Medical Device Link.

Originally Published MX November/December 2004

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

Business incubators can make a big difference in the success of early-stage medtech companies.

Steve Halasey

For medtech entrepreneurs, finding the right location for a new business means more than just picking a nice city. Locating where the company can receive support from university technology-transfer offices and regional incubators can give a start-up medtech firm a major boost.

According to the U.S. Small Business Administration, 50% of small businesses fail within the first five years. But that story is very different for companies that have had the support of a business or technology incubator. According to Dinah Adkins, president and CEO of the National Business Incubation Association (NBIA; Athens, OH), 60–70% of incubated companies are still in business after five years.

To find out more about what makes a medtech start-up a good candidate for business incubation—and what entrepreneurs can expect when looking for an incubator—MX spoke with a number of experts with experience in the field. This article takes a brief look at the key elements that make business incubation a workable model for medical technology companies, and what challenges company leaders should anticipate.

Getting to Incubatable

Entrepreneurs in a variety of high-tech and biotech endeavors find a creative environment in the innovation-rich Technology Enterprise Center of Eastern Carolina. (Photo courtesy Technology Enterprise Center of Eastern Carolina)

Not every idea can make a product—and not every entrepreneur is suited to build a company. Experts in medtech incubators see a lot of such proposals, but they don't all agree on the most important characteristics of an incubatable company.

"Incubator companies may come with a wide variety of capabilities," says David J. Fink, PhD, Venable entrepreneur-in-residence at the University of Maryland, Baltimore County's techcenter@UMBC (Baltimore). "Generally, there must be some protectable intellectual property (IP) and the applicants must have the basics of a business plan. They must also have a financing plan and sufficient resources to get them started toward their objectives. Our incubator companies are frequently started by scientist-inventors who are most involved with the project. They often lack business training or experience and the financing they need."

"A strong IP position is the most desirable characteristic of an incubatable company," says Clyde E. Dyar, director of the Thomas M. Teague Biotechnology Center of Maine (Fairfield, ME). "If we need to help finance it is important that some value be available for security."

"Certainly the proof of concept and testing are critical, to ensure that the technology is in place," says Charles D'Agostino, executive director of the Louisiana Business and Technology Center (LBTC) at Louisiana State University (Baton Rouge, LA). "But after that, it is essential that the IP agreements are reasonable, because the commercialization of the technology must be a win-win for all involved. If it is a university technology, the IP office must understand that a small amount of something is better than a large chunk of nothing.

"Funding is critical for taking a medtech company to the marketplace, so there must be room in the model to allow the company to raise capital—and in most cases to raise several rounds prior to a public offering," says D'Agostino.

Fink

"IP in the bank or in process is critical," says John O'Donnell, executive director of TechRanch (Bozeman, MT). "A clear path for seed funding is very important. And a large potential market can also make a company more incubatable."

"The key characteristic that makes a company incubatable is its IP," says James J. Finkle, manager of the Long Island High Technology Incubator (LIHTI) at Stony Brook, a unit of the State University of New York, Stony Brook. "Sometimes new companies own it outright, other times they license it. But in all cases that I have seen, this is what separates the men from the boys. We no longer take companies that don't have IP."

Since 1988, says Finkle, 71 companies have participated in the LIHTI program. Today, more than 40 of those companies are still in business.

"I should add that 98% of our companies have been started by men holding at least a PhD, and we use that degree as another requirement," says Finkle. "The few companies that were started by non-PhD-holders placed the CEO in a position beholden to the technical staff, and that developed into distrustful relationships."

But not every incubator considers IP an essential trait for potential clients. "We don't get hung-up on whether a company has protected IP," says John Chaffee, executive director of the Pitt County Development Commission (Greenville, NC), which underwrites the Technology Enterprise Center of Eastern Carolina. "We're open to technology-related businesses even if they will operate a service company rather than a product-development company. The bottom line is the ability of the start-up to take advantage of a niche and generate jobs.

"For us, it's more important that the company have a talented management team (with an understanding of their limitations and what types of people they need to advance the company), a good business plan, a demonstrated ability to raise capital (or finance expansion), and a reasonable size market to pursue," adds Chaffee.

The quality of a company's management team ranks high among the characteristics of an incubatable company, say the experts.

"When we look at a start-up company, the most important thing is its management team," says Wayne Barz, manager for entrepreneurial services at the Ben Franklin Business Incubator Center at Jordan Hall (Bethlehem, PA), the NBIA's 2001 Incubator of the Year. "An in vitro diagnostics company now in our portfolio was launched by two individuals who are new entrepreneurs, but they have more than 40 years of new product development experience at Roche Diagnostics, where they launched products that generated over $700 million in new revenues.

