Venture Capital Outlook Bright for Neurotech Devices

by James Cavuoto, editor
Neurotechnology entrepreneurs and product developers looking for venture capital have a relatively rosy outlook in the years ahead, despite the current economic conditions and the somewhat sparse history of funding for start-ups in this field, according to interviews Neurotech Reports conducted with two dozen VC firms. Our research, conducted subsequent to the September 11 terrorist acts, reveals that numerous VC firms are open to funding requests from neurotechnology device manufacturers, and several of them see a window of opportunity that will peak in the next three to five years.

Several of the VCs we interviewed drew a parallel between the onset of today’s “neuro” space and the “cardio” space of several years ago. There was nearly universal agreement that among all the applications for neurotechnology, stroke represents the greatest market opportunity, followed by pain treatment. Parkinson’s disease, Alzheimer’s disease, hearing disorders, and paralysis were also highly rated as large potential markets for neurotechnology.

The most likely firms to fund neurotechnology ventures are VCs that have a history of funding medical device start-ups. Generally, the principals and partners responsible for medical device funding are distinct from the professionals responsible for biotechnology, pharmaceuticals, and genomic sciences.

While bio/pharma approaches to treating neurological disorders and diseases such as stroke, Parkinson’s disease, and spinal cord injury have attracted more attention and funding dollars than electrical stimulation and recording devices to date, that in large part results from the fact that VC firms receive many more requests for funding from bio/pharma companies in the neuro space than device companies. That’s beginning to change, however, and many VC firms are actively looking for viable neurotechnology firms they can invest in.

Bio/Pharma vs. Neurotech
“Historically, we’ve done more in the bio/pharma space than neurotechnology devices,” says Douglas Reed, M.D., managing director of Vector Fund Management in Deerfield, IL. “There just hasn’t been much out there so far. But some of the data we’ve seen from trials of neurotechnology devices is very interesting.” Vector Fund is a late-stage firm, so they’re not as likely to take risks as an early-stage VC firm. “A lot of physicians don’t want to be the first to try a new therapeutic technology,” he says.

Daniel Wood, a partner of IngleWood Ventures in San Diego, CA, is active in early-stage funding of both device and compound companies in the neuro space. “In the past year, we’ve seen one neurostimulation deal, five neurodiagnostic deals, and six neuropharmacology deals out of about 250 total investments in life sciences,” he says. Wood believes that medical devices have lower regulatory hurdles and therefore can be developed for less time and money than bio/pharma deals. But bio/pharma approaches may take a larger market share that justifies the higher entry barriers, he says.

Robert Ulrich, general partner of Vanguard Venture Partners in Palo Alto, CA, is also enthusiastic about neurotechnology devices. Vanguard is an early-stage firm that likes to fund manufacturers of medical devices and tools. “Devices have a shorter path to liquidity than do bio/pharma compounds,” he notes. He believes that neurological disorders have been relatively neglected in recent years and that there is a good opportunity for neurotechnology start-ups. One challenge facing the industry is developing tools for measuring the success of a particular treatment modality.

Tullis-Dickerson & Co. in Greenwich, CT likes to be the lead capitalist in medical funding deals. Two-thirds of the time, their investments represent the first institutional money funded companies receive. CEO Jim Tullis believes neurotechnology devices will be in fashion about four years from now. He believes that technology approaches can coexist with biological and pharmaceutical treatments. Looking at stroke, for example, he thinks that bio/pharma approaches aimed at improving cerebral blood flow are best within 72 to 96 hours post-trauma. After that, other therapeutic approaches, including neurotechnology devices, may be more appropriate.

Heath Lukatch, managing director of U.S. Bancorp Piper Jaffray Ventures in San Francisco, says about 60 percent of the funding requests he receives are from bio/pharma firms, as opposed to devices. He points out that the degree of invasiveness of a therapeutic treatment is an important factor. “Implants are justified in only the most dire conditions, as opposed to pills,” he says. Still, he thinks that stimulation devices may be less invasive than some of the new cell therapies coming down the road, such as stem cell implantation. He thinks that cell-based therapies for neurological diseases and disorders are as much as 10 years down the road, and as a result, there’s a “significant opportunity” for neurological devices in the next two to five years.

