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Investors Focused on Growth-stage Companies vs. New Technologies

Large, cash-rich orthopaedic device companies have increasingly opted to acquire companies and product lines that allow for scale over focusing resources on in-house development. The investor community has followed a similar trend, backing growth-stage companies with regulatory cleared products. Though the total investment dollars aren’t down, ultimately, this has left a hole in the funding of new technologies.
“The increased emphasis from investors for companies to get to market and profitability faster shows a lack of patience in the investor community; however, it can also be a benefit as more companies have to adapt to this new environment,” says Chris Fair, Managing Director and Co-Founder of Medtown Ventures. “The end result will be that higher-quality companies will get through the funding cycle.”
ORTHOWORLD has reported that more than 30 transactions with a combined value of more than $500 million in funding—from a $150,000 grant to a $120 million IPO—have occurred in the orthopaedic space in the first half of 2014. (A list of these transactions and how the capital is expected to be used follows this article.)
For greater understanding of the state of funding, ORTHOKNOW asked Fair to provide perspective on market trends and advice for all companies on how to capitalize on young technology. Fair and Greg Downey, both of whom have extensive experience in the orthopaedic and medical device industry, recently launched Medtown Ventures to fill the gap in the capitalization and commercialization of early-stage life science companies. Fair’s insights follow.
Post-seed has become the most difficult funding stage.
The entrepreneur has proven that he has a solid idea and is able to produce a fit-and-function product. This is a product, but not yet a company. Entrepreneurs are creative by nature; unfortunately, the next step in business development is full of conflict-oriented decisions, from raising capital to product commercialization, that typically require a different skillset. This phase of development, as well as the entrepreneur, can benefit greatly from seasoned operator experience. The entrepreneur must be able to communicate his strengths and where he needs help. This self-actualization step is harder than it sounds.  
In this stage of funding, most companies require a $1 million to $5 million capital infusion to reach the next value creation point. The challenge is that the private equity and venture capital investors who normally filled this role are rarely making investments in unproven companies, but are now investing in growth-stage entities seeking scale, as they are less risky. The result is that companies that find themselves in this stage become stagnant.
The Medtronics of the world used to visit universities to look at technologies before they transformed into companies. However, large companies and venture businesses have stopped doing so. The number of companies coming out of universities is slowing. The other side of the coin is physician-backed companies, which reach a certain stage because physicians have capital and can fund their own development. The total number of companies actually getting started, funded and executed is down because of a gap in funding.
Companies don’t know where to turn for it. They have a really good idea, but just don’t know how to navigate the waters and lack the capital to hire an investment banker. These companies are stuck.
Biologics and delivery model solutions have received greater attention.
Within hardware-driven solutions, fewer new companies are getting started. We see greater uptick in unique technologies, like surface treatments to enhance biological function. These advancements might replace some of the biologics currently in use, and lower the cost burden. Biologics is always a hot area; however, with uncertainty in the regulatory environment, these entities often have difficulty raising capital. They need to demonstrate a clear path to market and how they differentiate from other competing technologies, and often times need to articulate how they can generate revenue ex-U.S. in the event that domestic approval is delayed.
Lately, discussion has grown regarding ways to change the delivery of implants and reduce costs associated with traditional sales and marketing methods. We’re monitoring this interesting area, as it truly helps reduce costs on both sides of the transaction.
M&A will remain a popular path for companies of all sizes.
We will continue to see more IPOs and exits in the coming months as three things occur. First, the capital markets for M&A are booming due to the beneficial nature of current borrowing policies and larger companies with more cash on the books. Second, with the consolidation of healthcare in general, bigger companies are seeking scale. Third, smaller companies that are not yet profitable and are searching for growth capital are finding it more economical to merge with similarly-sized companies. This can be better than taking a down round in the investment opportunity.
Startups that avoid these pitch mistakes will be better positioned for success.
First, the entrepreneur must know that the pitch is a selling opportunity, not a dissertation or grand rounds presentation on the technology. Know your audience. Get them interested in what you are doing. Most importantly, do not try to translate your career into a 15-minute presentation. It won’t work. Start with the investor in mind and create your pitch accordingly.
Second, know how you are going to make money and be willing to discuss it in detail. This does not mean showing a slide on “exit opportunities.” Entrepreneurs must show how they will scale and grow a business to profitability. Talking about the exit ramp before the company gets on the ramp is premature and will turn off many investors. Knowing how you will achieve profitability also shows that the entrepreneur values the investors’ hard-earned dollars and has a plan to return these dollars to them. 
Finally: valuation, valuation, valuation. Many an entrepreneur has pitched a good-to-great idea and has lost investment based solely on valuation. Valuation tells the investor if you are being realistic or out of touch with reality. It also shows the investor whether the incentives are aligned amongst the present company shareholders and potential new ones. Valuation is not supposed to show what a company might be worth, but what it is worth today, without new investment. The new investor has to be part of the upside in the company’s next stage of growth.
Large- and mid-sized companies may receive greater ROI by acquiring small companies.
In conclusion, know that large companies are acquiring for scale. They do so to reduce costs and survive the next ten years. Midsize players are asking, “How do we set ourselves apart? What technologies should we acquire that actually make a difference?” If large- and middle-sized companies focus on acting earlier to find smaller companies, they may get a better financial return on investment. If I work for Tornier, my challenge is how I find the acquisitions. What do I look for? If I’m involved earlier, make investments earlier, money can be turned around faster, but it’s a challenge. 
