Guest Q&A — Hank Plain, General Partner of Lightstone Ventures and Morgenthaler Ventures

by | Aug 6, 2015 | Alliances, Funding, Mentoring, Thought Leadership

Recently we had the privilege of catching up with Hank Plain, an experienced medtech venture capitalist. As General Partner of Lightstone Ventures, General Partner at Morgenthaler Ventures, former Vice Chairman of the Foundry, co-founder of eight medical device companies and director of multiple companies that were acquired with a combined value in excess of $3 billion, Hank knows the medtech space very well.

Hank has been a long-time friend and supporter of the Fogarty Institute and a mentor to many of our startups. During a recent Lunch-n-Learn at the Institute, our interns and entrepreneurs were treated to a candid discussion with Hank, on topics ranging from the state of medtech; to overcoming “the valley of death,” or lack of venture funding; to best tips on pitching VCs, among other items discussed.

Q. You have been involved in the medical device industry for many years, both as a company founder and a venture capitalist. What drives you to pursue this industry?

A. It’s where I have focused my 35-year career and frankly all I know. As a Partner in a VC firm, I sat in pitches from companies in the IT space and other industries. I have had the opportunity to listen to very interesting pitches from startups that have made for great investments – for example, Siri. The reality is that I don’t know how to help these companies or how I can add value. I grew up in the healthcare space, going from pharmaceuticals, to getting involved in startups, to founding eight companies. Medtech is where I hopefully add value; it’s the field I am passionate about.

Q. What are the challenges and opportunities facing medical device companies seeking venture funding today?

A. The medtech space has become more difficult over time.

I have been doing this for a long time, and have been on both sides of the fence – I have raised hundreds of millions when I was an entrepreneur and invested $150 million as a VC – in good and bad times. Right now is probably the toughest time to raise money. I don’t know if this is just a phase or the new reality. Medtech funding is down 60-70 percent and healthcare VCs are investing about 20 percent in medtech and 80 percent in biotech.

The reason many funds have moved out of medical devices is because of overall poor returns on investment. Venture firms have to look at the biggest returns for their Limited Partners – and in many cases medtech companies have generally not offered as high of returns as other areas. But firms like ours have been very successful medtech investors. We have been fortunate to be a part of some of the biggest exits in the medtech space.

Launching a medtech company is expensive and takes time. Startups have to conduct clinical trials to prove their technology is safe and effective; obtain FDA approval, which is a very challenging and unpredictable process; prove to doctors their product works; and get reimbursement. It’s a cold, hard fact that raising sufficient capital to get an innovative idea all the way through FDA approval and reimbursement is a difficult challenge in this environment.

I’ve been described as a “unicorn,” in this space, as so many other VCs have departed the medtech space – especially early stage medtech investing. Yet the need for innovation remains strong and the big medtech companies are starved for growth. It’s hard to find funding. But the really good concepts are still finding a way to succeed and the large acquirers still need innovative new products.

Q. What’s makes a strong pitch?

A. While the team is key to the success of the company, start with the clinical need, why it’s a big market and how your technology is differentiated. Show a reasonable, predictable clinical trial and regulatory path. And make sure you explain how it’s going to be reimbursed or paid for by the patient. It’s also important to be forthright on the technical, clinical, regulatory and fundraising challenges; what has been accomplished thus far, and reasonable plans for getting the product to market. Credibility is the key to the pitch.

We need to be convinced that there is a big opportunity, which can be patent protected, with straightforward technology that can be proven in clinical trials, approved and reimbursed.

We also look at risk. Managing risk is the difference between success and failure. If I can’t convince myself that a startup team can find their way through challenges, I don’t invest. We don’t expect early-stage companies to have everything sorted out – they just need to be aware of the challenges, how to overcome them and be open to input from experts to help them through the process.

One of the values of having experienced investors is to help startups get the right team in place so they can succeed and ultimately improve the lives of millions of patients. And founders need to be open to the concept that if the time comes for the founder to hand over the reins to a new CEO or management team, he or she needs to be willing to do so.

Q. What do you look for when investing in a company?

A. The key ingredients to the question of “can the startup be funded” are: is there a big market, can the technology be proven in a clinical trial, is there a predictable regulatory path, will the technology be reimbursed, what are the commercialization opportunities and what is the likelihood of a sale of the company to a large acquirer.

In the end, we access the probability of success: Where will the funding come from? How big is the market – does the technology address a significant clinical need? Does it really work? What are the risk factors? How good is the invention? Is the technology innovative and how much competition will it have?

We also consider what the clinical trials will look like – the size, cost and length of follow up. And the regulatory and reimbursement process – is the technology in a market that is reimbursed or who will pay for the product?

When investing, we weigh all these factors. We bring in a team of experts including regulatory and reimbursement consultants. One of our favorite areas to invest in are medtech projects with technologies that are focused in the space that has historically been served by drugs.

Q. What is the key to success for a startup?

A. Launching a medtech startup is not an easy process, so it’s not just the invention… it’s the ability to put together the right team to solve whatever issue comes up, whether it is during development/clinical stage, regulatory process or the commercial launch.

In today’s environment, having committed investors to eliminate fundraising risk is also an important component. Startups need a minimum of $5 million in funding for small projects, and $100 million for more complex PMA projects. VCs tend to invest in the larger projects that require more financing. We can also contribute by bringing in the right team of experts to help the company be successful and sit on the board to offer input and advice. This can be an invaluable tool for startups to succeed.

Q. At what stage of the startup do you look to invest?

A. As early as possible. Even if it is still a drawing on a napkin. We are not afraid to seed companies, provide Series A funding and support future financings.

Q. What makes a good team?

A. It’s largely about experience. We love to invest in serial entrepreneurs. We look for experienced people who are still very hungry and driven to succeed.

It’s also about diversity within a team. It’s important to have different backgrounds and experiences, with a team that is willing to collaborate with a focus on success.

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