Texas Medical Device Landscape--2016

Each year medical devices continue play a vital role in people's lives. These products are revolutionizing medicine with groundbreaking advances in both the treatment and the detection of diseases.

A medical device is defined by the FDA as "an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component part, or accessory…intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease.”

The U.S. is the largest medical device market in the world with a market size of approximately $110 billion. In 2012, the U.S. market value represented around 38 percent of the global medical device market. There are nearly 7,000 medical device companies in the U.S., most of which are small and medium-sized enterprises (SMEs).  More than 80 percent of medical device companies have fewer than 50 employees. Medical device companies are mainly concentrated in regions known for other tech industries, such as microelectronics and biotechnology. 

Many of the biggest players in the medical device industry have corporate facilities in Texas. More than a dozen Fortune 1000 medical device companies have manufacturing or management operations in the Lone Star State, including Abbott Laboratories, Agilent Technologies, Baxter International, Becton Dickinson, GE, Johnson & Johnson, Medtronic, St. Jude Medical, Stryker, Zimmer, among others.

These companies have developed a large medical device workforce in the state. Over 740 firms employ more than 15,400 workers in this sector, making Texas one of the top states in the country for the number of medical device workers.

A wide variety of medical products are developed and manufactured in Texas, ranging from surgical sutures and bandages to medication delivery systems and molecular biology kits. While a broad spectrum of medical specializations are served by Texas device companies, the state has developed several unique clusters, including ophthalmology, orthopedics, cardiology, diagnostics, and wound care.

Venture capital has played a major role in the development of Texas’s medical device industry. Since 2005, the state’s Texas Emerging Technology Fund (TETF) has invested more than $88 million in medical device-related deals, and, from 2009 to 2014, venture capital firms invested more than $526.7 million in 82 Texas medical device deals.

Texas's Life Science and Health Care Scene -- 2016

Research and development (R&D) is at the core of Texas’s biotechnology industry. In Texas, biomedical research, or research conducted to aid and support the development body of knowledge in the field of medicine, is bolstered in large part by the state’s vast network of public universities and medical institutions. These school and health-related facilities invest strongly in biomedical research and development. In 2013 alone, Texas universities spent nearly $3 billion on medical and life sciences research, which made up more than 65 percent of all higher education R&D expenditures in the state.

Public investment in biotech R&D is complemented by Texas’s significant concentration of private sector R&D activity. More than a thousand private R&D firms, employing nearly 20,000 workers, call Texas home. Many of the world’s largest private biotech R&D firms have operations in Texas, including PPD, Covance, Quintiles, and INC Research.

In addition to R&D centers, Texas has more than 1,600 medical and testing laboratories. These laboratories employ nearly 40,000. Major lab firms in the state include LabCorp’s Esoterix subsidiary, Spanish biological product firm Grifols, and Sonic Healthcare’s Clinical Pathology Laboratories subsidiary.

Over the past decade, the state’s Texas Emerging Technology Fund (TETF) has invested more than $142 million in some of the state’s major higher education institutes for biomedical research-related deals in areas ranging from genetic engineering to pharmaceutical manufacturing.

The Lone Star State is also among the leaders in cancer research. Major Texas institutions in cancer research include MD Anderson Cancer Center in Houston, Scott & White Cancer Institute in Temple, and Texas Oncology and Mary Crowley Cancer Research Centers in Dallas. Furthermore, the Cancer Prevention and Research Institute of Texas (CPRIT), a $3 billion initiative based in Austin, has played a major role in expanding Texas cancer research. 

Escalate Capital by Ross Cockrell—Venture Capital Profile

Can you tell me a little bit about the history of Escalate? Where it came from and how long it’s been around?

We started in 2005 as a spin out from Austin Ventures, where I had been for 10 years. My partner, Tony Schell, was running the Comerica tech lending practice here in Austin. We had known each other since our time together at UT Business School in the mid-‘90s. We have raised 3 funds totaling $625M in capital with our most recent closing in late 2014 at $235 million. We’ve been executing pretty much the same strategy since day one, which is to provide mezzanine capital to expansion and later stage tech and healthcare companies. We invest all over the country and have made 75 investments to date as a firm.