Chris Fair has over 20 years of senior executive management and entrepreneurial experience focused in medical device and biologic platforms. He began his medical device career at DePuy, where alongside a small team of personnel, he helped to build the spine franchise from $10 million to $350 million within nine years. He also served in executive positions at St. Francis Medical Technologies, MedShape Solutions and Amniox Medical. He can be reached at chris@medtownventures.com
Medtown Ventures
Funding activities identified during 1H14 include:
Arthroscopy/Soft Tissue
Ceterix Orthopaedics 
US $18MM in new financing
To support commercial expansion of novel arthroscopic surgical tools with application throughout various knee, hip and
   shoulder procedures
US $39MM investment
To support debt reduction/restructure and company/product expansion, specifically Anterior Cruciate Ligament Reconstruction
   system (as well as Response Spine System for scoliosis treatment) 
Fracture Fixation
Conventus Orthopaedics 
US $10MM credit facility
To support commercialization of Conventus DRS to treat distal radius fractures, further development of new indications for self-
   expanding implant platform technology (proximal humerus and lower extremities) 
X-Bolt Orthopaedics 
€1.8MM (~US $2.5MM) equity investment round 
To support FDA clearance of hip fracture fixation product, fast-track commercialization to global market
US $36MM Series E financing
To support commercialization of advanced visualization devices for minimally invasive surgery, with application in spine, 
   orthopaedics, etc. 
Joint Reconstruction
US $5MM in equity financing
To support expansion of product sales, including its knee resurfacing device, in Europe and select ex-EU countries 
Bruin Biometrics
US $10MM round of funding 
To support EU and U.S. product marketing, clinical trials and R&D initiatives 
Developed the OrthoSonos biometric sensing device, designed to diagnose and spot-monitor health of joints and implants
OMNIlife science 
US $27.5MM debt financing
To support expansion of hip/knee replacement products, commercial development of OMNInav Robotics and Navigation
   platform for hips. 
Avitus Orthopaedics 
US $0.35MM investment from Connecticut Innovations
To support manufacturing, 510(k) regulatory clearance, marketing, etc. for minimally invasive, disposable bone graft harvesting
Carmell Therapeutics 
1-year US $157,000 Phase I SBIR Grant 
To support study of plasma-based materials to deliver antimicrobials to control infection, e.g. following bone fracture 
US $9MM venture debt financing
To support general operations, including advancement of U.S. regulatory process
Has developed i-FACTOR biologic Peptide Enhanced Bone Graft 
Cocoon Biotech 
Seeks up to US $0.75MM in seed funding 
To support animal study and optimization of silk-based injectable gel for the treatment of osteoarthritis 
ISTO Technologies 
US $8MM private debt financing (previously raised ~$20MM) 
Developing orthobiologic treatments for cartilage and bone repair 
Launched IPO seeking to AUD $8MM (~US $7.5MM)
To support development/regulatory approval of CelGro collagen-based scaffold for orthopaedic and other applications,
   marketing of Ortho-ATI stem cell therapy for tendon repair
Closed 2nd and final tranche of Series A preferred stock financing (undisclosed amount,
   though company has raised >$14MM through equity financing and R&D contracts)
Developing TPX-100 injectable cartilage repair therapeutic agent for knee osteoarthritis 
Aurora Spine 
Private placement of common shares valued at CDN $10MM (US $9.1MM)
To support manufacturing, sales and marketing of ZIP device/other FDA-cleared products and for general working capital
Baxano Surgical 
Definitive agreement to secure ~US $10MM in a private placement of convertible debentures
To support development of Avance pedicle screw, other commercial growth 
Benvenue Medical 
US $64MM financing round
To support expansion of U.S. commercial presence, manufacturing, working capital, etc. 
Products include Kiva VCF Treatment, Blazer-C Vertebral Augmentation and Luna Interbody systems
Cardinal Spine 
US $0.3MM of a planned $1.25MM offering
Products include STGC vertebral body replacement and STCC cervical cage, both FDA cleared 
Intellirod Spine 
US $1.6MM debt financing from Ohio Third Frontier’s Commercial Acceleration Loan Fund
To support commercialization of Intellirod Sensor and related lumbar fusion implants
IPO net proceeds ~US $120MM
Supporting working capital, general corporate purposes, retirement of outstanding indebtedness, etc. 
Filed a registration statement for a secondary public offering of common stock, expecting to raise ~US $25MM
To support global sales & marketing, including U.S. launch of Mobi-C; R&D; general corporate purposes, etc. 
Paradigm Spine
Credit agreement for up to US $75MM of secured debt financing
To support expansion of domestic commercial operations, etc. 
Has developed coflex Interlaminar Stabilization device 
Premia Spine 
NIS $7MM (~US $2MM) of a NIS $10MM financing round from new/current investors
To support clinical trial to commence in early 2015, sales expansion in Europe and Asia, etc. 
Markets the TOPS System and adjunct Versalink Fixation System (available in Europe, Israel, Turkey, etc.)
Providence Medical 
US $6.8MM Series C round 
To support U.S. sales, marketing, training and clinical activities
Markets DTRAX Cervical Cage in the U.S.
US $33MM growth capital round
To support U.S. sales expansion, ex-U.S. commercialization, R&D, clinical studies, etc.
Has developed iFuse Implant System, a less-invasive alternative to traditional sacroiliac joint fusion 
Spinal Kinetics 
US $34MM financing 
To support clinical trial of the M6-C cervical disc, expanded ex-U.S. commercialization and clinical programs 
Wound Closure
ZipLine Medical 
US $4.3MM Series C financing round 
Developing noninvasive surgical skin closure for suture-like outcomes with application in a variety of specialties, including