Crowdfunding ROI: $813 per hour invested
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We’ve all seen and heard about people and companies with novel ideas getting funded on sites like Kickstarter and Indiegogo. There are many anecdotes of ideas going viral and raising lots of cash. There are also plenty of ideas that either don’t get funded at all or fail to reach their target. A new study reports that in terms of crowdfunding ROI, you can expect to receive about $813 for every hour you invest in a successful crowdfunding project.

It would be helpful to look at crowdfunding at a high level and get some questions answered about this relatively new fundraising alternative. Forbes magazine recently reported on a new report about crowdfunding published by Capital Crowdfund Advisors (CCA). In August 2013, CCA interviewed several hundred organizations in North America, Europe and Africa that had completed successful crowdfunding campaigns.

Here are some of the most relevant questions asked by CCA and reported by Forbes:

  1. Does crowdfunding increase sales?
  2. Does crowdfunding create jobs?
  3. Does crowdfunding help attract follow-on investment?

First of all, yes, crowdfunding does have a positive effect on sales. The effect was modest when considering all three crowdfunding modes: rewards, debt, and equity. (Yes, you can now raise equity with crowdfunding. Be sure to speak to a savvy attorney first!) The sales increase for the equity crowdfunding mode was dramatic: an average of 341% increase in quarterly sales after the successful campaign.

Crowdfunding was shown to have only a small positive effect on job creation with 39% of those surveyed hiring an average of 2.2 new employees and an additional 48% planning to increase hiring by an unspecified amount.

As for helping to attract new investors, it appears that successful crowdfunding has positive effects: 28% of those surveyed completed rounds of traditional investment with angels or venture capitalists within three months of the conclusion of their campaigns and 43% more were in talks with institutional investors.

How much was raised in a typical crowdfunding project? From the Forbes article:

In this report’s sampling, the average raised across all methods was $107,810 (with a mean of $40,300, as some results were exceptionally large). For an equity raise, the average was even higher, producing the U.S. equivalent of $178,790. In the process, firms sold between 5% and 50% of their companies, with an average of 15%.

Kickstarter even publishes its latest stats on projects and funding. Projects on Kickstarter have raised $985 million to date for 133,565 projects from 5,648,063 individual backers. This is microfunding on a major scale.

Read more: New Report: The ROI Of Crowdfunding – Forbes.

Takeaways: Fundraising for early stage medical device companies continues to be challenging. Federal government grant money has been shrinking and more companies than ever are competing for the same pot of cash. Angel investors and venture capital firms have become more risk-averse as have the strategic investment activities of the large medical device companies. Crowdfunding, while no panacea, may be an another funding option for early stage medical device companies.

Keep in mind that you will probably not be able to launch your medical device using just the proceeds from a crowdfunding campaign. Medical device commercialization is costly. Crowdfunding proceeds should be earmarked for a specific purpose such as building an early prototype or conducting an important test In other words, reduce risk so you can attract follow-on investment from more conservative investors.

While Kickstarter specifically prohibits medical products, other crowdfunding websites are more open. Here is a very cool (and useful) road map from Inc. Magazine that identifies the ideal crowdfunding site for your Big Idea. Not mentioned by Inc. but nonetheless specific to medical devices and medical technology, Medstartr is another crowdfunding site to investigate and consider.

Ranking the best places for healthcare startups
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Silicon Valley is Mecca for technology companies. When it comes to ranking the best places for healthcare startups, however, the global technology hub seems to be not as dominant.

A common method for ranking the best places for startups is to quantify the number of exits and aggregate valuation in a given time period. A recent report by CB Insights, an investor service focused on early stage companies and emerging industries, says that Massachusetts and not the Bay Area has been more successful in exits for VC-backed healthcare startups.

Healthcare startup categories included medical device, biotech, and pharmaceutical companies.

The analysis also shows that other regions are competitive as well. Southern California had the next highest number of exits in the same time period, 2012-present.

The CBinsights report looked at the startup exit data in another way that highlights differences between the regions more clearly. They defined another metric, “Value Creation”. Value Creation is the ratio of the average exit value of a company in the region to the average VC investment in a company in that region. So bigger is better.

