Medtech venture capital: Opportunistic vs. commitment styles of investment

Venture capitalists have been criticized of late for their opportunistic investing choices in medical devices – moving away from early stage investment and into safer, later-stage deals that herald larger returns. Early stage investment, dubbed commitment investing, requires that they accept a longer wait to exit. This is all but dying out in medical device venture capital – making it harder […]

Venture capitalists have been criticized of late for their opportunistic investing choices in medical devices – moving away from early stage investment and into safer, later-stage deals that herald larger returns. Early stage investment, dubbed commitment investing, requires that they accept a longer wait to exit. This is all but dying out in medical device venture capital – making it harder for early stage medtech entrepreneurs court dollars from VCs and strategic investors.

“There’s definitely more capital on the later stage, opportunistic end of the spectrum,” said Renee Ryan, vice president of venture investments at Johnson & Johnson Development Corporation, speaking on a panel at this week’s MedTech Investment Conference in Minneapolis. While her firm’s been looking at earlier stage companies, even the Series A rounds they’ve been participating in already have patients undergoing clinical trial.

“From a strategic standpoint, I think we all recognize the problem,” Ryan said. “Everyone wants to go earlier, but it’s harder if you don’t have the data to look at.”

In short, startups’ timelines often outlast corporate priorities and strategies. Over that course of time, strategics themselves pivot. The organization changes. People leave. So it’s hard to keep a strategic aligned with a startup for the long haul – it’s still all about finding the most efficient way to build value.

“It’s tough for a lot of VCs, because constitutionally we skew toward early stage and innovative companies – that’s where breakthrough technologies are birthed and incubated,” said Alexander Schmitz, investment director at Endeavor Vision. But when limited partners pressure for faster exits, there’s only so much a venture investor can do.

“Markets are markets,” said Kirk Nielsen, managing director of Versant Ventures. “So capital flows to where the perceived opportunity is.”

Nielsen is optimistic, however, that this could change. If you transpose the situation against biopharma, he said. you can draw some conjecture on how this all might play out in devices. A few years ago, biopharma was playing it safe – chasing a 6th or 7th generation statin in favor of helping seed something groundbreaking.

“They were having the same question – fewer people were going after big idea science,” Nielsen said. “The idea in biopharma was also, ‘Invest later, make money.'”

That’s changed in the last few years, thanks to some really robust exits. The IP window is wide open – helping encourage VCs and strategics alike to have more faith in early stage biopharma deals.

“The pendulum is going opportunistic investing to more commitment investing,” Nielsen said.

Nielsen thinks the same shift can happen in devices – there just need to be some more strong exits. As the FDA “becomes more reasonable,” the likelihood of a medtech pivot in investment strategy – from opportunistic to commitment – grows.