The richest families in America are pouring money into healthcare startups
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- Life sciences companies, especially those that make medical devices, are tapping funding outside of the venture capital community.
- Family offices, which manage the money of very wealthy investors, are appealing backers because they can also consider the philanthropic aspect of funding healthcare technology.
Healthcare startups are taking a new tack in their efforts to find financial backers.
Instead of tapping venture capital backing - which comes with perks like a network of like-minded businesses, and board members experienced in taking companies public or selling them off - they're tapping the super-rich. This other group, the founders say, has its own perks, including less meddling with how a business is run and, sometimes, a more philanthropic view of health-care investments.
These deals are wide-ranging in size and scope. Samumed - a $12 billion company with a pipeline of what could be revolutionary treatments to regenerate hair and bone - raised $220 million from anonymous high net worth individuals, for example. Smaller companies have also raised just a few million from family offices, which manage the assets of the wealthy.
The kinds of institutions that invest in these startups differ too. Some are highly sophisticated financial investors, like Pritzker Group, Flatley Ventures, and Stetson Family Office. Others were set up by former pharma executives, like PBM Capital Group. The Bill and Melinda Gates Foundation is a super-charged kind of version as well.
In some cases, family offices are looking to invest for the first time, driven perhaps by a personal experience with a specific illness.
In part, the money is available because there's been a surge in multi-millionaires around the world, says Peter Meath, head of life sciences for Middle Market Banking at JPMorgan Chase Commercial Banking.
"This alone has spurred more investing in the space from family offices themselves," he told Business Insider in an interview.
One challenge for family offices is developing the expertise and the network to make these kinds of investments, according to Meath. However, there are now organizations, including structured multifamily office funds that are helping the newbie health investors find prospects, he said.
Finding a wealthy individual or family also means the biotech entrepreneur has to work harder, to build relationships that can help link up with the people. "They likely are funds that operate under the traditional Life Science investing 'radar'," he said.
The movement of family offices into life sciences comes around the same time as other funding moves "upstream," to later rounds when companies are farther along in development, and there's less capital for earlier stage companies.
Filling the gap left by venture capital
Venture capital funds anyway may be less interested in medical device companies because they don't see a straightforward exit like they might from a company with a potential blockbuster drug, said Akhil Saklecha of Artiman Ventures, an early-stage venture firm based in Palo Alto, California. It might take a fund longer to see a return on their investment with a device maker than a drug developer.
Saklecha, who has invested in some medical device companies says, he's going after big markets, such as hypertension or diabetes, which could make it easier to get the exits that VCs look for.
A medical device company with friends as investors
"Structured VC companies are not your first choice of partners if you have the choice," said Don Crawford, the CEO of startup Analytics 4 Life. The company has developed a test that's meant to replace "stress tests" and other measures used to figure out if a person should get a more invasive procedure to see if they have coronary artery disease.
The idea is that by using sensors to gather data, and artificial intelligence to analyze that information, doctors might be able to gather key information faster and with less risk than they're able to do today. The company is still in clinical trials for the device. So far, the company has raised more than $32.5 million.
Crawford started a medical device company back in 2008 when it wasn't easy to fundraise from venture capitalists, so he had to turn elsewhere. He tapped family offices, wealthy investors, people who came from the world of medical devices, physicians, and orthopedic surgeons - around the world.
Eventually, he sold the company in 2014, which paid off for his initial investors. From there, he was in a good position to help fund Analytics 4 Life.
"I started with Analytics 4 Life maybe four months later, but I had 300 friends with a quarter of a billion dollars," Crawford told Business Insider.
And the choice to partner with these investors again was intentional.
"Family offices, a lot of times, they are investing, they want a return like everyone else, but they also have some other philanthropic reasons that align the interest of the family to certain areas," he said.
Analytics 4 Life raised its latest $25 million round in September, giving them enough capital to get the device to approval in the US. The device has to go through large clinical trials, which are meant to vet whether the technology can work as well as other tests already available at detecting coronary artery disease.
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