Archive for June, 2011

Free, or Almost Free Money for Your Startup

As many of you know who follow me, I am a big fan of Fred Wilson of Union Square Ventures (USV) with a blog, AVC. I have been following his blog and learning a lot for over 5 years. Fred put up a great post today, where he talks about Government Grants as a financing source that you might consider. Fred points out that among the positive aspects of government grants are that they are Free Money, you don’t have to pay it back, and you don’t have to give up any of your company stock for it.

Fred also points out that there might be some drawbacks that might turn some entrepreneurs off. The application process can be time-consuming and time to approval, if you can get a grant, may take a long time. Fred points out a few other “strings” you might encounter. He specifically mentions the Small Business Innovation Research (SBIR) grants.

Fred’s not high on startups getting this type of funding. It seems a lot of his bias comes from the investment sectors that USV focuses on. There are a number of other sectors like bio-tech including medical devices, and clean-tech that need enormous amounts of capital that are hard to fit into a VC time cycle. For example, getting a new drug approved by the FDA is potentially a 10 year process and most VC funds are structured with a 10 year life span. Or, how about the tens of millions of dollars it might take to get a medical device through the FDA’s 510 (k) process. I realize that there are VC firms that invest in this segment, but this is not for the faint of heart. A VC has to believe in the investment without clearly knowing when the device will come to market (the 510 (k) process), and they won’t know exactly how much reimbursement will be allowed by the Center for Medicare and Medicaid (CMS). So, getting some early dollars from a NIH grant to help the process along can be huge for companies.

When you read Fred’s article, be sure to go through some of the comments to get some idea about the network of conversations about grants.

In the meantime, if you are in Southern California and have a product or device that you think might fit a government grant program, there is a great resource at TriTech Small Business Development Center (SBDC) with offices in Irvine and Riverside. They recently brought on a SBIR/STTR and federal grant expert to help companies understand the available programs and whether there might be a fit between a grant and the company. They are currently putting on SBIR workshops that are worthwhile attending if you might be interested or want to know more.

Being someone who likes full disclosure, I feel compelled to say that I have been mentoring high-tech startups at TriTech for a couple of years. I recently sat through a session with one of my clients who was not convinced that going after a Phase 2 grant was worthwhile. After about an hour with the new expert, he better understood the process and why he had nothing to lose in applying.


Wireless Health – Seed Accelerator 2

My next big set of issues were around what it would take to put a program together. Issues to consider included: a place to run the program, finding and signing mentors, getting the word out about it, figuring out how to fund this (and how much would be needed), finding sponsors, and a myriad of other details.

I watched Brad Feld at the Startup America unveiling, and listened to his announcement of TechStars Network. So, a natural place for me to start was to find out about TechStars Network and see if there was a format to follow. I exchanged a couple of emails with Brad and his partner in this organization, David Cohen, and discovered that they were in the process of putting a program together and gave me the contact information for the new Director of the Network, Jenny Boyd.

One of the things I really like about the people involved in this startup space is how open and sharing they are. I was able to read a lot about the program before I had a call with Jenny, but she spent 30 minutes filling in what details were in place and it sounded like just the program that fit what I wan planning. When I mentioned that I was talking to a number of organizations that were looking a creating programs, she offered to talk with anyone that wanted to know more about the Network.  I now had a list of things I needed to put in place in order to apply to TechStars Network.

The first was to find a space. Late last year, my partner and I attended a meeting of the Escondido City Council, in support of  Gary Knight, the CEO of the San Diego North Economic Development Council (SDNEDC). This was Gary’s final step in the process where he was looking for approval of the SDNEDC’s plan to rehab a vacant public building in Downtown Escondido and create a Business Innovation Accelerator (a new name for a Business Incubator). Gary walked out with a 3 year lease with a 2 year extension. I had previously agreed to support his efforts and be a business mentor for his program.

