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McNair Center Weekly Roundup

Weekly Entrepreneurship Roundup 4/14

Weekly Roundup is a McNair Center series compiling and summarizing the week’s most important Entrepreneurship and Innovation news.

Here is what you need to know about entrepreneurship this week:


How to Make Texas More Startup-Friendly

Iris Huang, Research Assistant, McNair Center for Entrepreneurship and Innovation

McNair Center’s Huang interviews Blake Commagere, entrepreneur, angel investor and startup mentor in the San Francisco Bay Area on how to improve an entrepreneurial ecosystem. Commagere graduated from Rice University in 2003 with a degree in Computer Science. Upon graduation, Commagere moved to Austin to begin his career as an entrepreneur and soon decided to move to Silicon Valley. Commagere has raised over $12 million in VC, started seven companies and sold five.

Commagere describes the pull of talent toward San Francisco as “a virtuous cycle,” where “former successful startup founders become the next generation angel investors and venture capitalists, who fund and help more startups succeed.” Silicon Valley’s concentrated network of VC firms and tech startups provide struggling entrepreneurs with a vast pool of mentorship opportunities, funding resources and talent. Budding startups heavily rely on local tech networks for early-stage support and advice. In order to develop its entrepreneurial ecosystem, Texas cities need to focus on building its tech space.

Additionally, the state’s cities must expand their VC presence. Otherwise, there will always be too many startups fighting for too little capital (as if this isn’t a problem already), and startups will continue to move to cities like San Francisco. Startups depend on local VC firms because many firms refrain from investing in companies outside their primary city. When firms do invest in outside companies, the qualification bar is set much higher.


Medical Device Startups and the FDA

Iris Huang, Research Assistant, McNair Center for Entrepreneurship and Innovation

McNair Center’s Huang takes a look at the FDA approval process for medical devices. The medical device industry is a $140 billion market. For many companies in the industry, obtaining FDA approval is a long and costly path. For some, it’s a barrier. Of the 6,500 companies in medtech, 80 percent are composed of fewer than 50 employees.

A Stanford University survey of over 200 medtech companies found that the average cost for a low-to-moderate-risk 510(k) product to obtain FDA clearance was $31 million. The same survey found that it took these products 31 months from initial communications with the FDA to obtain clearance. For startups, these costs pose significant barriers to entry. Huang aptly summarizes this dilemma: “as the cost of getting to market approaches the average exit value, the medtech funding equation looks less attractive to venture capitalists.”

The FDA approval process acts as an essential screening point in the medtech industry. However, Huang recommends that policymakers consider possible ways to alleviate the significant burdens placed on the businesses involved in the development of these critical technologies.


First Data Joins Silicon Valley Bank In Fintech Accelerator

Tom Groenfeldt, Contributor, Forbes
Silicon Valley Bank (SVB) recently announced a collaboration with First Data, a global payments technology solutions company, on Commerce.Innovated, its fintech accelerator. Commerce.Innovated, founded in 2014, is a four-month long virtual accelerator for startups in the financial services and technologies sector. The accelerator, unlike most early stage accelerators, focuses on startups that have already secured or are in the process of securing seed or Series A funding.

According to SVB’s Reetika Grewal, the accelerator looks for firms with “five to 10 people with an idea they are committed to.” In this stage, startups usually require help with the “operational,” rather than conceptual, front of development. Commerce.Innovated helps fintech firms bring their solutions to market. Since these startups already possess strong leadership with a clear vision for their product, a virtual platform makes sense.


A $150 Million Fund, The Engine, Will Back Startups Others Find ‘Too Hard’

Lora Kolodny, Contributor, TechCrunch

The Engine is a venture fund and accelerator for “advanced technology startups.” The new fund recently closed its debut round at $150 million. Startups in The Engine’s portfolio gain access to one of MIT’s unique resources, The Engine Room, a laboratory for small startups to develop and test their technologies. In addition to to The Engine Room, startups also receive access to laboratory equipment and technologies from organizations in the greater Boston area.

Despite its close affiliation to MIT, The Engine invests “in teams and technologies that hail from a variety of industry and academic backgrounds, not just from the MIT ecosystem.” The Engine supports companies involved in the development of “hard-tech” – so basically anything “from advanced materials and manufacturing technologies to medical devices, robotics, artificial intelligence, nuclear energy, fusion and more.”

Hard-tech startups typically face higher costs, more risk and a longer development period than most B2B or consumer-focused software. These startups often find it difficult to find VCs willing to invest in their innovative, but risky technologies. The Engine, according to the fund’s CEO Katie Rae, is dedicated to lowering the costs of development and testing “hard-tech” and encouraging more entrepreneurs to go into the field.


Tax Reform Must Help Small Businesses, Too

Laurie Sprouse, Reporter, The Wall Street Journal

Laurie Sprouse, a small business owner from Dallas, covers tax reform and small businesses for The Wall Street Journal. As Sprouse points out, small businesses have added two thirds of new jobs to the U.S. economy in recent years. Still, analysts and policymakers continually propose tax overhauls that largely ignore the plight of small firms. Instead, politicians and reporters alike focus on alleviating financial burdens for larger corporations and providing helpful, but insufficient, tax credits for small businesses. According to Sprouse, “Only a plan that benefits businesses of all sizes equally will create the broad economic growth President Trump and Congress seek.”


Stripe Acquires Indie Hackers in Bid to Strengthen Relationship with Entrepreneurs

Ken Yeung, Contributor, VentureBeat

Founded in 2010, tech company Stripe delivers application programming interfaces (APIs) that support electronic payments for consumers and businesses. Recently, the firm announced plans to acquire Indie Hackers, a startup dedicated to creating an internet community for entrepreneurs to share their success stories and lessons. While the financial terms of the deal remain unclear, it seems that site will operate as an independent subsidiary of Stripe.