As seen in the table, New York comes out on top in this ranking while Silicon Valley lags at little more than half of the New York number. My home state of Washington is even lower on the list. This ranking may reveal why certain regions seem to have an easier time attracting venture capital investment than others. One last and very interesting note: the Value Creation metrics for technology companies are much higher than for healthcare companies. It starts to become clear why there is a dearth of capital investment in the healthcare space. If you are a VC, would you put your money in healthcare or technology?

Takeaways: Although no single city or region in the U.S. dominates when it comes to a great location for healthcare startups, there are a few conclusions that can be drawn from the report.

The East Coast  – Massachusetts in particular but also the New York/New Jersey/Pennsylvania tri-state areas are very strong in healthcare startups. Obvious reasons include major population centers for access to a talented and experienced employee pool, large numbers of world-class research universities and medical centers, and close proximity to financial hubs.

Of course, other locations such as Minneapolis, the San Francisco Bay Area (including Silicon Valley), Southern California, and the Seattle Metro area have their drawing power as well. Some of the additional factors include lifestyle, proximity to the FDA and other government officials, and being part of an industry “cluster” (medical device in Minneapolis, biotech in the Bay Area for example).

Read more:

Silicon Valley doesn’t dominate when it comes to VC-backed healthcare exits.

Silicon Valley is Second to Massachusetts for Venture Capital-backed Healthcare Exits.

MedTech Startup Red Flags to Watch Out For and to Guard Against

Red flagIn an amusing series of articles and blog posts last week, biotech veterans and observers traded their favorite red flags that investors must watch for when considering biotech investment.

Most of these caveats also apply to medical device companies. On the flip side, startup CEOs should be forewarned and forearmed to not make the same mistakes when pitching and/or structuring their companies. They are on to you…

Here are a few of my favorite caveats:

[from Luke Timmerman at Xconomy]
  • Watch out for weak science or results that can’t be reproduced by third party researchers.
  • The company story is too complicated and can’t be reduced to an elevator pitch.
  • “There is no competition.”
  • No plan to demonstrate outcomes or show clinical and financial benefits to the healthcare system.
  • “Rent-a-luminaries” make up the Medical/Clinical/Scientific Advisory Boards.
[from David Sable, physician and venture capitalist]
  • CEO is clueless around investors
  • CEO is inflexible and won’t deviate from the rehearsed pitch
[from Christopher Henney, co-founder of Immunex, Icos, and Dendreon]
  • Too many VCs on the board
  • Family members in key management or board positions

I’m sure these three veterans have seen and/or interviewed dozens, if not hundreds of startup CEOs and their pitches.

Takeaways: Simple is best. Use a template to develop your pitch – they are easily found. Don’t deviate (at least not too much) from standard practices for startups in your industry segment and in your geographic area. It’s easier than ever to get a negative reputation. You may be able to get past one round with a sketchy pitch or objectionable governance. The stakes keep going up, however, and you risk everything by not being able to secure financing all the way to market launch. Do yourself and all of your stakeholders a huge favor and address the red flags before the investors see them.

Read more:

21 Red Flags to Watch for in a Biotech Company | Xconomy.

Six Red Flags to Watch Out For in a Biotech, From Dendreon Co-Founder Chris Henney | Xconomy.

A few more biotech red flags (h/t @ldtimmerman) – David Sable .

Prosthetic Hands May Soon Gain the Sense of Touch

Someday in the not too distant future, amputees with prosthetic hands may gain the sense of touch.
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This research being conducted at the University of Chicago could be a major advance in robotics and prosthetic technology. Amputees today have no way to “feel” their prosthesis except to watch it as it moves. Someday in the not too distant future, amputees with prosthetic hands may gain the sense of touch.

Using monkeys, the researchers first identified specific areas of the brain that corresponded with their fingers. Then the scientists connected electronic strain gages in the prosthetic hand to those specific areas in the brain. Using software, the scientists were able to successfully identify a “contact event” at the prosthetic hand from the monkey’s brain and to create a sense of pressure.

An important next step would be to control the prosthetic hand with the brain and to be able to apply force with feedback so the brain can sense what and with how much force the hand is touching.