D'Agostino

"The second most important factor is the strength of market demand," says Barz. "A woman who has launched a high-throughput screening company in our portfolio was not an experienced entrepreneur, but she had letters from major pharma and drug-discovery companies that indicated a plan to purchase her products."

"The most important factors are people, people, and people, agrees Jeff Coney, director of new business initiatives for the Illinois Technology Enterprise Center (ITEC) at Northwestern University (Evanston, IL). "And there should be a particular emphasis on listening skills and signs that the entrepreneur is coachable.

"Just as important is passion," adds Coney. "It must ooze out of every conversation; it must be clear that this person wants to change the world. The chances for failure are very high, but passion serves as a mitigator.

"Also important is whether the individuals have skin in the game—whether they're willing to invest out of their own pocket," says Coney. "This speaks volumes about their underlying commitment."

"The most important characteristics for business success are the ability to find the best people, especially business management, and the ability to raise the financial resources necessary to bring their product to market. The technology is not generally the major problem," says UMBC's Fink.

Finkle

Although technology may not be an issue for most medtech start-ups, issues related to developing a medtech product can stand in the way. "The regulatory process has a large impact on what is incubatable," says Jay Srini, vice president of emerging technologies at the University of Pittsburgh Medical Center (UPMC; Pittsburgh). "To reap the maximum benefits of a technology that is going through the rigors of regulatory approval, it should also offer a platform base for expansion.

"Another facet to consider is the 'disease cachet factor,' says Srini. "Cardiovascular diseases have always caught the imagination of both the public and reimbursement groups, and the amount of external marketing that affiliates and trade associations provide—and the quality of the journals associated with the specialty—has a great impact.

Support Mechanisms

The needs of medtech start-ups for specialized facilities and equipment are often uppermost in the minds of company leaders. But according to the experts, most companies require help in a lot more areas than they realize

Simon

"In addition to requiring a flexible space that is both expandable and has the necessary amenities, incubator companies need good programs or coaching on a variety of issues," says William B. Simon, vice president and COO of the Center for Emerging Technologies (St. Louis), an advanced technology business incubator. "They may need advice about how to build a board of directors, about partnering, or about how to prepare for meetings with angel or venture capital investors. They may need referrals to sources of funding and grants, or contacts for professional service providers. They may need access to market research services, or to staff training activities. Or maybe they just need exposure to networking opportunities. Incubators provide all these things."

"Incubator companies may require support or advice in nearly all aspects of their business except for their technical expertise," agrees Ellen J. Hemmerly, executive director of UMBC's techcenter@UMBC. "Each company's needs are a little different. These may include standard business issues such as accounting, legal affairs, and patent preparation. However, many start-ups also need help with preparation of business plans, preparation of applications for state and federal grants, networking with potential collaborators at regional universities, market analysis, and introductions to regional angel investors or other investment groups."

"Medtech companies typically require low-cost space, with the flexibility to get cut rates up front," says Pitt County's Chaffee. "But they also need administrative staffing, contacts with funding sources, advice on regulatory or reimbursement issues, networking opportunities (including contact with key advisory groups or consultants), and assistance with their public relations and marketing."

"Medtech business cocoons need connections, guidance, and leadership in order for the butterfly to emerge successfully," says UPMC's Srini. "Until it emerges, a lot can still go wrong with the caterpillar. Constant and focused interventions throughout this metamorphosis are critical.

"Apart from basic management, financial, marketing, and sales guidance, early-stage medtech companies also need access to academic institutions willing to collaborate for clinical trials," says Srini. "Research and joint publication are critical, as are connections to prestigious medical journals."

Fortunately, many incubators with a specialty in medical technologies are aware of such needs and offer a wide range of services.

"Incubators must provide business counseling to biomedical and medtech companies," says LBTC's D'Agostino. "Most of these companies are started by scientists who have very little business knowledge about how to run a company—nor do they care to learn how. The LBTC at LSU provides business counseling and makes sure that the company has a chance to succeed from a business perspective.

"We always advocate that the company develop a business plan and business model that calls for the hiring of a CEO with appropriate biotech or medtech experience, so that the founder-scientist can do what he does best—perform research and develop the technology," says D'Agostino. "We also provide assistance in writing applications for Small Business Innovation Research (SBIR) grants, which are in essence venture capital for a small technology business. We have helped incubator companies win more than 15 SBIR grants in the past three years.