Indie Hackers founder, Courtland Allen, describes his site as a “community where successful founders could share their valuable stories and insights, and where aspiring entrepreneurs could go for inspiration and advice.” Meanwhile Stripe executives view the deal as an opportunity to grow “the GDP of the internet” by increasing the “overall number” of successful businesses.

In an interview with VentureBeat, a Stripe spokesperson revealed that the company wants to support Indie Hackers’ mission by taking on some of the budding site’s financial burden. In just under a year, the site already runs a monthly profit of $6,000. Going forward, Allen hopes to see Indie Hackers take on a similar role as Y Combinator’s Hacker News.

The Weekly Roundup will return in June. 


Categories
Government and Policy McNair Center

Medical Device Startups and the FDA

Does the FDA approval process impede innovation? Medical devices must be reviewed for safety and effectiveness by the Food and Drug Administration before being marketed in United States, which encompasses 43 percent of the global market for medical devices. Startups in the medical device industry are often dissatisfied with this approval process, favoring the FDA’s European Union peer, CE Marking. Some founders even believe the time consuming and expensive FDA process “holds back the entire industry.”

Classification of Medical Devices

The FDA classifies medical devices based on their associated risks. Class I devices, like enema kits and elastic bandages, have minimal potential for harm and are typically exempt from the regulatory process. Devices that present medium risk, like contact lenses, are classified as Class II and carefully reviewed. Class III devices, such as pacemakers and replacement heart valves, are the highest risk devices, subject to the most regulatory controls.

Blood Pressure Cuff -- Class II

The FDA categorizes devices based on their function, not their underlying technologies. These categorizations may cause unnecessary delays by imposing regulatory requirements on technologies that have already been tested. Ariel Dora Stern of Harvard Business School found that for devices based on the same technologies, those placed in already existing product categories took less time to approve than those placed in new categories.

Premarket Processes

There are two FDA processes required of medical devices in different classifications:  Premarket Notification 510(k) and Premarket Approval (PMA).

Most Class I and Class II devices can be marketed after receiving 510(k) clearance. It demonstrates that the device is “substantially equivalent” to a device already on the market. Those devices that can be paired with substantial equivalents or “predicate devices” do not require a PMA. The 510(k) clearance tends to take around 200 days and costs much less than PMA.

PMA is required for new Class III high-risk devices. Companies need to submit evidence that provides reasonable assurance that the device is safe and effective. The PMA can take more than 450 days and include the ongoing costs of clinical trials among other expenses.

The clinical study stage often takes as long as the initial concept development stage. Josh Makower, Aabed Meer and Lyn Denend at  Stanford University surveyed over 200 medical device companies and found that it took the companies an average of 31 months from first communication with the FDA to receive 510(k) clearance and 54 months for PMA. 81 percent of survey respondents believed that the FDA has a difficult time with novel technologies. Stern also found that the first device in any given category took 34 percent longer to receive approval than the next device in that category, leading to an average delay of 7.2 months.

Hefty Expenditures

Makower et al. found the average total cost to bring a low- to moderate-risk 510(k) product from concept to clearance was $31 million, with $24 million spent on FDA-related activities. For a higher-risk PMA product, the cost became $94 million, with $75 million spent on FDA requirements. Approximately 50 percent of medical device exits (acquisitions or IPOs) are under $100 million; 75 percent are under $150 million. As the cost of getting to market approaches the average exit value, the funding equation looks less attractive to venture capitalists.

Obstacles to True Innovation

It is likely that companies sometimes compromise and pursue the less risky yet also less innovative 510(k) route. They make relatively simple extensions to low-risk product lines already in existence. The FDA typically evaluates more than 4,000 510(k) notifications and about 40 original PMA applications each year. This means that only one percent of devices are innovative, new medical technologies that require clinical data to get FDA approval.

Challenges Facing Small Companies

Startups face particular challenges in navigating the FDA regulatory process. More than 80 percent of the 6,500 medical device companies in the U.S. have fewer than 50 employees. According to the industry-wide survey, 72 percent of small companies submit new products. Only 35 percent of large companies do this. The total average review time for small companies is 330 days, as opposed to 177 days for large companies. However, Stern found that privately-held firms with revenues under $500 million made up only 14 percent of FDA submissions for follow-on devices and 7 percent for novel devices.

CE Mark or FDA?

The EU represents 31 percent of the global medical device market, which has a projected value reaching $544 billion by 2020. Access to both the American and European markets gives startups 74 percent of the global market, worth $400 billion. Attempting both FDA approval and CE Mark approval simultaneously is not feasible for most companies

In 2012, a Boston Consulting Group study found that most PMA medical devices were available in Europe 3 years earlier than in the U.S. Makower et al. found it took medical technology firms an average of seven months to get CE Mark clearance and 11 months to get PMA for the EU. Approximately two-thirds of small medical device companies obtained clearance in Europe first. The number one reason is the unpredictability of 510(k) requirements, according to a comprehensive industry-wide survey conducted by John H. Linehan and Jan B. Pietzsch at Northwestern University.

The difficulty of obtaining FDA approval also makes it harder for startups to raise VC funding. In 2012, BCG interviewed venture capitalists on medical device investments and found that some investors would not invest in a medical device startup unless the company received a CE Mark and promised consequent revenues in Europe.

Conclusion

The value and importance of FDA approval are undeniable. However, policymakers should examine whether the lengthy and expensive FDA approval process is necessary. The FDA might consider reducing the length of the process for all applicants. It might also help if the FDA accommodates startups’ specific needs. This can be done by granting subsidies to small businesses, offering expedited paths to truly novel and needed technologies and providing equipment or space for conducting clinical trials to innovative startups.