The research work was partially funded by the U.S. government’s Defense Advanced Research Projects Agency (DARPA). DARPA is well-known for sponsoring high risk, long term research activity. The wars in Iraq and Afghanistan have resulted in large numbers of U.S. military amputees, creating an ongoing and increasing need for improved prosthetic technologies.

Takeaways: There are non-obvious sources of funding early technology development work. DARPA is a great example but there are plenty of others. In the government, NIH, CDC, and NSF have ongoing research grant programs. There are other military programs as well, for example, TATRC. Yes, there is competition for these grant dollars so you need to make a strong case for the technology and the problems it solves. There is also the possibility that the researchers have no intention of commercializing their technology. In that case, it is possible for a company to license and commercialize the technology on its own.

        Read more: How to Give Prosthetic Hands Touch Sense : Discovery News.

Medical Device Startup Fundraising: 5 keys for your pitch

Woman presentingIf you are leading a medical device startup, fundraising is your top priority. Here are five key points that you must address in every pitch that you make, no matter if it’s for a grant, seed investment from friends and family, angel investment, venture capital funding, or strategic partnerships with multinational medical device companies.

From the article:

  • Be clear on what your product is, right up front
  • Articulate the important problem you are solving
  • Define your customers
  • Spell out how you will create value with the $$ you are raising
  • Instill confidence in you and your team

Another way to look at the pitch is to think of it in terms of risk reduction. Most experienced investors talk about three main areas of risk in startup investing:

  • Technical Risk
  • Market Risk
  • Execution Risk

Investors will not move forward with an opportunity unless they believe that these key risks have been addressed and are below their personal threshold. Of course, you will never know that threshold so you must work to convince the investor that you have mitigated the three risks to the maximum extent possible.

Technical risk is all about the product or solution. Does your product solve the customer’s problem? Have you built a working prototype? Do you have an animal model? Have you performed animal testing? Are there important technical issues yet to be resolved? Do you have any intellectual property protection? Have you conducted a freedom to operate analysis? Does your product or solution depend on products or IP owned by other companies? Have you conducted beta testing? What’s your regulatory classification and plan? Are there more products in the pipeline?

Market risk is about the customer(s). Have you identified the problem? Is the problem a large one? Is the market opportunity big enough to justify the investment? Who are the customers? Why will they buy from you? What’s the competition (and don’t make the rookie mistake of saying that there is no competition)? Do you have evidence of demand? Do you have testimonials or at least interest from Key Opinion Leader customers? How do you plan to distribute and sell your product? How does your product or solution fit in today’s environment of managed care, healthcare reform, and evidence-based medicine? What’s your reimbursement strategy and plan?

Execution risk is about you and your team’s ability to convince investors that you can use their money to execute your plan. Does your team have the talent and experience to successfully commercialize your product? Do you have experienced and knowledgeable advisors, both business and clinical? Do you have a credible business model? What are your key milestones? What’s your exit strategy? Do you have a detailed pro forma income statement, especially for the period up to launch and for the two years after launch? Will you execute it exactly as conceived? Of course not, but you should be confident in your plan and your ability to execute. You should also have detailed contingency plans for the inevitable crisis when things go awry. 

Takeaways: Like many things, being successful at medical device fundraising requires being a great salesperson. Whether it’s a surgeon or an investor you’re selling to, put yourself in the place of that person. Be sure to address the five key points with details, evidence, and background information: product, problem, customer, milestones, team. Also keep in mind the risk tolerance of the investor. Your ability to communicate mitigation of technical risk, market risk, and execution risk will determine your success in fundraising.

Read more: Medical Device Startups: 5 essentials for your pitch deck | MassDevice.

A Cautionary Tale: Biotech firm Atossa recalls its only product | The Seattle Times

Atossa Genetics is an early stage biotechnology company in Seattle developing breast cancer diagnostic tests and medical devices using molecular diagnostic technology. The publicly traded company ran afoul of FDA regulations earlier this year and last week announced a voluntary recall of its products, causing its stock to tank.

The company bills itself as “the breast health company (TM).” Atossa is small, with only ten full-time employees (at least five of whom are senior management executives) according to Yahoo Finance.