This is a big space and having a seed acceleration program seemed like a natural fit; Gary agreed and I was able to check off two big program milestones. I had the space but I also had a supporting organization for the program, which TechStars wants to see as part of a proposal. Additionally, there was a natural evolution for the companies in the program. If they decided to stay in the area, they could move to another part of the building and take up residence in the Innovation Accelerator. As they grow and need more space or different support services, they can move a couple of blocks to the new Technology Business Center that the city is building. This creates a natural pool of mentors for subsequent programs and, hopefully, a technology hotspot for wireless health product development. I realize that this may take a number of years to evolve, but as Brad Feld has stated many times, you must have a long view for these types of programs and not expect or promise big short-term gains.

In my next post, I will continue describing my experience focusing on defining and engaging possible mentors.

In the meantime, any thoughts, comments or suggestions are, as always, welcomed.

VC’s Go to Washington to Talk About Medical Device Approval Process

I ran across this post on the Wall Street Journal’s Venture Capital Dispatch blog. A group of Venture Capitalists that invest in medical devices went to Washington to talk about the issues associated with getting medical devices cleared through the FDA. Main point was they were focusing on making the process consistent, predictable and transparent. They also talked about how the current process is driving more entrepreneurs overseas along with all their innovations.

It seems they got to speak their minds, but doesn’t sound like they got commitments to resolve the problems. Now that’s not good.

Wireless Health – Seed Accelerator

At first, the idea of me putting together a seed accelerator program based on wireless health products was daunting. After all, I am not in that field and certainly have little knowledge of the science involved in developing medical devices. As for wireless, I do have a communications background from my career at Bell Labs, AT&T and Lucent Technologies although not necessarily cellular. Then I realized that a seed accelerator is actually focused on positively affecting the “process” of startups not the technologies and products of the startups. I can deal with that!

I began looking at the current process being used. Not necessarily a pretty picture. The length of time it takes to get from idea to market is extremely long if you are developing a medical device. I understand that a lot of this time is to ensure that the product does what is says it will do while not harming the patient. That responsibility falls onto the Food and Drug Administration (FDA), which has a long and involved process for bringing new drugs to market that takes 10 years to get through.

They were reasonable about devices to conclude that maybe there should be a shorter process for devices without risking harm to patients, and developed the 510 (k) process where some devices can be approved in a matter of months versus years; a big breakthrough. They did make provisions that result in longer approvals by requesting more tests (clinical trials) whose complexity can add years and millions of dollars to the product development cycle. The good news is that the Center for Devices and Radiological Health (CDRH) who is responsible for approving medical devices has been studying ways to make the program more effective and be better prepared for new technologies like wireless being added to new devices. You can read about their plans here.

I have no intention of trying to become involved in the changes at CDRH or their 510 (k) process. Since I am looking at the process itself, I started to look at the process and see if there are things that startups, especially first time entrepreneurs, can do to get closer to the Months to Approval that I mentioned above versus the Years and Millions of Dollars alternative. So, I talked to entrepreneurs who have been in the medical device space and have successfully navigated the approval process along with others who seemed trapped in it. I also talked with lawyers who have helped clients with their applications and listened to people who have years of experience with the FDA. I learned that there are a number of things that entrepreneurs can do that will help them through the process many of which can be included in a seed acceleration 90 day program.

Personal Health devices like the Nike iPod Touch application or the Fitbit product require no FDA approval and can get to market much quicker. With an increased interest on personal health, there will be many new wireless personal health products introduced over the next few years. Obviously, there are lots of things you can accomplish during a seed accelerator program to assist companies startup process.

Once a medical device is approved by the FDA, it can be brought into the market. The next important step is for the product to be reviewed by the Center for Medicare and Medicaid (CMS) who determines if and how much they will allow patients to be reimbursed when they have the devices prescribed for them. There are currently some problems with wireless medical devices within the current CMS policies, but, as with the FDA 510 (k) process, these have been identified and CMS is working on resolving the issues. In the meantime, there are things that entrepreneurs can do to facilitate the CMS process that can be covered in the seed acceleration 90 day program.