Typical structure is in the form of subordinated debt, where we are coming into companies’ later rounds of financing, providing a little more leverage than is traditionally available from banks. We work a lot with SVB, Comerica, Square One, writing $3M-$15M checks into software, tech enabled services, and Internet companies.

Profile-wise, we look for companies with a fair bit of stability and low wipeout risk. Since we are not making as much on the upside, we typically try to underwrite for credit first and equity appreciation second.

So this is mezzanine debt, correct? How would you define mezzanine debt?

We brought what had been a fairly popular financing solution in traditional PE, real estate, and other asset classes to IT, which was a novel concept 10 years ago and we had to do some evangelizing early on. When I came up in the venture business, there was a traditional playbook that said you went out and raised multiple series of equity, maybe layered in a little bit of bank debt, start-ups were largely all equity financed. We are offering another financing solution for certain types of companies looking for additional growth capital or to make acquisitions.

What size company and what criteria does a business have to meet in terms of revenue to get in your door at Escalate Capital?

Companies that we invest in are typically in the $10-$50 million revenue range with a fair bit of granularity in the business. We are not interested in making bets around technology standards or in customer or channel concentration. We invest in a fair bit of B2B software, and companies that utilize software in offering solutions.

Do you do much with Healthcare IT?

We do, we’ve invested in probably 12 Healthcare IT companies.

Any management buyouts?

Selectively, where we come in alongside equity to help finance a recap, but that’s not the primary use of funds in our typical situation.

Have you made any Texas deals?

Early on we invested a lot in Texas: HomeAway, RetailMeNot, LDR, and SailPoint are some of our Austin deals, and we’ve been fairly active in Dallas and Houston as well. All told we’ve invested in around 20 companies based in Texas.

Do you syndicate deals, and how does that work?

We are generally the only provider of capital within our portion of the capital structure. It’s been pretty rare for us to have opportunities syndicate. You could say we syndicate with senior lenders, which are good partners of ours and great sources for deal referrals.

So you partner with the banks on the debt side, not with other firms?

We have and we would, but it’s pretty unusual.

Tell me more about the management team.

Besides me and Tony, we a third partner who covers the East Coast for us named Chris Julich. With a total headcount of seven, we are a fairly small shop; that can certainly be an advantage for companies that are looking for speed and the ability to work directly with principals.

From the last Texas Venture Growth Forum, did you find any groups interesting?

Yes, you guys did a terrific job, especially for the first time. It seemed well attended by companies and investors alike. We try to have a pretty good grasp on what is going on in our backyard, but it’s awesome to meet new companies and I had a chance to do that for sure.

What’s your take on putting Limited Partners out there at the next conference?

If those guys are interested, I think that’s fantastic. I’ve never seen that before combined with these kind of events. That would be another awesome connection to make and a great way to potentially increase attendance among investors

The Cabernet vs. the Tempranillo-- Choosing the Right Funding Model for Your Climate

In the late 90s I started making my own wine.  To learn more about winemaking I traveled throughout Texas visiting wineries to talk to professional wine makers.  At that time, there were about 40 wineries in Texas but it was growing.

Personally, I like red wines and took every opportunity to try them.  The vast majority were Cabernet Sauvignons.   Almost all of them were absolutely terrible.  One winery explained that the Cabernet grape doesn't do so well in Texas because the weather doesn't cool off enough at night to make as good a wine as it does on the West Coast.  It's just too hot here for that type of grape.

To make my own wine, I ordered Cabernet grapes from California.  Peter Brehm would travel up and down the coast gathering up buckets of grapes from various wineries and then put them in cold storage in Oakland. When I ordered the grapes, he would put them a Southwest flight to Austin where I would pick them up at the cargo lot. From there I would crush the grapes, ferment the juice and bottle it.  Not a bad way to have your own vineyard.

Today, the Texas wine industry has over 240 vineyards and growing even faster.  In checking back into the Texas wine scene recently I was surprised at how many wineries have shifted over to Tempranillo and Tannat grapes.  Those varietals come from Italy where the weather is similar to Texas. I was pleasantly surprised at how good those wines are.  It may be the industry has improved on its winemaking techniques but I believe the fundamental choice of grape makes the most difference.

