, Ga.-based venture firm he co-founded a few years ago that focuses on “building the companies that got left behind after [investment] money from venture and private-equity groups moved to safety,” Fair said.

To further that effort, Medtown Ventures recently launched an online funding platform called Round2Funding.com that Fair hopes will make the process of connecting early-stage healthcare companies with eager investors much easier. He describes the website’s “sweet spot” as companies looking to raise $1 million to $5 million, he told Medical Product Outsourcing.

“The capital resources are there, but they’re not in places that people would normally look,” Fair explained. “Groups like family offices, ultra-high-net-worth individuals and even some of the angel [investment] groups are a good fit, but the challenge is getting these companies, or individuals with new technology, in front of these groups.”

Family offices are private wealth management firms that handle financial and investment matters for affluent individuals or families. Angel investors provide financial backing for small startups or entrepreneurs and often are found among an entrepreneur’s family and friends. They can provide a one-time injection of seed money or ongoing support to carry the company through difficult times.
Whatever you do, however, don’t call his model crowd funding.

“Crowd funding is great if you’re doing some sort of consumer-facing product. With medical devices, traditionally, you’re going to need multiple rounds of capital and most companies don’t want to see a cap[italization] table with 500 people at $5,000 a head,” he said. “It’s sort of like [dating website] e-Harmony meets a family office. It’s a matter of knowing who has the capital, what they want to see and know, and then getting the right companies as a match. There’s a lot of noise out there. A lot of companies approach investors before they’ve been properly vetted. They’re not investable.”

Round2Funding (which, like Medtown Ventures, is not a broker/dealer) is designed to help each side of the transaction cut through the noise.  “We used to get on a plane and talk to our friends and people we raise money from, and those conversations would go quickly because they know us, they trust us and know we’re not going to bring them a deal that’s half baked,” Fair said. “So we set out to design a platform that builds the same kind of trust, does the vetting, and connects parties. Investors get to decide when they show their hand to the companies, which is a way to guard their privacy.”

For example, when investors go to an angel meeting, they’re very often bombarded by solicitations from companies that want to sell them copiers, insurance, office supplies, you name it. On the other side, companies looking for funding don’t always get honest feedback at such meetings. “Nobody says to them, ‘Good idea, bad management team,’ for example,” Fair said. “So we wanted to build that feedback into our tool.”

To keep the process even more streamlined, Round2Funding charges a flat hosting fee for its technology clients. “Regardless if a company is raising $1 million or $5 million, it costs the same,” Fair said, noting that typical investment banking groups would charge fees upward of $7,000 a month, plus 6 to 10 percent of the equity raised. “That’s just not economical.”

So far, the feedback has been good. Technology-transfer offices at universities have been particularly interested, Fair told MPO.
His new venture is working with 10 to 15 schools, a number that he predicts will grow rapidly. Traditional private equity also has taken an interest. While the size of investment may be too small for them, they’re looking for the “next big thing.”

The website uses internal and external experts to vet prospective ventures. Medical devices, diagnostics, biologics and therapeutics work best for the platform, Fair said. The longer time-to-market timeline for pharmaceuticals makes the sector not as strong a fit for the site’s model. At present, the platform allows investors to search for targets by treatment condition, amount of investment sought and other variables, and Fair said the next version of the software will include the ability to alert investors about technologies and other categories that fit their preferences. “We can say to them: ‘You like to invest in cardiovascular technology, and we just loaded a new cardio company you might be interested in.’ Investors can feel comfortable that these deals have already been vetted and cleaned up because we have the expertise and advisers in different [medical technology] sectors,” he said.

What does the future hold? Fair thinks the idea will take off and that the “timing is right,” predicting that the website will have close to $1 billion in available funding by the end of this year.

Who says medtech investment is dead?