July, 2009 - On the surface, the monster rounds raised by Small Bone Innovations Inc. and ConforMIS Inc. seemed to defy recent reports that venture capital commitments are way off from the previous years. But the $144 million committed to the extremities-oriented Small Bone and the $50 million raised by ConforMIS, maker of a unique knee implant, say very little about the appetite of US venture capitalists for more deals. Both companies, in fact, drew heavily from investors outside the US and outside of venture capital, creating a playbook that other medical device companies with global aspirations might want to follow.
To complete these massive financings, the two companies tapped into sovereign wealth funds in regions rarely frequented by US-based venture capital-backed start-ups. Small Bone Innovations, which actually closed a $36 million Series C round and a $108 million Series D, counted among its investors Khazanah Nasional Berhad, the investment firm of the Malaysian government, Malaysian Technology Development Corp. (MTDC), a Malaysian-based venture capital company and The Family Office of Bahrain. ConforMIS, meanwhile, didn't identify many of its investors, but it drew capital from equity funds in Asia, Germany and the Middle East including two sovereign-wealth funds. Zurich-based Aeris Capital led the round.
To be sure, capital from abroad is not foreign to US-based life sciences start-ups. Historically, venture capitalists have tapped wealthy investors from Asia, the Middle East or Europe as limited partners for their venture funds. In addition, those investors and others might have made direct investments in life sciences-based start-ups, usually biopharmaceutical companies. Such capital typically helped round out a massive, late-stage round. The companies got capital from investors who cared less about valuation and more about gaining insights into the life sciences industry.
But Small Bone and ConforMIS executives say this influx of capital is worth more than the money invested. In addition to capital, company executives hope to benefit from insights on sales channels and regulatory pathways that might smooth their companies' entrance into foreign markets. Investors, meanwhile, see the investment as the opportunity to lure high-tech international business operations to their countries in order to bring highly skilled jobs.
Khazanah Nasional Berhad, in fact, issued its own press release announcing its $25 million investment in Small Bone, the company founded in 2004 by Viscogliosi Brothers LLC, the orthopedics-oriented merchant bank and venture firm. In the release, Khazanah announced that Small Bone will set up its Asia Pacific hub in Kuala Lumpur, the largest city and capital of Malaysia. The hub could include product development, manufacturing, research and development and a surgical training site. "SBI's presence in Malaysia is expected to create additional skilled knowledge workers in the areas of new technology and product development," the release states. "Malaysia's nascent medical devices industry will be enriched by the introduction of SBI. The human capital development of the local orthopedics ecology in particular, will benefit from potential collaborations between SBI and the local researchers, entrepreneurs and surgeons."
Anthony Viscogliosi, co-founder of Viscogliosi Brothers and chairman and CEO of Small Bone, says Small Bone's expansion plans call for the establishment of global hubs in Europe, the Middle East and Asia. Small Bone, he says, set out to raise capital from investors who could help establish those hubs and help them prosper. "I explicitly sought out investors who could help me build a business," Viscogliosi says, noting that he achieved his goal of securing investments from investors based in each region. "Our intention and the actuality of the business model is we are a global business and want to have powerful partners in the key geographies who have the ability to help us locally. Viscogliosi says the global hubs will house sales and marketing, logistics, some research and development and training sites where surgeons can learn to use SBI's devices.
Calling Malaysia "the Switzerland of Asia Pacific," he says Small Bone sought out a site in that country because he sees in it a vantage point for reaching into the larger Asian markets such as China, India and Australia. Khazanah Nasional Berhad is backed by the Malaysian government. "When you have a powerful partner like that it opens a lot of doors," he says. "We are very grateful to the government and the sovereign wealth fund. Viscogliosi also says his new investors have a stake in health care services and hospitals within their own countries. He expects they'll help Small Bone establish commercial relationships with potential customers.
ConforMIS CEO Philipp Lang, MD, says his company's plans to expand into other countries aren't as defined, but they exist. So ConforMIS set out with "the objective of having global investors. The equity investments provide ConforMIS, which already sells several lines of knee implants, with the opportunities to expand into foreign markets. One of the company's investors is based in Singapore, and "there are some very interesting manufacturing opportunities in Asia," Lang says.
Clearly this level of financing isn't available to everyone, particularly in these financial times. Small Bone initially had designs on closing on the fund-raising last fall, then the financial market collapsed. The delays continued after the terrorist attacks in Mumbai caused investors to pause. But Small Bone and ConforMIS both benefited from their stage of development and their health care focus. "Everybody has suffered under the current economic conditions," Lang says. "But the health care market is one that benefits everyone and investors saw it as a good, long-term play that will continue to be a decent business opportunity and less dependent on the overall economic climate. Neither company is a start-up. Both are selling products into the market, which assured investors. But a world of capital may be available to companies that meet those criteria and are willing to travel. "I literally knocked on doors that I've never knocked on before," says Viscogliosi, who says he's had a direct role in raising more than $2 billion in over 170 transactions. – less – More from ZoomInfo »