The biggest reason startups get turned down by venture capital is they've got "crappy teams," said Peter Thompson, a private equity partner at OrbiMed one of the largest healthcare investment firms in the country.
Thompson spoke with some candor at a recent Q&A sponsored by J-Labs San Diego. Here’s what he said, edited for clarity:
Is there a sweet spot for deal size?
We usually stay within the $10 million mark, but some of the companies we’ve seed financed for much less than $1 million. The earlier stage a company is, the more exciting it has to be to generate investor interest from anyone.
Say we like your progress, or what’s going on in your company. If we feel like we can write a $100 million check, we can.
Regarding early stage companies, how important is IP?
It depends. Sometimes we’re betting on the IP that makes a company’s work proprietary, but sometimes it’s more about the intellectual capital.
There are not a lot of medical device companies left standing right now. Why did that happen, and what’s next?
The easy answer: The returns have been horrible. You have to wonder – are we in the midst of some sort of Machiavellian exercise, the design of which to stamp out medical device innovation? It’s been brutally effective so far.
In part it’s because the regulatory and reimbursement environments have changed. But one of the interesting things: When there was communication from the Institute of Medicine that asked, what if we figured out – in the clinic – whether these devices actually worked?
The device industry went batshit. “This is going to kill innovation,” they said. I’m a humble country doctor, and I look at the data out of some of these marketed devices – and I don’t know if they work.
As we look at devices, we have tended to go after the later-stage ones. We’re still not sure what getting on the market for a device in Europe even means. It’s better than not, I guess. If we go after earlier stage companies, we challenge and work with them, and figure out if what they’re doing actually works out for patients.
The VC model seems to be declining in therapeutic development. What are your thoughts?
I think it’s been a case of the strong getting stronger. We just raised a $740 million fund, but we’re turning lots of people away. I think there was an expansion that admitted a bunch of folks that generated a lot of capital in the sector, generating core returns, leading to LPs becoming very selective about where they put their money. But I haven’t found a significant challenge in syndicating our deals.
This is a special, special sector. You can always look at folks building the next great Instagram, but it’s in our sector that you have to do something with tangible, demonstrable benefits to patients to see a return. That ain’t bad.
What are the different steps required to present to your board?
As you think about getting in front of our board, bear in mind that there pretty much isn’t anything OrbiMed hasn’t seen. So there’s no question that teams and individuals are very important. No question that a serial entrepreneur that has already made money is more appealing to the venture community. So, at least find mentors that are serial successful entrepreneurs. Network.
People always say, “don’t take NO for an answer.” But sometimes “no” is the answer. So you have to think about why that is – and adapt.
What’s the biggest reason venture capitalists don’t invest in a healthcare startup?
If a startup hasn’t thought through the clinical aspects, or doesn’t think through the competition or regulatory landscape. A lot of startups just haven’t really examined what a project should look like – and generally don’t have insight into the realities of a commercial situation.
This is the consequence of not reaching outside of the skill of those at the bench. Startups pay inadequate attention to drivers beyond what should shape the next experiment.
But the biggest problem, I find, is that they’ve got a crappy team.
Most of you won’t get to the clinic. Most of you will fail. The entire process is a learning exercise: It becomes all about the people that are hands-on when it comes to data and business, and can respond and adapt.
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