Here’s a timeline of company events:

  • November 8, 2012 Atossa Genetics, Inc. Announces Initial Public Offering (NASDAQ exchange, IPO value $4 million). That’s not a typo. It really was $4 million, 800,000 shares at $5 per share.
  • February 21, 2013 Atossa Genetics, Inc. received a Warning Letter from the FDA regarding its Mammary Aspirate Specimen Cytology Test (MASCT) System and MASCT System Collection Test. From the company’s press release:

“The FDA alleges in the Letter that following 510(k) clearance the Company changed the System in a manner that requires submission of an additional 510(k) notification to the FDA.”

  • March – September 2013 Atossa Genetics Inc. continues marketing its products, announcing numerous distribution and partnering agreements as well as supporting women’s health events.
  • September 18, 2013 The company’s stock closes up almost 21% in one day at $6.00 on volume of more than 8.4 million shares traded when it announces a distribution agreement with medical distributor McKesson.
  • October 4, 2013 Atossa Genetics Inc. initiated a voluntary recall to remove the ForeCYTE Breast Health Test and the Mammary Aspiration Specimen Cytology Test (MASCT) device from the market. This voluntary recall includes the MASCT System Kit and Patient Sample Kit.
  • October 7, 2013 Atossa Genetics Inc. stock opens at $5.32 and quickly drops to $2.66 (down 50%) on the news of the voluntary recall. The stock closed today at $2.45, an all-time low.
  • October 7-8, 2013 At least six law firms have announced initiation of shareholder lawsuits in the aftermath of the recall.

Apparently, the company and the FDA disagreed on whether a new 510(k) was required after the company changed the Instructions for Use (IFU) on its product. The company seems to have decided to continue marketing without submitting a new 510(k). What happened next is unclear but the “voluntary” recall ensued.

The company told The Seattle Times that it currently has “sufficient cash for the next 8-12 months of operations without raising additional capital,” though it cautioned that the cost of the recall and other associated expenses is not yet known. Sales revenues were about half a million dollars for the first half of 2013. Atossa reported a $2.2 million loss for the same period.

According to The Seattle Times, Atossa is continuing to develop other diagnostic tests but “will be reassessing the regulatory status of these products … in light of our recent experience,” said CEO Quay. Seems like a prudent action given their recent history…

Takeaways: Do not disregard the FDA. They have the power to shut down your company. If you have a fundamental disagreement with FDA, hire a regulatory consultant and attorney and take their advice.

Make sure you have people with experience in commercializing medical devices, especially regulatory affairs, on your executive team and board of directors.

Think carefully before deciding that an IPO is your best financing option. There are very large fees to be paid and the reporting requirements (Sarbanes-Oxley, etc.) are much more revealing – and onerous – than anything required if you remain private and use VCs or angel investors as your sources of capital.

As the article points out, there are plenty of attorneys waiting to represent disgruntled shareholders. Perhaps you can prevail against all of this adversity but think of the opportunity costs in lost time and cash spent on lawyers and regulatory revisions instead of product development or marketing.

Read more: Biotech firm Atossa recalls its only product | Business & Technology | The Seattle Times.

Frazier Healthcare raises $377M venture fund, surpassing target | GeekWire

Wow, looks like a repeat of the 1990s! A new venture fund from Frazier Healthcare is seriously good news for the healthcare startup community. I hope it’s the beginning of a trend and that we’ll see a few more VCs make fund announcements.

For the past few years, VCs have been pretty much absent from the market. Angel investors were left as one of the few financing options for early stage medical device and biotech companies.

Perhaps we will see a return of past practices where angel investors concentrated on very early financing rounds and then VCs stepped in. Who knows? But I believe it’s on balance a positive development for the industry.

Takeaways: There is a lot of money out there “on the sidelines.” Frazier may be taking a leading role in revitalizing healthcare startup financing. At least it shows that a lot of wealthy individuals and fund managers believe in the future of healthcare as an investment opportunity. Startup CEOs, keep pitching!

Read more: Frazier Healthcare raises $377M venture fund, surpassing target – GeekWire.