Tom Clement

Tom Clement: There’s been a lot of talk about new realities for entrepreneurs, venture capital and startups. Over the last few years, investors have looked at low returns and battened down the hatches. Certainly the landscape has changed, and it is time to find new strategies for getting our startup companies financed.

This is particularly evident in the area of life sciences funding, which, according to PricewaterhouseCoopers, received the highest percentage of VC funding in the first half of this year. But that’s not because all the entrepreneurs out there have suddenly changed their focus to life sciences. It’s because, while overall funding is down, life sciences funding has remained relatively constant.

Seattle’s startup culture has seen high spikes in raised capital for the last 15 years. VC investment in biotech and medical devices during this time, although not spectacular, has been steady.

According to a study last year by the Washington Research Council, during the dot-com era of 1999-2000, life sciences funding was less than 10 percent of overall VC investment in Washington. Today, while the actual amount of investment has not changed dramatically, the life sciences sector takes almost 40 percent of overall VC investment.

A report released earlier this year from Battelle Research Corp. and the Council for American Medical Innovation outlined the various regulatory, policy and investment challenges facing the nation, but noted that the growth and successes of the life sciences sector over other sectors has the potential to lead the entire economy back to stability.

Just as there will be a continuing need for scientific discovery and innovation in medicine, energy and climate change, the science of economics and funding those discoveries will also evolve.

Back in the 1980s, I was fresh out of graduate school when a medical device I helped develop at the University of Washington, along with a couple of other new technologies, was licensed to a big life science company, where our group was treated like a start-up. I walked in the first day to a room full of empty benches and started ordering the equipment and supplies we would need.

The large company spun off our start-up and it ultimately succeeded with one interventional medical product, while selling the other products to other established companies.

Our start-up, Heart Technology, eventually went public and after the product cleared the FDA and entered the market, was bought by Boston Scientific. At that point we had 550 employees and sales approaching $100 million per year. I stuck with Boston Scientific for nearly three years helping to develop new cardiovascular products.

In the late 1990s during the tech boom, a partner and I decided it would be more efficient to develop new products independently, then let the big life science companies come along and buy them.

Of course, the investment environment was a lot different during this time, and we were able to secure a generous angel investment before we even knew which medical problem our new company would set out to solve. Starting a company without a product idea would be very difficult if not impossible to do today.

At the turn of the century and over the last decade, the venture environment saw its rollercoaster of ups and downs – mostly in the dot-com and software arenas. I am sure there are still “classic” medical device VC plays out there today where a company raises $80 million or more over five years or longer, builds a sales force at great expense, and hopes that their sales climb so dramatically that a big device company buys them at a price that is based on multiple options to exit, instead of normal financial metrics.

But the IPO market has evolved to companies that are profitable or on the verge of profitability, so the opportunities for venture capital investors to make their returns after investing relatively large amounts to take a company to a later stage have diminished.

The National Bureau of Economic Research in Cambridge announced in September that the recent recession lasted 18 months, starting in December 2007 and ending in June 2009. More than a year later, however, the business atmosphere has changed, and it might not change back.

In the innovation sector, especially, the new realities of business, including seed (“valley of death”) capital, the need to do more with less, and the new realities of regulatory risk, require an investment-revenue reset.

In today’s economic climate, startups have to think about business in a different way. I call it a “control-alt-delete,” kind of what our grandparents went through in their personal lives following the depression of the late 40s.

We need to start with good ideas that address REAL customer and patient needs.

We need to look for ways to start with less capital and look for creative ways to bring in more capital, like grants and sweat equity.

We need to focus on products that can demonstrate a good value proposition and reduce health care costs.

We need to work more collaboratively with regulatory agencies and others to navigate the increasing risk and uncertainty of changing laws.

And it probably requires looking for a different investment model, one that can use $2-million investments for a $10- or $15-million exit, or a $5-million investment for a $25- or $40-million exit.

I believe we have the core of a strong, new innovation cluster across all sectors of technology. This is a pivotal time of change and there are many great ideas, and many great entrepreneurs for starting new companies.

Successful entrepreneurs have always been the ones who embraced hard work and prudent spending, and who have taken the responsibility to respond to the business climate.

Now we need to encourage the investment community to also be creative about this new environment and work with us to develop successful financial models.

Tom Clement is a medical device entrepreneur and chairman of the Washington Biotechnology & Biomedical Association.