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.

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

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

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.

Fink

"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."

D'Agostino

"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.

Finkle

"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.

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."

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.

"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.

"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.

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."

Hemmerly

"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 the 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."

"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 Jay Srini, vice president of emerging technologies at the University of Pittsburgh Medical Center (UPMC; Pittsburgh). "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 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 an outstanding group of retired executives and successful investors to help our start-ups deal with the many issues they are facing," says John O'Donnell, executive director of TechRanch (Bozeman, MT). "Our seed funds are important, but our advisory network is by far the single strongest asset we offer our clients."

"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."

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, of the Center for Emerging Technologies. "And finally," he adds, "they should consider the culture of the incubator, and whether their company will fit in."

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 LBTC's 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."

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 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.

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 Pitt County's 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 UPMC's 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.

"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.

Photo courtesy PITT COUNTY DEVELOPMENT COMMISSION

Copyright ©2004 MX