My next big question was “Can I develop a program that addresses the main issues that I described above and includes other relevant information that will accelerate companies working in this sector in 90 days?” Again, I talked to a lot of people currently operating in this space along with the service providers who support them, and created a set of program milestones. I got great feedback especially in relation to the milestones. There is a significant learning curve with first time entrepreneurs that can be positively impacted in a seed acceleration program. As an side, if you put an entrepreneur who has developed medical devices together with an entrepreneur who has developed wireless devices the result is a set of first time entrepreneurs who will have a learning curve.

So, I’ll end here for now. In my next post in the series, I’ll begin to discuss the process of putting the program together. One last point, as I have been working through the process, I originally used Wireless Medical and Personal Health as the title.  As I move along, I get input and adjust accordingly. One recent recommendation was to shorten the title to Wireless Health. The rationale was that the title was too long and this shorter version includes both the medical device and personal health device spaces.  It also reduces the number of keystrokes, which may not seem like much, but over time will be significant. So, I have adopted that recommendation.

As I said above, I look for input and I believe this will be a program that will get better based on continuous process improvement. So, if you have any thoughts or suggestions, please send them along in the comments.

The Flipside: Friends and Family Financing, Great Move or Impending Disaster?

The Flipside, Another Way to Look at an Issue

Many entrepreneurs look to family and friends as the source of their initial financing. After all, the amount of money they need is not substantial in the greater scheme of things, they already know who you are, family members want to show they support your efforts, and you don’t have to get into sticky issues like Valuation, Use of Funds, and Exit Strategy. So, sounds pretty good eh?

NOT SO FAST, you may think of it as the easiest way to get funding, but the downsides are something you should consider a lot. There is an interesting article in the Small Business Section of the Wall Street Journal today that describes the downside of using friends and family members. If you take money from friends, you have to consider the possibility that your friendship will end or be severely affected. Or how about dreading those all too often family social events where you will run into Uncle Andy who either looks at you in a way that makes you feel like a complete failure or spends the entire evening espousing his way to better run your business.

What the article did not discuss is the idea of Smart Money versus Just Money. Rarely, do family have the backgrounds to provide the mentorship that early stage companies need. Consider first time entrepreneurs, they start with an idea they have passion for and a desire to make it happen. However, they lack experience in developing a startup, understanding of the various organizational structures so they can choose the one that fits them best, identifying and selecting the right team members, access to additional levels of funding that may be require, or the Rolodex of other people they can call to help as needed. In other words, all the areas they need to successfully execute on their plan!

If you are starting out, my suggestion for one of the first things an entrepreneur should do is to find a great mentor who is willing to work with you. A mentor is someone with considerable skills, knowledge and experience to help you through a myriad of issues including being able to identify who else you should talk with.

Anybody else have an opinion?

The Flipside: Keeping Your Idea/Technology Secret When Starting Out

The Flipside, Another Way to Look at an Issue

I run into lots of entrepreneurs who go out of their way to keep their idea or technology secret. They search me out, want to get my opinion or advice, and start out by asking for an NDA. I am not special, they act the same way with anyone they talk with. In their minds, the idea is the most important thing and they have to do whatever they can to protect it! Now I am not naive and do understand that there are secrets that are the cornerstone to a business, but every idea is not as critical the formula for Coca Cola.

So, here is the flipside to think about, there are tons of great ideas, but very few turn into successful businesses. The successes don’t always have the best idea or most innovative technology. So what do I think is the difference? The successful ones figure out how to “execute” on the idea; how to turn a great idea into a great business. To do that, you need lots of help starting with building a great team.

If you ask most investors what is more important a great idea or a great team, I don’t know one that picks the idea. It sounds cliché, but we tend to bet on Jockey’s not Horses. We see lots of great technologies, but few teams that show the wherewithall to build the business and execute on the plan they have developed.

Focus on the  skills, knowledge, and experiences you believe you need to build a successful business and then go about identifying the best talent to execute your plan and build your business. In order to get the best people, you have to show them your vision, which includes your technology. If you build the best team and business plan, all anyone can do is steal your idea, but they still have to figure out how to execute on it. At the same time, you will be off but you be off getting your products into the market and build your business.

Something to think about. Any other thoughts on this?