"Another key to our success with medtech companies has been our connection with LSU's E. J. Ourso College of Business Administration," says D'Agostino. "This enables us to bring in business faculty to assist our client companies. We also have access to the college's marketing department for performing market research, focus groups, and related activities. And various other departments will also allocate faculty and students to assist incubator companies. The LBTC is a virtual test lab for business theory and for business students—graduate and undergraduate—to test the theories they've learned in class."

"We work closely with our tenant companies through several mechanisms. Our business advisory services director continuously monitors the progress of each company and coordinates business services, including periodic presentations by local service providers," says UMBC's Hemmerly. "Our entrepreneurs in residence work on an individual level to provide business and technical planning advice, assistance on grant application preparation, and networking with regional academicians, businesses, and investors. We have also been directly involved with new company formation in collaboration with UMBC's office of technology development.

"We have a very large network that ranges from small business development counseling to a board of directors mentoring program," says Maine's Dyar. "Our staff handles administrative tasks, and we offer a televideoconferencing system that enables entrepreneurs to make their home office an extension of their business. Through agreements with local colleges and hospitals, we also offer contacts with faculty and postgraduate interns that can provide business assistance. We also have venture capital and other financing resources."

"Because we are located on the campus of a major research university, we bring their facilities, equipment, and staff to the table," says LIHTI's Finkle. "The client brings the IP, and we then help develop the IP with human and animal subjects, radioactive isotopes, specialized equipment, and of course plenty of postdoctoral students. The incubator serves as a concierge, coordinating these relationships until the company's CEO and staff can develop their own relationships."

"We have an outstanding group of retired executives and successful investors to help our start-ups deal with the many issues they are facing," says Techranch's O'Donnell. "Our seed funds are important, but our advisory network is by far the single strongest asset we offer our clients."

"Every company needs funding sources, but we always attempt to have our companies seek federal grants in order to minimize the equity arrangements that must be made in later stages of development," says Finkle. "According to a benchmark study by the NBIA, the LIHTI is the country's number one incubator in terms of getting outside aid."

"Support for early-stage medtech companies must include all facets related to regulatory compliance and reimbursement," says UPMC's Srini. "Without a reimbursement code—unless sales of a company's device rely on discretionary income—the chances for growth are stunted. But consumer-driven health plans are placing more responsibility and control of healthcare dollars in the hands of patients. In upcoming years, it will be important for companies to discover ways to position their products directly in front of consumers by educating, involving, and convincing them."

"Incubators must provide connections with group purchasing organizations and healthcare consortiums such as the groups representing academic medical centers," adds Srini. "Contacts with the Department of Defense and other government agencies can also be critical for early-stage companies as they seek to overcome regulatory and reimbursement hurdles on their way to the finish line."

"The services we provide medtech companies are the same as for all the companies with which we work," says Ben Franklin's Barz. "Our job is to understand the businesses well enough to put companies in touch with people who are specialized and experienced, whether they are venture or private investment sources who understand their business, intellectual property attorneys, university experts, CEO candidates, or whatever."

Incubator as Model

Despite the large number of business incubators that have sprung up around the country over the past decade, many observers question whether the incubator model is really everything it purports to be. Critics of the model argue that incubators can't possibly satisfy all the needs of a technologically diverse but highly specialized industry such as medical device manufacturing. Moreover, say critics, the range of services traditionally offered through incubators is insufficient to deal with the critical issues that affect companies in a regulated industry.

"Providing companies with real estate alone is not the answer. Nor is it enough just to provide dollars," says Srini. "Those elements fall far short of fulfilling the true role of incubators in leveraging past successes—or lessons learned from past failures—to help develop new early-stage companies.

"Whether any particular incubator can meet the needs of an emerging medtech company depends on the level of support it provides in terms of sustained and focused guidance, networking contacts, marketing and sales knowledge, and leadership help as the early-stage company evolves," says Srini. "But it is equally critical for the early-stage company to be receptive to the hands-on involvement of the incubator. The incubator must serve and be recognized as the extended management team of the early-stage company."

One incubator that meets the definition of a full-service center is the LBTC at Louisiana State University. No stripped-down model, the LBTC offers business counseling and support, access to Small Business Innovation Research (SBIR) grants, access to cooperative endeavors with other businesses and federal labs, access to capital, and general coaching of the sort that is most needed by the founders of medtech companies.

