Orthopedic Venture Capital Down but not Out
BY JOHN MCCORMICK, OCTOBER 2, 2008
What do the severe dislocations seen in the credit markets mean for the orthopedic device startup looking for venture capital? Duly noting we are not a venture capital firm (we perform buyouts), our observation from afar is that the venture capital firms have scaled back their investments, but not as much as you might think. In short, the VC's are alive, but selective.
The S&P500 stock index is down 15% to 20% year-to-date depending on which day you are taking its temperature. Between that and the once-in-a-century liquidity strains we are witnessing, we would expect all sectors of the economy to suffer.
Medical devices, as an overall category, has held up comparatively well, however. According to RBC Capital Markets, medical device equities are up nearly 12% and orthopedic equities up about 8% which is indicative that the capital markets are treating our industry as a safe harbor.
Checking under the hood though, IPOs have dried up to a standstill and no one - not even medical devices - is on high ground. This year there have only been three IPOs in the sector and one in orthopedics (Nasdaq: MAKO). Like an on/off switch, IPO markets act in a binary state according to the environment and right now the switch is off.
So where do companies go to get capital when there is no credit and no IPO market? Venture capital is a logical choice. The problem is that venture capitalists use the IPO market to make a return on their investments and if that is not available as an exit option, they hold off from investing.
How much? Unlike IPOs, venture capital in orthopedics has not been binary. Instead, it has scaled back and has behaved selectively. Up to September 30 this year, reported venture capital deals in orthopedics have added up to almost $280 million which is down 42% compared to the same period in 2007. Not bad when you look at IPOs which have brought only $51 million (down nearly 70%) into the industry so far this year.
Venture investors are continuing to look for growth opportunities despite all the noise. This trend is not exclusive to orthopedics or even medical devices. Just so you know we are not drinking our own Kool-Aid, venture capitalists have been increasing their investment in environmental technologies at a rate of $300 million per quarter according to a just-released-report by Greentech Media.
The place in orthopedics where the capital is being allocated but the pencils are sharp include spine, biologics and extremities. Quite honestly, we are a little surprised that spine continues to attract investment given all the crowding in the space with surgeon owned companies introducing low-barrier-to-entry products and more discs companies than we can count. Recent fundings with Apatech, Vertiflex, Paradigm and Spineology show resilience, but selectivity on the part of venture capitalists seeking product innovations in the area.
So if you are in the right sector, venture capital is down but not out.
