Medical Alley, Minnesota-based Health Tech Cluster: Investment Invitation for Startups
Engage Venture Partners, a venture capital corporation, is a member of Medical Alley (From the JETRO webinar)
Medical Alley, a Minnesota-based health technology innovation network, wants to invite startups to invest in the U.S. market.
The 40-year-old organization has been expanding its network of medical device makers and healthcare service providers since its inception. Its goal is to build a network of hospitals, medical device developers, healthcare insurance companies and other professionals to support the formation and growth of health technology startups.
In an Aug. 29 webinar, the Japan External Trade Organization (“JETRO”) Chicago Office featured this “innovation hub” of the health industry. Through the presentations, representatives of the network explained what it has to offer to medtech startups, along with advantages and strategies of doing business in Minnesota.
What is Medical Alley?
By Kylle Jordan, Global Principal, Medical Alley
Medical Alley was founded in 1984 as a nonprofit trade association. Headquartered in Minnesota’s Minneapolis/St. Paul area, it has more than 700 member companies and organizations today.
Medical Alley’s membership includes many large, reputable corporations and organizations (From the JETRO webinar)
They include healthcare providers such as the Mayo Clinic and Children’s Minnesota hospitals & clinics; health insurance companies such as UnitedHealthcare, BCBS of Minnesota, and Allina Health Aetna; medical device makers such as Abbott, 3M, Ecolab Inc. and GE Healthcare; and large corporations such as FedEx and Best Buy. Many of them are based in Minnesota.
Jordan said companies from non-health fields like FedEx and Best Buy find it beneficial to join Medical Alley. Medical devices and products are frequently transported by air across the world, in which FedEx is a major player. Best Buy, meanwhile, is eyeing more and more a digital format business model, which includes digital healthcare technologies. Currently, almost half of Medical Alley’s member entities are digital healthcare technology firms.
Minnesota is the prime location for health technology innovation, Jordan said.
According to Jordan, about 500,000 people are employed in the healthcare economy in Minnesota. The state is traditionally known as a cradle for innovative industry players. After the end of World War II, the U.S. government invested heavily in Minnesota and Texas in the area of computer technology. Jordan’s father, a software engineer, moved from Boston to Minnesota as part of that “new wave.”
When major medical device developer Boston Scientific came to Minnesota, the state’s computer technology was used to develop medical devices. Boston Scientific in Minnesota now has 10 times more employees than at its headquarters in Boston, MA. It explains how the state of Minnesota became strong in the area of medical device developing, Jordan said.
Minnesota is also home to the Mayo Clinic, a world-class nonprofit medical center. It was created when the Mayo brothers joined their father’s general practice in Rochester, MN in the 1880s, and it was eventually turned into a nonprofit health care provider. The Clinic is one of the leading members of Medical Alley.
The state also has many “firsts.” The world’s first successful bone marrow transplant took place at the University of Minnesota Hospital in 1968. The Mayo Clinic performed the first FDA-approved total hip joint replacement in 1969. “This is the state that cares about healthcare and innovation,” Jordan said.
What does this all mean to Japanese startups?
For Japanese businesses that are looking to operate in the U.S., Medical Alley’s dense network of professionals can provide the help they need, Jordan explained.
Medical Alley’s 700+ memberships include more than 200 venture capital companies, investor groups and corporations with their own investment arms. Along with its network of professionals and entrepreneurs, it’s capable of giving advice in every sphere of investment in Minnesota, Jordan said.
The benefits to join Medical Alley include:
Saving cost and time. Medical Alley has accumulated data about the bottom line for investors and startups in the area of health technology. With such information, new startups don’t need to conduct their own research from scratch.
Accumulated know-how and experience. Minnesota has strength in such sectors as organ transplant technology, personalized medicine, and dental technology. It’s estimated that 80% to 90% of implantable medical devices in the U.S. are manufactured or engineered in the state. And about 40% of all FDA medical device pre-market approvals are given to Medical Alley’s member companies. Such accumulation of experience gives Minnesota medical technology corporations an advantage in securing government approvals. Jordan said Medical Alley members can obtain FDA pre-market approvals 26% faster than the national average.
Highly valued by investors. According to the organization’s survey last year, Medical Alley had strong approval ratings from investors, medical device maker representatives, digital medicine providers and others.
One of the largest benefits of connecting with Medical Alley is its ability to match a startup with a type of U.S. partner it needs. Once it’s paired with a partner, Medical Alley’s mentors will share their expertise in medical technology commercialization with the business in its budding stage, Jordan stressed.