"Our model has survived the test of time," says LBTC's D'Agostino. "The LBTC is now completing its 16th year on the LSU campus and was ranked as the nation's number three technology incubator for job creation according to a 2002 survey by the NBIA and the U.S. Department of Commerce."

Even when an incubator offers a wide range of services, however, not every client company can be successful.

"When it comes to developing pharmaceutical and medical device companies, our experience has been something of a mixed bag," says LIHTI's Finkle. "Some of the start-ups failed. Others, such as Vasomedical and Curative Health Systems, have become publicly traded companies. OmniCorder Technologies, which developed a scanning device using Star Wars technology, just recently backed into a public shell.

"The incubator model works very well with start-ups, in large measure because companies in an incubator have friends in high places. People have invested sweat in them. Universities do not want their fledgling firms to fail, so they help those companies to succeed," says Finkle.

"The incubator model works great," agrees Simon, of the Center for Emerging Technologies. "Incubators are a great source of creativity and innovation. Everyone in an incubator has the attitude that anything can be done."

In addition, says Simon, incubators are an especially good fit for the life cycle of a typical medtech company. "Incubators offer a flexible environment that works well with the potentially short life span of a successful medtech start-up. With so many possible exit opportunities—merger, acquisition, partnering with a larger company, and so on—early-stage medtech companies need the contractual flexibility that incubators offer."

"For the companies involved, our incubator has worked very well," says Pitt County's Chaffee. "It has offered individuals the critical support they needed to launch companies, provided encouragement when they began to doubt themselves, and allowed them an inexpensive beginning—all of which has increased the survival rate among our client companies."

The role of the business incubator is often just as important to economic development agencies as it is to client companies. In the case of Pitt County, says Chaffee, the incubator has become a winning enterprise by encouraging tech-savvy individuals to start new companies and stay in the area. But he admits that the incubator wasn't an overnight sensation. "We had to commit to a long-term view, underwrite expenses for the first several years, and suffer some criticism along the way. But we still believe the community and its economy will be better off in the future because of this incubator. And once a critical mass is established within the technology community, the center will take on an even more powerful role in advancing the economy of the region."

Showing its commitment to the business incubation process as one of the most effective mechanisms for new company assistance, Maryland has developed a network of 12 business incubators across the state. "The state has also focused much of its business development activities in the life sciences sector, which is a technological strength in Maryland," says UMBC's Fink. "While most of Maryland's incubators house a variety of business technologies, nearly all of them have medtech companies as tenants."

Incubators can play an especially important role in regions of the country where access to medtech-related resources can be difficult. "In our remote, underserved market, the incubator is truly a hub for all activities," says TechRanch's O'Donnell. "Our incubator is critical for most of our client companies because we provide access to many things that might otherwise be nonexistent, including advisers, capital, human resources, service providers, and so on."

Great Expectations

Despite all the assistance that today's medtech incubators can offer, inventors and entrepreneurs who are hoping to develop an idea in an incubator setting may have a lot of unexpected work to do. And the effort doesn't end once the entrepreneur has laid the groundwork for early discussions. To get the full benefit of their partnership with an incubator, say the experts, medtech start-ups should plan for the long haul.

Choosing an Incubator. With incubators springing up like Starbucks, entrepreneurs can find that their first challenge is to identify the right site for their company. "Companies should look for an incubator at a research university, and make sure that previous companies have successfully graduated from the incubator," says LIHTI's Finkle.

"Then, determine whether the incubator can bring real deals to the table—or whether its PR is just talk," Finkle adds. "In my experience, everyone seems to have a successful biotechnology or medical-product incubator. But when you ask direct questions, you discover that most of their deals are based on soft money from state or local governments."

Asking the right questions can help entrepreneurs ensure that they identify the sites that are the best fit for their business. "Company leaders should quiz incubator administrators about their programs, talk to present tenants, and attend some of the incubator's events," advises Simon. "And finally," he adds, "they should consider the culture of the incubator, and whether their company will fit in."

Although early-stage companies may have a lot of work to do to identify appropriate incubators, reaching an agreement with a specific incubator isn't a one-way street. Administrators will also have a lot to say about whether the start-up company is a suitable client, so entrepreneurs should come prepared.

"Entrepreneurs should be prepared to offer an honest description of the level or stage of development their company is in," says Dyar. "Early discussions should be directly related to the needs of the principal investigators for space and assistance. Companies should have reasonable expectations that acknowledge the time constraints of incubator staff. After the first meeting has been held to identify a company's needs and to discuss potential arrangements, then a more-formal statement of expectations—for both sides—can be prepared.