I tell this story because I work with startups and growth companies and I see many Texas companies trying to emulate the Bay Area model of startup funding. Of course, it's hard to raise funding for a startup company anywhere.  It's especially hard if you're trying to use a California model to fund a Texas business.  Texas startups hear about the vast amounts of funding raised by California startups who appear from a distance to having nothing more than a great idea. It also looks like every startup in California is getting funded.  The reality is that only 1% of California startups raise substantial funding.  The other 99% don't get much press coverage so the perception from the outside is somewhat skewed.

In Texas, there are not as many venture capital funds.  There is a great deal of funding available -- it's just not in the venture capital model.  In Texas it's in the family office and the venture arms of corporations.  These investors want to see traction, proven business models, and  raising funding on an idea alone doesn't resonate well them.

My advice to Texas companies is to choose a startup funding model that works well in Texas and not try to emulate the California model.  Cater to the funding sources that are here and not look for the rare venture capital funding source as it will be like trying to find a decent Cabernet wine that's made in Texas.  I still like Cabernets from California, but found the Tempranillos in Texas are just as good once you try them.

Braden Snyder of Updata Partners -- Venture Capital Profile

Updata Partners by Braden Snyder -- Venture Capital Profile

What is the history of Updata Partners?

Updata is a technology-focused growth equity firm based in Washington, D.C. The firm was founded in 1998 and was an early leader in the growth equity category. We have invested in more than 60 industry-leading companies and have built and sold businesses exceeding $3 billion in shareholder value.

What do you invest in?

As a growth equity investor, we invest in businesses that have reached between $5 to $50 million in revenue, that are growing greater than 25% per year, and that have a proven and capital efficient business model. Within the technology market, we focus our efforts on software, internet / digital media, and technology-enabled services companies. Our capital is used to accelerate growth by investing in sales and marketing, expanding into new geographies, developing complementary products, and / or financing a potential acquisition. We generally target bootstrapped or lightly capitalized companies and are flexible when it comes to deal structure. We invest between $5 and $20 million into companies in the form of both primary and secondary capital, and we partner with other investors on larger transactions. 

What do you not invest in?

Within technology, we stay away from hardware-based businesses.

How do you handle syndication deals?

We are typically the lead investor, but we welcome the opportunity to invest with partners that can add value. We are not typically part of large group deals. We also have strong support from our LPs, who actively look for co-investment opportunities and help support us on larger transactions.

Where do you invest geographically and have you invested in Texas deals?

We invest across the U.S. and internationally. We have had success targeting geographies with a strong technology ecosystem, talent pool and early stage capital sources, but lack a growth equity capital pool. We have experience investing in Texas, including Alert Logic, based in Houston, which was acquired by Welsh Carson, and Merlin Technologies, based in Dallas, which was acquired by Trident Capital.

What do you think about the Texas-based deals?

Texas has a strong history in our core software markets, producing leaders like BMC Software, i2 Technologies, Dell and others. We have been very impressed with the quality of the investment opportunities in Texas, and since raising a new fund, we have focused closely on enhancing our presence in Texas. We are excited about the opportunity to further these efforts and continue to evaluate the great opportunities in the region.

What kind of operational support do you offer your portfolio?

All of our GPs are former operators and entrepreneurs, which is a great benefit our portfolio companies can leverage. Having been in the seat before, we understand how to add value and develop a successful management team / board of directors / investor dynamic. Also, we open up an extensive network of industry contacts, experts, and companies our portfolio companies can access. We view our involvement as a true partnership and do everything we can to set up our portfolio companies for success. 

What is the history of Updata Partners?

Updata is a technology-focused growth equity firm based in Washington, D.C. The firm was founded in 1998 and was an early leader in the growth equity category. We have invested in more than 60 industry-leading companies and have built and sold businesses exceeding $3 billion in shareholder value.

What do you invest in?

As a growth equity investor, we invest in businesses that have reached between $5 to $50 million in revenue, that are growing greater than 25% per year, and that have a proven and capital efficient business model. Within the technology market, we focus our efforts on software, internet / digital media, and technology-enabled services companies. Our capital is used to accelerate growth by investing in sales and marketing, expanding into new geographies, developing complementary products, and / or financing a potential acquisition. We generally target bootstrapped or lightly capitalized companies and are flexible when it comes to deal structure. We invest between $5 and $20 million into companies in the form of both primary and secondary capital, and we partner with other investors on larger transactions. 

