February 14, 2012

Stanford BioDesign

Mike Carusi: The Healthcare VC is Not Extinct

Mike Carusi had a good year.  As a general partner at Advanced Technology Ventures (ATV) he saw his investments in Ardian and Plexxikon payoff with acquisitions of $800 million and $805 million respectively (not to mention potential milestone payments).  He saw another investment, GI Dynamics, IPO on the Australian stock market, and to top it off he was named on the Forbes 2011 Midas List as a top investor.
 
Keep in mind that this occurred in a year where VC investment for life sciences dried up.  This was a year where medical device entrepreneurs were squeezing phrases like “android-compatible” into their pitch decks just to get a foot in the door.
 
This set the stage for an incredible tableside chat with Mike where Biodesign Alumni had the opportunity to see the venture industry through his eyes.   He walked us through his path to becoming a VC and his thoughts on what lies ahead for the industry.  Below are a few key takeaways: 

Don’t underestimate sales and marketing experience.  Mike’s first job out of college was sales engineering position, and later on as a consultant he had a heavy focus on marketing.  It taught him the discipline of building a story and listening to the customer. As a venture capitalist, access to the best deals only comes after you have some success and build an extensive network.  So, early on in their careers, VCs have to squeeze themselves into deals by selling themselves. Mike attributes his part of his success to his ability to gain access to some good deals soon after becoming a VC. 

Life science is challenging, and that’s why it’s appealing. Looking back at his first job selling ball bearings, Mike recalls that there was really just one challenge – sell the product.  In healthcare it is much more complex, and he likes the hurdles that it offers.  It takes strategy and planning and hard work.  And it separates people who are really good and not so good. As Mike laid out his own career path, it was clear that he had a natural affinity for challenging, entrepreneurial environments.  Even at large companies he sought out the small teams and strategically developed the experience necessary to succeed in the healthcare space.

Life science is a good investment.  Despite the doom and gloom that we hear about the life science sector, it has actually provided the best return of any sector in VC investing over the past decade.  However, they often get no respect (see this article “Life Sciences: The Rodney Dangerfield of Venture Capital”) because 1) there are no huge outliers like Facebook or Groupon to point at, and 2) life science companies are often difficult to understand.  To Mike, the fact that there is less investment in healthcare can actually be a good thing, especially to the companies who do get funded.  Major companies like Medtronic have the same appetite for growth through acquisitions as before, yet with fewer companies receiving venture funding it means there could be higher valuations for those companies who do receive funding.  These cycles are not unusual in the venture industry, and so far life science investments have always reemerged as an integral part of many funds.  Mike is bullish on the future of the industry.

Swing for the fences.  Without a doubt, Mike prefers the big game changers to the base hits.  He reminded us not to pass up on an idea just because it is a PMA.

Team risk is a killer.  When asked what risk he is generally not willing to take on in a new investment, Mike quickly answered: team risk.  Scientific risk is usually definable and surmountable, but even one member of a founding team can easily break an investment.  Mike recounted some significant lessens learned where a single founder was the reason for the failure of a company. Learning the character of the people you’re going to spend the next 5 years with is important to do early on and Mike makes it a priority before an investment.

Discipline. In Mike’s own words, “The (VC) industry needs discipline. I believe we are repeating the mistakes of 2000 in 2011… There is clearly a shakeout underway in the industry. It is a story of the haves and have-nots, with the ‘haves’ representing those firms or partners who have generated performance. Ultimately, a healthier industry will reemerge with fewer firms chasing fewer deals.” (WSJ)