May 18, 2012
Why does a medtech VC think many late-stage venture deals are crap?
Last week. venture capitalist Mike Carusi created a bit of a stir at the IBF MedTech Investing Conference in Minneapolis when he loudly proclaimed that many late-stage deals are “crap.”
He went on to add that the reason they are late stage is because no one is interested in them.
Although the audience laughed out loud, I suspect there were several VCs in the audience who received that declaration with skepticism. After all, Carusi’s is a contrarian approach, especially in the medical technology world where regulatory delays at portfolio companies have delayed investor payday. VCs also have a master — limited partners — and it appears that LPs have not been too keen on seeing their capital tied up endlessly.
So I went to Carusi, general partner at California venture capital firm Advanced Technology Ventures (ATV), to get some additional insight in what informs his philosophy of investing in early stage companies. Here’s what emerged from our conversation:
Late-stage companies are very likely doing incremental advances, which is why strategic investors like corporations probably want to see that clinicians, patients or payers are valuing their solution. And “incremental advance” is becoming a dirty word in the brave new world of healthcare.
Showing value most often means late-stage companies have to demonstrate some revenue. And that requires building a sales, marketing and maybe even a manufacturing organization. All of these carry inherent risks.
These companies are most likely coming up against a competitor with an entrenched product and unless the startup’s product is really valuable, people are not going to make the switch.
These companies are also likely having to do some reimbursement battles and that’s another risk.
In other words, Carusi firmly believes that if a company is novel and disruptive, it won’t be around to become a late-stage company. Some shrewd corporate buyer will come scoop it up or the company will have a successful IPO.
Take Ardian, for example. ATV invested in the company when it was barely a year old and before its hypertension treatment was tested in a human being. A few years later, Medtronic had the foresight to buy it for $800 million up front and additional milestone payments. Still, it was early stage in that even at that time, Ardian had some clinical data in Europe but none in the U.S., Carusi said. Realized investment in the Ardian deal is at least 15 times more than what ATV invested and if the company reaches its regulatory and clinical milestones, ATV stands to make even more.
So how early is early for Carusi?
Typically, ATV has invested in companies that are preclinical. In other words, ATV gets in at the series A round. In some cases, the company has done seed rounds too — for instance, it was one of the founding investors of Zeltiq Aesthetics, which developed a nonsurgical weight loss treatment and went public in October.
“If we look at our portfolio, the average hold time on some of our exits have been four to five years,” Carusi said, who has been with ATV since 1998. ”And so that’s why I do push back on the idea that early stage necessarily means longer time to exit.”
ATV has come out on top in terms of realized investment, Carusi said, declining to reveal the exact amount because the company is trying to raise another fund. And in the end, that is the strongest argument for his early stage investment policy.