"Of course, entrepreneurs should be prepared to give a five-minute, nontechnical explanation of the technology they are developing. But they should also be prepared to discuss their graduation plans," says Finkle. "The entrepreneur shouldn't be surprised if incubator administrators want to know how long it will be before he leaves the company, or what the entrepreneur wants to do in his next company."

Market Realities. "Most inexperienced inventors need to learn to see past their own technological innovations in order to focus on those factors that will make the start-up a successful business," says UMBC's Hemmerly. "Those factors include finding the best available management team, understanding the markets for the company's products, and developing a strategy for financing the company's growth."

"Medtech companies need to understand that technology alone cannot ensure their success; they must also have a business model that works," agrees D'Agostino. "Company leaders must also learn to listen to their counselors and advisers. Most seem to believe that they know everything already, and they're not receptive to suggestions about their business. In the past, this has been the doom of several companies that have made bad intellectual property or venture capital deals."

The LBTC offers the services of MBA graduate assistants who can perform market research to determine the size of a product's market, competitors and size of competition, market potential, and opportunities and threats to industry and company.

"But once we develop this information, it is critical that the inventor accept the research findings and gear the company's business model accordingly," adds D'Agostino.

TechRanch's O'Donnell is even more insistent about the need for entrepreneurs to have a realistic view of the market and the difficulties of fund-raising and team building. "These are must-haves to get into the TechRanch incubator program," says O'Donnell. "We simply will not work with entrepreneurs who do not understand and appreciate these issues. It is too hard to overcome people who are unrealistic about the difficulties of start-ups—especially in underserved markets like Montana."

"The absolute best advice for any entrepreneur is to spend a significant amount of time speaking with customers," says Ben Franklin's Barz. "Whether in previous employment engagements or in conjunction with the new business venture, entrepreneurs need to learn how to ensure that their business model and credibility are as sound as their technology. Companies should have evidence not of market need, but of market demand," he adds.

"Experienced entrepreneurs will have learned these lessons already," says Hemmerly. "An experienced entrepreneur will bring an understanding of his product technology and its potential markets, a business plan encompassing business and market development and financing strategies, and (if the entrepreneur is a scientist or inventor) the recognition that he will require a skilled business team to be successful."

Attitude Adjustment. Sometimes the biggest adjustments needed to advance the progress of a medtech start-up can be very personal. For some company leaders, hearing the news that their own personality traits and tendencies are a hindrance to company growth can be a rude awakening.

"Entrepreneurs must be willing to admit to personal shortcomings and to identify people with the skill sets needed to advance the company's cause," says Chaffee. "They should be prepared to work hard, take constructive criticism, and seek help in developing a business plan with reasonable goals and overstated costs. And, very important, they should appreciate everything that others do for them—which makes their supporters want to do even more."

The most important attitude that entrepreneurs can bring to their work in an incubator is one of willingness, says Srini. "Entrepreneurs should be willing to set aside product features in order to adapt to market needs, to partner and build external relations, to hire a CEO at the appropriate time, and to participate in marketing as much as in scientific development."

The Long-Term Vision. Creating a long-term relationship with a business incubator can pay dividends for medtech start-ups, but such a relationship requires work on both sides.

"Entrepreneurs entering a incubator should recognize that they are involved with a very difficult project, but one that can be very satisfying if successful," says Hemmerly. "The incubator staff should provide facilities and advice in support of, not in place of, the company's own efforts to develop a successful business."

"Start-up companies should expect to work hard toward building long-term relationships," says Chaffee. "But doing so can be critical for the future success of the company. A company should never burn any bridges."

D'Agostino emphasizes the importance of maintaining such contacts. "Our mission is to support our clients both while they are in the incubator and after their graduation into the business community," he notes. "We have a solid track record of working with former tenants to conduct an annual review of their business plan. In fact, some companies have continued working with us as much as 10 years after their graduation."

Conclusion

To develop their ideas into marketable products, medtech entrepreneurs often face significant technological challenges that only they can overcome. But the same doesn't have to be true when it comes to the challenges of building and operating a business.

Medtech incubators offer services that can help entrepreneurs overcome a wide range of obstacles, from business planning and fund-raising to market research and PR planning. And as more and more incubators compete for desirable medtech clients, the range of services being offered is becoming even greater and more specific to medtech company needs.

Copyright ©2004 MX