What do you not invest in?

Within technology, we stay away from hardware-based businesses.

How do you handle syndication deals?

We are typically the lead investor, but we welcome the opportunity to invest with partners that can add value. We are not typically part of large group deals. We also have strong support from our LPs, who actively look for co-investment opportunities and help support us on larger transactions.

Where do you invest geographically and have you invested in Texas deals?

We invest across the U.S. and internationally. We have had success targeting geographies with a strong technology ecosystem, talent pool and early stage capital sources, but lack a growth equity capital pool. We have experience investing in Texas, including Alert Logic, based in Houston, which was acquired by Welsh Carson, and Merlin Technologies, based in Dallas, which was acquired by Trident Capital.

What do you think about the Texas-based deals?

Texas has a strong history in our core software markets, producing leaders like BMC Software, i2 Technologies, Dell and others. We have been very impressed with the quality of the investment opportunities in Texas, and since raising a new fund, we have focused closely on enhancing our presence in Texas. We are excited about the opportunity to further these efforts and continue to evaluate the great opportunities in the region.

What kind of operational support do you offer your portfolio?

All of our GPs are former operators and entrepreneurs, which is a great benefit our portfolio companies can leverage. Having been in the seat before, we understand how to add value and develop a successful management team / board of directors / investor dynamic. Also, we open up an extensive network of industry contacts, experts, and companies our portfolio companies can access. We view our involvement as a true partnership and do everything we can to set up our portfolio companies for success. 

Texas Entrepreneur Network (TEN) Infographic -- Business Funding Texas

Business Funding Texas is a Texas Intrastate Crowdfunding portal. The state of Texas passed its Intrastate Crowdfunding law at the end of 2014, allowing any resident of Texas to invest in a startup.  Unaccredited investors are limited to $5K/person/deal/year.  The law is much simpler than the JOBS Act recently passed by the SEC which requires more reporting, more detailed income tests, and financial audits.  Accredited investors in Texas can invest as much as they want.

The Intrastate Crowdfunding raise works well for consumer facing businesses that have a large network of unaccredited investors.  Microbreweries, wineries, distilleries, and consumer product good companies are ideal candidates.  The fund raise is primarily an exercise in having your customers invest in your business.  The raise strengthens your business beyond just funding in that it builds a strong group of enthusiasts and advocates around your business who will then support and promote your business to others.

Also, the experience of running a crowdfunding campaign can teach a new company a great deal about sales and marketing.  Crowdfunding is essentially investment marketing.  One learns how to create and run a campaign which can prove valuable in building the skills to sell and promote the product.

Businesses which can raise funding from their customers/clients are well positioned to raise additional money from accredited investors as it demonstrates a loyal following for you and your business.  

Texas Entrepreneur Network (TEN) Infographic -- AngelConnect

Angel investing is a learned skill that is not taught in the university.   The ability to select a deal, analyze it, invest, and then follow up requires a certain skills drawn from both one’s investment and business experience.  My experience having help launch and grow three angel groups indicates that there are certain skills and experiences an angel investor should have when approaching the decision to invest.

The Texas Open Angel Network is a 501c3 non-profit dedicated to educating angel investors on how to invest in startups.  It’s a non-profit so there’s no profit incentive to promote investment opportunities or sell services.  I launched the program in Austin and held monthly lunch and learn meetings.  Speakers with experience in consumer product goods, gaming, life science, technology and more came to the group and shared their experience with other investors. 

In taking the program to the rest of the state, I encountered a scalability problem. The physical meeting format was difficult to maintain in multiple cities.  I decided to take the education series online and captured the content in the form of podcasts which I listed until the program name—AngelConnect. 

This turned out to be a much better way to capture the voice of the experienced angel investor.  The distribution was highly scalable as anyone can download the audio file and listen to it on their own time. In addition to key investors, we’ve held panel sessions in which a group of investors discuss topics such as exits, due diligence, and more. 

Texas Entrepreneur Network (TEN) Infographic--TEN Investor Network

TEN Investor Network

The Texas Entrepreneur Network over the past six years has grown to include many portals and programs.  The world of entrepreneurship is broad and varied with many different types of entrepreneurs.  TEN has many “crowds” to support those many entrepreneur groups.   

