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Venture
Capital Outlook Bright for Neurotech Devices
by James Cavuoto, editor
Neurotechnology entrepreneurs and product developers looking for
venture capital have a relatively rosy outlook in the years ahead,
despite the current economic conditions and the somewhat sparse history
of funding for start-ups in this field, according to interviews Neurotech
Reports conducted with two dozen VC firms. Our research, conducted
subsequent to the September 11 terrorist acts, reveals that numerous
VC firms are open to funding requests from neurotechnology device
manufacturers, and several of them see a window of opportunity that
will peak in the next three to five years.
Several of the VCs we interviewed drew a parallel between the onset
of today’s “neuro” space and the “cardio”
space of several years ago. There was nearly universal agreement that
among all the applications for neurotechnology, stroke represents
the greatest market opportunity, followed by pain treatment. Parkinson’s
disease, Alzheimer’s disease, hearing disorders, and paralysis
were also highly rated as large potential markets for neurotechnology.
The most likely firms to fund neurotechnology ventures are VCs that
have a history of funding medical device start-ups. Generally, the
principals and partners responsible for medical device funding are
distinct from the professionals responsible for biotechnology, pharmaceuticals,
and genomic sciences.
While bio/pharma approaches to treating neurological disorders and
diseases such as stroke, Parkinson’s disease, and spinal cord
injury have attracted more attention and funding dollars than electrical
stimulation and recording devices to date, that in large part results
from the fact that VC firms receive many more requests for funding
from bio/pharma companies in the neuro space than device companies.
That’s beginning to change, however, and many VC firms are actively
looking for viable neurotechnology firms they can invest in.
Bio/Pharma vs. Neurotech
“Historically, we’ve done
more in the bio/pharma space than neurotechnology devices,” says
Douglas Reed, M.D., managing director of Vector Fund Management in
Deerfield, IL. “There just hasn’t been much out there so
far. But some of the data we’ve seen from trials of neurotechnology
devices is very interesting.” Vector Fund is a late-stage firm,
so they’re not as likely to take risks as an early-stage VC firm.
“A lot of physicians don’t want to be the first to try a
new therapeutic technology,” he says.
Daniel Wood, a partner of IngleWood Ventures in San Diego, CA, is
active in early-stage funding of both device and compound companies
in the neuro space. “In the past year, we’ve seen one neurostimulation
deal, five neurodiagnostic deals, and six neuropharmacology deals
out of about 250 total investments in life sciences,” he says.
Wood believes that medical devices have lower regulatory hurdles and
therefore can be developed for less time and money than bio/pharma
deals. But bio/pharma approaches may take a larger market share that
justifies the higher entry barriers, he says.
Robert Ulrich, general partner of Vanguard Venture Partners in Palo
Alto, CA, is also enthusiastic about neurotechnology devices. Vanguard
is an early-stage firm that likes to fund manufacturers of medical
devices and tools. “Devices have a shorter path to liquidity
than do bio/pharma compounds,” he notes. He believes that neurological
disorders have been relatively neglected in recent years and that
there is a good opportunity for neurotechnology start-ups. One challenge
facing the industry is developing tools for measuring the success
of a particular treatment modality.
Tullis-Dickerson & Co. in Greenwich, CT likes to be the lead capitalist
in medical funding deals. Two-thirds of the time, their investments
represent the first institutional money funded companies receive.
CEO Jim Tullis believes neurotechnology devices will be in fashion
about four years from now. He believes that technology approaches
can coexist with biological and pharmaceutical treatments. Looking
at stroke, for example, he thinks that bio/pharma approaches aimed
at improving cerebral blood flow are best within 72 to 96 hours post-trauma.
After that, other therapeutic approaches, including neurotechnology
devices, may be more appropriate.
Heath Lukatch, managing director of U.S. Bancorp Piper Jaffray Ventures
in San Francisco, says about 60 percent of the funding requests he
receives are from bio/pharma firms, as opposed to devices. He points
out that the degree of invasiveness of a therapeutic treatment is
an important factor. “Implants are justified in only the most
dire conditions, as opposed to pills,” he says. Still, he thinks
that stimulation devices may be less invasive than some of the new
cell therapies coming down the road, such as stem cell implantation.
