Traditional venture capital firms are struggling to remain relevant to new company formation, the development of new technologies, and the capability of bringing new medical device technologies to market. Although my comments are specific to medical device venture investing, my friends in Silicon Valley will agree, if even only in a quiet moment of reflection, that the same applies in biotechnology and general technology investing.
There are four reasons the traditional venture capital model has failed with regard to backing medical device companies.
With a permanently closed IPO window for devices, buyouts are the way to go. The big companies readily admit they can’t invent their own products, and look to acquisition as the way to fill their needs. They complain, however, venture-backed pickings are not attractive. Targets are too expensive, and it is too difficult to incorporate bloated venture-backed companies into their own infrastructure. They want products, not companies.
Also, larger funds reward partners more through management fees than carry. A $500 million fund returns $100 million to its few partners over 10 years. Nice living. There is no need to actually deliver successful products, which is why returns remain low.