Medical Device Daily Contributing Writer

MADISON, Wisconsin – Fittingly enough given the locale of last week's MidAmerica Healthcare Venture Forum, the East and West Coast-based members of a panel on "Coast-to-Coast Healthcare Venture Capital Investing" showed an interest in steering some of their investment dollars to Midwestern start-ups.

The session at the Monona Terrace Conference Center alongside the sun-splashed waters of Lake Monona in downtown Madison brought the requisite acknowledgements that VC investing in healthcare and virtually every other sector is at a low ebb right now, but signs of optimism were commonplace.

Rod Altman, senior partner at CMEA Ventures (San Francisco), said that the cost structure for companies operating in the Midwest – as in the Southeast and South Central region – is less, "so opportunities exist there" for increased VC investment.

John Fletcher, founding partner of Fletcher Spaght Ventures (Boston), said that data gathered by his company identified Michigan and Ohio in particular as regions showing promise for healthcare investing, "so we want to look more enthusiastically there – it has good potential." He added, "We like meeting people who have good ideas."

David Lowe, a partner in Skyline Ventures (Palo Alto, California), said his firm is "agnostic to geography," adding that "it is a question of people and ideas."

Moderator John Neis, managing partner at Venture Investors (Madison), noted that the latest available data on VC investing have not been kind. Figures for the third quarter ended Sept. 30 showed a sharp falloff to a total of $4.8 billion in venture investment, down from $7.2 billion in the prior-year quarter, which came just before the plunge off the economic cliff that is statistically marked as of 4Q08.

Neis, who heads that firm's healthcare practice, observed that the psychology being followed by VCs generally "appears to be that they are hoarding their cash for deals they already are in. There are companies out there getting financed," he said, "but they need to be hitting the ball out of the park" insofar as product development and clinical results are concerned.

His observation about portfolio companies ruling the roost when it comes to receiving financing generated a range of responses.

Lowe said, "The deal flow actually is very good for us – it probably has never been better." But he added that getting deals together "seems harder, most likely because uncertainty is higher."

He said the percentage of healthcare deals his firm is getting involved in is skewing more toward device companies than in the past, now amounting to more than 50% of all deals, "because with devices, you can see a way through to taking it to market."

Altman said his firm is doing "a couple fewer deals," and acknowledged that in the current economic environment, "sure, we're putting more money into existing deals."

He said that because of both economic and political uncertainties, such as the don't-yet-know status of healthcare reform, "there's more work to do at the board of directors level with these portfolio companies."

Ashley Friedman, senior associate with Investor Growth Capital (New York), said, his firm has been "a bit surprised" at the difficulty in getting deals done, sometimes even in quoting on possible deals.

"You'd think it would be easier to do deals in this environment," he said, "but it isn't. "We have seen deals tip over at the altar because the terms or something else wasn't right."

Fletcher explained the general trend to shy away from new deals in favor of existing pieces of a portfolio: "You need to have enough money to take a company all the way through to a deal," likely an exit via acquisition. "We do in fact tend to put money into a company longer" than might have previously been the case.

Altman noted that VC investors are "looking more closely at what stage [a company] might be at" in relation to what the final cycle might be.

Referencing a specific deal, but one that serves as an illustration of the market in general, Lowe said that from a practical sense, there really was only one way to turn. "Absent an IPO market and with the uncertainty in the economy, combining venture capital with a corporate strategic investment was the right deal."

Friedman said his firm's competitors today "now are not so much other VC firms, but rather, corporate investing."

As to whether there are more limited paths open to VCs in these troubled economic times, Altman said, "In this market, it's all about survival – the main goal is to get a company financed."

Citing what he termed "the differential in VC return rate," Fletcher said that "in the absence of a public-market option, you have to put a cap on your investment and clearly see a company's public value."

All of the panelists cited the importance of being involved with other investors in syndicating a financing deal.

It's a matter of making a given company valuable to potential public investors and eventually to possible corporate acquirers. "We have to provide the incentive to get others investors in," Altman said.

Fletcher added, "In syndicates, each participant is putting in less, but it's still a way to spread out the risk."

The 7th annual MidAmerican Healthcare Venture Forum was sponsored by the Mid-America Healthcare Investors Network and conference organizing firm International Business Forum (Massapequa, New York).