For seed deals, TEN has the Business Funding Texas portal that lets anyone in Texas invest in a startup—even unaccredited investors.  The majority of deals are going to market and are looking for angel investors.  Businesses with cash flow can also pursue revenue-based funding. Later stage startups can raise funding from Venture Capitalists.  

TEN also supports the Wilco Funding portal—the first hyper-local portal in Texas for funding startups in Williamson County or those startups moving there.  Communities like Williamson County can use crowdfunding to support their local startups through their Economic Development Corporation.  Texas has over 700 EDCs which foster business growth.  TEN brings startups to many of these EDCs.

The TEN Funding portal also has Family Offices, real estate investors, and oil and gas investors. 

Texas Entrepreneur Network (TEN) Infographic -- Texas Venture Growth Forum

About a year ago, I was reading the local paper and found a startup with an iPhone app who had raised $250K and was featured prominently on the front page of the business section. In turning to the back page, I found a later stage startup raising over $20M and receiving only scant attention. It seemed odd to me that a startup with almost no hires could gain such attention, while the later stage company providing many more jobs received a yawn. But in today’s, startup focused world, the new trumps the old. 

In talking with many in the community, the phrase “Series B” crunch came up often.  For some there’s ample seed and Series A funding, but little after that. Texas has no Series B funds.  In general, a Series A fund is $50-100M and writes $500K to $2M checks.  A Series B fund has $300M and writes $5M to $15M checks. 

I had a client go to the JP Morgan Healthcare conference and came back with some substantial funding.  It was a 1:1 style conference in which the participants sign up to meet investors, providers, and others.  The ability to hold many meetings in one week makes it attractive.  This is a new type of conference called the “appointment based event” which focuses on networking people together.  In the past, most conferences were more about the keynotes, panels, and large group discussions.  Appointment-based events are about 1:1 and small group meetings.

TEN launched the Texas Venture Growth Forum, in 2015, holding its first conference in Austin on October 7-8, 2015.  We had over 40 investors come from across the country to meet with 27 Texas companies who were later stage startups yielding over 125 1:1 sessions over a two day period.    

The overwhelming feedback was positive and focused on the ability to meet in 1:1 settings.  Investors and CEOs liked the event because they don’t want to just talk about fund raising.  They want to be doing it.

TEN is now planning for a Life Science version of the event in the spring of 2016. 

Texas Entrepreneur Network (TEN) Infographic--History of TEN

The Texas Entrepreneur Network started in 2008, after I finished starting the Central Texas Angel Network in the role of  Executive Director. I saw many startups going  through the CTAN process and not succeeding because they weren’t using the resources available in the city.  

We originally called it the Austin Entrepreneur Network and later expanded to cover the state and renamed it the Texas Entrepreneur Network.   We ran a citizen journalism website in the early which hosted over 50 bloggers.  We cataloged all the resources in the city for startups of which there were over 120+.  Our mantra was Networking, Mentoring, and Funding.  

We provided programs that brought the entrepreneurs together with mentors such as the First Look Forum in which the entrepreneurs learned out to give a Fast pitch on their business to a group of mentors who provided coaching.   We later decided to focus on fund raising since that was the greatest need by entrepreneurs.

In an effort to expand angel investing, we ran a funding forum series that ran across the state from Austin to Dallas to Houston to San Antonio, to El Paso.  Ten entrepreneurs would pitch to a panel of ten investors.  Initially, the investors liked the idea of seeing quality deals presenting, but later wanted to source the deals online. Entrepreneurs who participated in the funding forums raised over $100M in funding.  

In 2013, we moved the dealflow to an online portal and called it the TEN Funding Portal.   At that time, Williamson County commissioned us to build a portal exclusively for Williamson County companies. 

Sensing a need for more training of angel investors, we launched the Texas Open Angel Network which provided educational sessions for potential investors.  In trying to scale the program across the state, we decided to capture the content in a podcast series which we called AngelConnect.

Finding a need among later stage startups for Series B funding, we launched the Texas Venture Growth Forum to help those seeking Series B funding and beyond meet investors through a conference designed to foster 1:1 meetings.