Mentoring Service for Japanese Startups:
By Stephen Otto, Principal & CEO, Ottosphere Group
Otto is well versed with medical device development and marketing, both in the U.S. and Japan. From 1982 to 2007, he worked in Tokyo and Kobe handling high-priced large medical devices. He set up three Japanese subsidiaries for foreign companies during that time. Using his knowledge and experience in medical device development and marketing, he is now helping investors and potential startups in this field.
(From the JETRO webinar)
Since he retired from fulltime work, Otto has mentored four companies, each from the U.S., Australia, Canada and Israel. He has also engaged in setting up two venture medical companies.
Otto wanted to share his thoughts as a mentor about what a Japanese startup should consider when planning to do business in the U.S.:
Ask yourself whether or not communication is working well with your U.S. partner. Make sure that your partner company understands your goals and strengths. You and your partner must share what you want from the partnership.
If you already have a partner, make sure that the partner knows about the market you are planning to go in. Does your partner have a support system to help you succeed in the U.S.? Without a good support system, the project may fail.
Make sure that you have an approval from the Minister of Health, Labor and Welfare for your product. If you do, you will have a better chance to succeed in the U.S., but it will depend on individual cases in the end. You and your partner must maintain close communication every step of the way for each project and detail.
Make sure that you and your partner understand the scope of agreement. To what degree is compromise possible? Both sides must know the range of limitation.
Remember that due diligence is one of the most important steps in choosing your partner or mentor. Often times, the claim “In the know and know it all” turns out untrue.
Know that it costs money to find good mentors or obtain good market knowledge. If it’s free, the information or knowledge is probably worth nothing.
(JETRO offers mentoring services to Japanese startups that last for a certain period of time.)
Investment Strategies:
By Steve Sigmond, Founder & President, Engage Venture Partners
Morgan Evans, Founder & Principal, Engage Venture Partners
Engage Venture Partners, Medical Alley’s member, is a venture capital corporation that’s specialized in investing in the early-stage medical tech businesses. It’s a “mentor capital” that provides startups with ongoing financial support, along with market research & analysis, product development assistance, and clinical analysis.
The company conducts in-depth research on numerous investment opportunities each quarter and selects the top two candidates. Then, the company invites Medical Alley investors to co-invest. By being a preferred capital partner of startups, Engage Venture aims to “generate superior investment returns” for its co-investors, Sigmond said.
Minnesota has a program called Minnesota Angel Tax Credit, Sigmond explained.
The program is designed to give tax credits to investors when they invest in startups of any field in Minnesota. This is a great incentive to potential investors, and is part of the reason why the state is home to strong technology innovations.
Engage Venture facilitates participation in the program for its partner startups, Sigmond said.
Evans explained Engage Venture’s investment model.
Primarily focused on the early stage investment, Engage Venture uses Special Purpose Vehicles (“SPVs”) – typically in the form of an LLC - to handle startup investment. A SPV is a single legal entity owned by a pool of investors. Engage Venture handles all administrative, legal, banking and tax functions of the SPV throughout its lifecycle, and acts as the point of contact between the investors and the startup. This model “provides investors with complete discretion, flexibility, and control,” Evans noted.
Engage Venture’s investment is in the range between $500,000 and $1.5 million, aside from SPV. Its investment strategies include the following:
Take a close look at the product in an early stage of development. Specifically, look at milestones in its R&D, design, and testing processes. Then, review pre-clinical data and users’ feedback to determine what market needs it may fulfill.
Investigate the product’s intellectual property rights. Check whether its core technology is protected by patents, or any types of market barriers. Check if it uses patents that are defensible or any patent applications are pending. For intangible property like software, check if it’s protected by defined strategies and clear market barriers to fend off challenges form competitors.
Engage Venture also looks at a potential investment project for its marketing strategies. According to Evans, critical points to consider include the following:
Whether or not the startup has a commercial partner in the U.S. market;
Whether or not its geographical marketing strategy makes sense;
Whether or not the startup has a “compelling plan for how the product will be paid for” within the existing healthcare system;
Whether or not it has a clear understanding of regulatory paths in the U.S. and abroad. Engage Venture’s medical device investments are typically pre-regulatory clearance or approval, and this understanding is critical to form realistic timelines; and
Whether or not it has a clearly defined exit strategy. It’s an identified plan for the business’ exit from the market. Engage Venture also looks at whether the startup has a long-term business plan, as well as a clear prospect about when the project starts to make profits.