Lukatch sees stroke as a major market opportunity for all three approaches to treating this condition. All other things being equal, Lukatch said he might allocate 35 percent of his available stroke funds to bio/pharma approaches, 35 percent to cell therapies, and 30 percent to neurological devices.

Matthew Rieke, M.D., a principal of PA Early Stage in Wayne, PA, expresses a similar sentiment. “New devices, diagnostics, small molecule, and protein therapies have all improved the treatment options for people with neurological diseases,” he says. “There are always commercial opportunities for effective therapies, whether they are biotech or medtech.”

Hurdles Facing Neurotech
Not all VCs are bullish on neurotechnology devices, however. Alta Partners in San Francisco is one VC firm that’s been more tardy at funding neurotechnology start-ups than other firms. Managing director Guy Nohra says he has funded several companies in the neuro space, but all were bio/pharma companies.

Nohra said his firm looked at one neural stimulation venture, Cleveland-based NeuroControl Corp., a few years ago, but his advisors felt that the technology was not developed enough. He also was concerned that their only goal was hand restoration. When informed that NeuroControl has since received funding from Primus Ventures and other VCs, and they now have a product line that includes bladder/urinary prostheses and stroke therapy, Nohra seemed impressed. “Maybe the people I talked to weren’t creative enough,” he said.

Nohra notes that historically, VCs have preferred biotech approaches over medical devices, citing the number of deals and the volume of investment. Still, he said Alta would consider funding requests from neurotechnology device companies if they came in.

T. Forcht Dagi, M.D., a partner of Cordova Ventures in Alpharetta, GA, is also more inclined to support bio/pharma approaches to neurological disorders. “The plasticity of the central nervous system tends to get in the way of stimulation/ablation,” he says. Dose response issues turn out to be more sensitively addressed, all things being equal, pharmacologically.”

Vector Fund’s Doug Reed points out another potential drawback to neurotechnology devices: they often offer only a one-time sale, whereas drugs offer investors something of an annuity stream.

Tullis thinks the fact that so many VC firms are currently funding biotech start-ups offers an opportunity to neurotechnology firms. “We’re willing to look where no one else is looking,” he says. When too much VC money floods one industry segment such as biotech, this tends to thin out the management and technical teams involved with the start-ups. It also leads to pre-money valuations that are sometimes too high for his taste, Tullis says. Since Tullis-Dickinson is localized in regional areas such as Alabama, Michigan, and New Mexico where a vibrant university system is in place, this tends to make the firm less sensitive to fluctuations in premoney valuations.

Advice for Entrepreneurs
The venture capitalists we interviewed offered some useful advice for neurotechnology start-ups seeking outside funding. The two most important factors VCs consider when evaluating a business plan are technology and market potential. “We look for practical medical device or bio/pharma technologies that address large market opportunities in healthcare, including the neurological diseases,” says Ross Jaffe M.D. of Versant Ventures.

Matt Rieke of PA Early Stage likes to see a market opportunity of at least $500 million. But the most important factor to him is the stage of clinical development. “The further along a company’s products are in clinical development, the better.”

Michael Carusi, general partner of Advanced Technology Ventures in Palo Alto, CA, concurs: “You need to be at a development stage, not a science project.”

While some VCs look for a solid management team to back up the technology and the market opportunity, others are less concerned. “We can help with business strategy, building boards, management teams, and finding other investors,” says IngleWood’s Dan Wood. “But we do not spend any time in research.”

Besides NeuroControl, several other neurostimulation firms have attracted venture capital funds. One such firm is Seattle-based Vertis Neuroscience, which received funds from Mayfield Fund, Canaan Partners, and others. In obtaining funding, Vertis CEO Alan Levy capitalized on his background in the cardio space, having served as CEO of Heartstream, a manufacturer of automatic external defibrillators.



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