Cleveland Clinic, the renowned hospital and medical research center established in 1921, is entering the venture capital business, in a manner of speaking.
To be sure, Cleveland Clinic is a nonprofit organization. But it's a well-heeled one, with more than $12 billion in assets, according to its most recent financials. What's more, the organization has always been savvy about the intellectual property and innovation potential residing under its roof. Since 2000, when it launched its Cleveland Clinic Innovations division, CCI has secured more than 660 patents and spun off 76 companies.
Typically, CCI's investment in one of its spinouts has been between $25,000 and $50,000. That's hardly chump change for most nonprofits. But it's small beer in the six- or seven-digit world of early-stage capital.
All of that has changed in the past year, with CCI investing $500,000 of its own cash into Tatara Vascular, a startup which makes a coronary guide wire. Combined with $1 million in investment from partners operating under CCI's umbrella in the project, the total investment has reached $1.5 million. Far from small beer.
Cardiologists use guide wires like Tatara's to facilitate the placement of stents or balloon dilatation catheters during coronary angioplasty procedures. The wire, depicted above, was invented a few years ago by Dr. Patrick L. Whitlow, former Director of Interventional Cardiology at Cleveland Clinic and a renowned inventor. Whitlow knew firsthand that cardiologists often complained about how their guide wires could get twisted in the course of a procedure. So he designed a better one.
Of course, CCI has built and backed better mousetraps before. Why did CCI make the additional investment in Tatara? Interviews with the CCI team revealed three key reasons:
1. A key employee who understands the marketplace. Kelly Emerton, senior director for product development at CCI, is guiding Tatara Vascular "to the finish line." Formerly, she was a due diligence product development expert for Medtronic, the globally renowned medical device and technology company based in Minneapolis. Medtronic's cardiac and vascular division, by itself, rakes in $9.4 billion annually.
When Emerton worked at Medtronic, one of her duties was doing homework on the medical devices Medtronic was considering for acquisition. "So she knows what the industry is looking for," says Peter O'Neill, interim director of CCI.
2. De-risking the investment. When companies are considering products for acquisition or licensing, they are intent on making sure that they are paying for a product that is ready to launch. They want to buy the rights and start monetizing it immediately, rather than sinking their own time and funds into clearing regulatory hurdles and conducting testing. "They don't want to deploy resources on it," says O'Neill. "We have seen over the years that companies are more and more interested in licensing or acquiring technologies or products that are farther downstream."
When a startup team clears safety and performance-testing hurdles to better position the product for licensing or acquisition, that process is called "de-risking." For Tatara, part of the de-risking process was putting the guide wires through six key performance tests--tests they'd have to complete in advance of regulatory filings, anyway--and comparing the results to those for guide wires already in the marketplace.
That guide wires for comparable cardiac tasks already existed in the marketplace shrunk the time frame considerably. Tatara was not reinventing the wheel. It was building a better one. Emerton says that the Tatara wires "were equivalent or outperformed all competitive devices" in the tests. The strong results gave the Tatara team a jumpstart on putting together its regulatory filings. In January, less than one year after the testing process, Tatara received its Class II Device Regulatory Approval from the FDA.
3. Trustworthy intelligence from potential licensees and acquirers. Emerton says she has spoken to "six of seven" companies in the marketplace who've expressed interest in licensing or acquiring Tatara from CCI. Of those, she adds, "two are leading the way as far as interest goes, and nearing a term sheet."
After gathering marketplace opinions, CCI is confident it will at least triple the $1.5 million investment. O'Neill attributes the confidence to "the combination of the market response, a world-class inventor [Whitlow], and our diligence on the buy side."
"We de-risked it ourselves," he adds. "This feels like it has broken through some ceiling for us."