He thinks that cell-based therapies for neurological diseases and
disorders are as much as 10 years down the road, and as a result,
there’s a “significant opportunity” for neurological
devices in the next two to five years.
Lukatch sees stroke as a major market opportunity for all three approaches
to treating this condition. All other things being equal, Lukatch
said he might allocate 35 percent of his available stroke funds to
bio/pharma approaches, 35 percent to cell therapies, and 30 percent
to neurological devices.
Matthew Rieke, M.D., a principal of PA Early Stage in Wayne, PA, expresses
a similar sentiment. “New devices, diagnostics, small molecule,
and protein therapies have all improved the treatment options for
people with neurological diseases,” he says. “There are
always commercial opportunities for effective therapies, whether they
are biotech or medtech.”
Hurdles Facing Neurotech
Not all VCs are bullish on neurotechnology
devices, however. Alta Partners in San Francisco is one VC firm that’s
been more tardy at funding neurotechnology start-ups than other firms.
Managing director Guy Nohra says he has funded several companies in
the neuro space, but all were bio/pharma companies.
Nohra said his firm looked at one neural stimulation venture, Cleveland-based
NeuroControl Corp., a few years ago, but his advisors felt that the
technology was not developed enough. He also was concerned that their
only goal was hand restoration. When informed that NeuroControl has
since received funding from Primus Ventures and other VCs, and they
now have a product line that includes bladder/urinary prostheses and
stroke therapy, Nohra seemed impressed. “Maybe the people I talked
to weren’t creative enough,” he said.
Nohra notes that historically, VCs have preferred biotech approaches
over medical devices, citing the number of deals and the volume of
investment. Still, he said Alta would consider funding requests from
neurotechnology device companies if they came in.
T. Forcht Dagi, M.D., a partner of Cordova Ventures in Alpharetta,
GA, is also more inclined to support bio/pharma approaches to neurological
disorders. “The plasticity of the central nervous system tends
to get in the way of stimulation/ablation,” he says. Dose response
issues turn out to be more sensitively addressed, all things being
equal, pharmacologically.”
Vector Fund’s Doug Reed points out another potential drawback
to neurotechnology devices: they often offer only a one-time sale,
whereas drugs offer investors something of an annuity stream.
Tullis thinks the fact that so many VC firms are currently funding
biotech start-ups offers an opportunity to neurotechnology firms.
“We’re willing to look where no one else is looking,”
he says. When too much VC money floods one industry segment such as
biotech, this tends to thin out the management and technical teams
involved with the start-ups. It also leads to pre-money valuations
that are sometimes too high for his taste, Tullis says. Since Tullis-Dickinson
is localized in regional areas such as Alabama, Michigan, and New
Mexico where a vibrant university system is in place, this tends to
make the firm less sensitive to fluctuations in premoney valuations.
Advice for Entrepreneurs
The venture capitalists we interviewed
offered some useful advice for neurotechnology start-ups seeking outside
funding. The two most important factors VCs consider when evaluating
a business plan are technology and market potential. “We look
for practical medical device or bio/pharma technologies that address
large market opportunities in healthcare, including the neurological
diseases,” says Ross Jaffe M.D. of Versant Ventures.
Matt Rieke of PA Early Stage likes to see a market opportunity of
at least $500 million. But the most important factor to him is the
stage of clinical development. “The further along a company’s
products are in clinical development, the better.”
Michael Carusi, general partner of Advanced Technology Ventures in
Palo Alto, CA, concurs: “You need to be at a development stage,
not a science project.”
While some VCs look for a solid management team to back up the technology
and the market opportunity, others are less concerned. “We can
help with business strategy, building boards, management teams, and
finding other investors,” says IngleWood’s Dan Wood. “But
we do not spend any time in research.”
Besides NeuroControl, several other neurostimulation firms have attracted
venture capital funds. One such firm is Seattle-based Vertis Neuroscience,
which received funds from Mayfield Fund, Canaan Partners, and others.
In obtaining funding, Vertis CEO Alan Levy capitalized on his background
in the cardio space, having served as CEO of Heartstream, a manufacturer
of automatic external defibrillators. |
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