Medical devices cure VCs' biotech blues
The gadgets and gizmos doctors and hospitals use are increasingly reliant on Silicon Valley tech -- and that plays to the strengths of most venture capitalists.
By Michael V. Copeland, Business 2.0 Magazine senior writer

SAN FRANCISCO (Business 2.0 Magazine) - Investing in healthcare startups has long been a specialized business. It's one thing to kick the tires on an Internet startup; you just go to the website and start clicking away. It's another matter altogether to try to figure out if a biotech startup really has come up with a cure for cancer.

And the small number of biotech-savvy VCs has limited the number of healthcare deals that get done.

But medical devices are changing that. Private equity investment in medical devices rose 23% last year to $2.1 billion, and in the first quarter of 2006, 70 medical device companies received $690 million in venture investment, a 62% increase over the same period in 2005.

These investments are on the rise because these life-sustaining or -improving gizmos often use the same hardware and software found in the IT world -- gear that is familiar to the large number of VCs with engineering backgrounds. Indeed, information technology is giving birth to a new generation of medical devices that are doing everything from smoothing wrinkles to easing depression.

Staying younger, longer

To understand the demand for medical devices, just listen to the creaking knees of the baby-boom generation. There is a huge, well-heeled population of people hitting their 50s who want to keep up their daily routine for as long as possible. They want to look younger, run faster, and work longer than any generation that has come before them. And they have the money to pay for some devices and services out of pocket.

In addition to the fact that this market is growing, venture capitalists also like the fact that medical devices face far fewer regulatory hurdles than drugs do, so they can be brought to market faster and more cheaply.

"The number of people that are starting to consume this kind of healthcare is large and is only going to increase," says Mark Brooks, a venture capitalist at BA Venture Partners who focuses on medical devices and healthcare services. "It's a huge opportunity."

One area that Brooks and his firm focus on is orthopedics -- devices and materials that replace hips, knees, hands, feet and parts of the spine. "The spine is an incredibly hot area right now," Brooks says.

Redwood City, Calif.-based Spinal Kinetics is a BA Ventures investment that is developing a material that can replace the lumbar discs in your back. San Diego-based N-Spine, which is also developing implantable devices for the spine, recently banked $1 million in venture funding.

Another red-hot area of medical-device investment is non-invasive cosmetic surgery and skin care. In the U.S., people paid more than $12.5 billion last year for cosmetic procedures out of their own pockets. It's the sort of predictable and growing market VCs love.

Startups in this arena that recently received funding include DermaCare, a Livermore, Calif.-based company that landed $2.7 million to develop new skincare technologies. Palo Alto-based Aesthetic Sciences banked $3 million for its soon-to-launch "injectable filler" products which promise to erase, or at least lessen, wrinkles.

There are plenty of remaining opportunities. One area that remains largely untapped by startups, VCs say, is the intersection between wireless technology and healthcare. As sensors and communications networks converge to give us 24/7 health monitoring, there will be money to be made by adapting off-the-shelf wireless technologies to the needs of doctors and nurses.

Sad to say, even with all these new devices that will keep us going longer than ever before, at some point we're sure to land in the hospital -- and when we're there, we'll want the best technology money can buy. That's what makes medical devices such a great growth market for venture capitalists. Top of page

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