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Proposed $10 Million VC Fund Would Target Health Care Startups

Wednesday, October 18, 2017   (0 Comments)
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HOLLAND — Partners in a firm that invests in medical device innovations are considering forming a new $10 million venture capital fund to back early-stage health care startups, MiBiz has learned.

Organizers behind  Cultivate(MD) are laying the groundwork and gauging interest for a private placement with about 30 existing investors now involved in  Genesis Innovation Group LLC. They also could extend the private placement to their investors’ professional networks across the U.S.

“So far, the interest level has been very, very high,” said Genesis Innovation Group CEO Rob Ball.

The new fund has no plans to conduct a public general solicitation for investors.

If the private placement succeeds, Cultivate(MD) would target investments at early-stage startup companies involved in health care with a “bias” toward medical devices and orthopedics, Ball said. The fund would invest in medical innovations and seeks to build startups into successful exits through acquisitions that lead to commercialization.

“We believe it’s a space where the market dynamic is particularly well adapted to small companies innovating valuable products or services that are acquired by larger players with distribution organizations,” said Ball, who would serve as a managing partner of the fund. 

Ball and other partners in Genesis Innovation have expertise and interest in the health care sector. They are all engineers with experience in the industry, particularly in the orthopedics field.

The partners hope to have Cultivate(MD) operating by Jan. 1, Ball said. The fund would seek investment prospects nationally and serve as the lead investor or as a co-investor, starting with innovations and startups “at the very earliest stages” and spanning through Series A fundraising rounds. 

The fund primarily would focus its investments on targets involved with innovations that have the potential to reduce the cost of care, improve quality, or both.

“We generally believe that (the new fund) is right smack in the middle of the types of problems that we need to solve as a nation,” he said. “The cost of health care is a problem, so we’re focused on innovations that increase the value of health care. We need to provide a lot more benefit for the patient at the same or reduced cost, or provide a better outcome for the patient at a substantially reduced cost.”

Two Holland-based medical device companies in Genesis Innovation Group’s existing portfolio aim to fit that bill. 

Magnesium Development Co. is developing surgical screws for orthopedic procedures to replace a torn ACL in knees. Using an alloy material found in daily vitamins that was developed by Livonia-based Nano Mag LLC, Magnesium Development has designed the screws to gradually dissolve and absorb into the body. 

Magnesium Development recently closed on $600,000 in additional capital from existing investors that will fund a small clinical study in humans to test the safety and effectiveness of the screws, Ball said. The company to date has raised $1.6 million from investors.

The other company,  Shoulder Innovations Inc., developed a shoulder-replacement system that costs less, offers greater stability and lasts longer than existing implants, enabling a patient to perhaps avoid subsequent replacement surgery years later.

GROWING DEMAND

Cultivate(MD) would become the latest venture capital fund based in Michigan and part of a growing industry that last year put $222 million into 54 startup companies, according to the Michigan Venture Capital Association. Health care and life sciences companies accounted for 34 percent of the amount invested in the state in 2016.

At the end of last year, the 25 venture capital funds based in Michigan had $2.4 billion in total capital under management, up 60 percent from five years earlier.

With a focus on health care and medical devices, Cultivate(MD) would be getting into sectors that other venture capital funds have been backing away from in recent years. 

It’s a trend that the  Advanced Medical Technology Association, or AdvaMed, worries is hurting innovation. An October 2016 report noted that venture capital investing in medical technology startups has declined sharply from a high of 13 percent of all investments in terms of dollar value to about 4 percent as of 2014. The percentage of VC funds investing in early-stage startups also declined from about 10 percent in the early 1990s to 3 percent in 2014.

A quarterly report on U.S. venture capital investing from  Pitchbook.com  and the  National Venture Capital Association  illustrates a similar trend over a decade with a small uptick the last two years. In terms of the dollar amount invested, life sciences accounted for 19.7 percent of investments last year, versus 24.8 percent in 2008. The number of investments in the sector as a percentage of all deals declined as well from 18.5 percent in 2008 to 11.3 percent in 2014. However, it moved up in the last two years to 12.1 percent.

Through the third quarter of 2017, life sciences has picked up further to account for 19.7 percent of the value of all venture capital investments and 13.5 percent of deals.

Despite the decline in the value of investments and deals in the sector, and the resulting sharp reduction of medtech startups nationally over the last 25 years, one veteran venture capital investor who targets health care companies believes investors still have plenty of opportunity in the industry.

“There are a ton of entrepreneurs looking for money,” said Jan Garfinkle, founder and managing partner at  Arboretum Ventures Inc., an Ann Arbor-based venture capital fund that has $450 million in assets under management.

Arboretum Ventures has invested in about 40 companies since Garfinkle began her first fund of $7 million in 2002. The firm is now on its fourth fund, totaling $220 million, and has an active portfolio of 24 companies.

“There are still a ton of entrepreneurs that are starting companies in med devices and diagnostics,” Garfinkle said. “Every day we get two to four companies approaching us and that number has not gone down. If anything, it keeps rising.”


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