Wireless Health: Development Pitfalls

As any entrepreneur knows, getting started with a new company is fraught problems that can turn a great idea into a big mistake. There are just so many decisions that, if the wrong one is made, can kill or cripple the company. Worse though are the startups that haven’t encountered the big “Oh Crap” as yet and there’s a glimmer of hope that entrepreneur latches onto.  These startups are under the impression that they are really close to big sales/financing/strategic partnership.  Encountering your first big speed bump can be a slow and painful experience.

Many companies entering the wireless medical device space get stuck in this last category. However, their being stuck and not able to move forward may be less about something they did or did not do and more about the pitfalls along the path of taking a medical device to market.

For example, wireless devices startups may get snared in government processes that were put in place to insure that medical products are safe before allowing them into the market (by our friends the Food & Drug Administration, FDA). Once they are found to be safe, then another government organization gets involved to decide how much Medicare and Medicaid will pay for the product (Center for Medicare and Medicaid, a.k.a., CMS).

Now if you include working with the Patent and Trademark organization on intellectual property applications and issues, that’s a total of three government organizations involved in the product realization process. And, as we know, government organizations are not the fastest groups to deal with. Not only is this two-pronged FDA-CMS process time consuming, it is very costly, and every entrepreneur in this space has to make sure that he/she has planned on having sufficient financing and investors who understand what’s required to get through the FDA and CMS.

I am sure that this is one important reason why many investors avoid life sciences deals including medical device space altogether. After all, an entrepreneur can start an consumer Internet company for a few thousand dollars, a couple of great programmers, a good understanding of the demographics of the prospective customers and someone who understands the elements of SEO and Conversion. Consumer Internet startups can begin generating money in a matter of months. Contrast this to medical devices requiring large initial cash outlays over an extended period of time; in many cases years.

I find it interesting that, when there is talk about fixing the issues in the FDA, e.g., around the long timeframe for a wireless medical device company to get its products through the FDA’s 510 (k) process, there are always many comments about making sure that the primary goal of safety isn’t overlooked. I’m clearly not a proponent of having the pendulum swing all the over and weaken the process so that unsafe products get to market faster, but who can argue that the US economy and consumers both can benefit from an overhaul to the 35-year old 510 (k) process?

On a positive note, in January of this year, the FDA announced a plan consisting of 25 proposals targeted at overhauling the approval program and is targeting to implement some changes in 2011. Their list includes streamlining the review process for lower-risk devices, clarifying when companies should submit clinical data for a 510 (k) application and creating a new council of senior FDA experts (“Center Science Council”).

As for the insurance reimbursement process shepherded by CMS, a number of major stumbling blocks are under review. For example, the current process allows reimbursement for a medical device or associated devices only if the patient is at a medical facility when using the device. Now, given the nature of wireless medical devices, this just doesn’t make sense. Why should we mandate that an elderly or ill patient, having a wireless device that collects information and sends it along to a health care professional, leave their home and travel to some medical facility to use a product that works perfectly well in their home?  Especially for a device that’s merely sending data—readings of blood pressure, etc. along to the physician. This is one that we all hope is resolved soon.

I assume that it will take some time for both the FDA and CMS to make changes and integrate the improvements into their overall processes. In the meantime, what can we do to facilitate getting wireless medical devices to market faster and have them reimbursable?

Here are my suggestions:

•    What can entrepreneurs learn about the language they should use on an application for a specific device that would both position it correctly with the FDA reviewer and ensure that it is not incorrectly categorized into a class that all but ensures a lengthy approval?
•    A medical device will have both a “patent” which needs to be innovative and not intuitively obvious while the goal of a 510 (k) application is to describe the device as very much like something that has already been approved. What is the best strategy for an entrepreneur to follow given the diametrically opposed requirements of these two required organizations? There are knowledgeable people who know these organizations and have dealt with them and can provoke great suggestions to entrepreneurs.
•    So how do we get the knowledge where it is needed? This is, in fact, one of the goals of a startup acceleration program and one that we will be attempting to resolve as we move forward with an accelerator in our region.

As we put our program together, I am constantly looking for ideas and contacts that can help with this. Any suggestions or recommendations are always welcomed.

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June 2011
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