Ordinarily, people with good ideas in the medical technology field try to hook up with larger companies, which are better able to support the lengthy, costly, and risky process that precedes Food & Drug Administration approval. But not Tom Waggoner or Dr. Thomas Mazzocco. They decided to try to bring their idea to market themselves. "We both knew that if we went to a larger company, it would end up in research and development for eight years," the 34-year-old Waggoner explains.
So in 1981, Waggoner plunked down $5,000 and founded Staar Surgical Co. In early 1982, he and Mazzocco put up $250,000 to develop Mazzocco's idea: a soft intraocular lens (IOL) for cataract patients. As costs mounted in the Monrovia, Calif.-based company, Waggoner raised another $150,000 through an R&D partnership.
By early 1983, Staar was $250,000 in debt. Waggoner then decided to incorporate, hoping to raise funds from venture capitalists. "But," as he recalls, "there was a wide gulf between my want and their offer." In July, with financing alternatives dwindling, Waggoner took Staar public, raising $4 million. Ophthalmologists, it turned out, were attracted to the stock. "Selling within [the ophthalmologist community]," Waggoner says, "means I've established an immediate market for the product once [the FDA] approves it."
But Wall Street analysts remained skeptical as the company lost $1.5 million in 1983, a year that saw no revenues, and another $1 million on sales of $328,000 during the first six months of 1984. Cash shrnak from $1.8 million in early 1984 to $422,000 by midyear. Although Staar had an FDA go-ahead to implant the lens on a limited basis while its safety was studied, Staar's own 10K report to the Securities & Exchange Commission worried about "liquidity problems in the near future." Something had to be done: Full FDA approval wasn't expected before 1987, and the company's monthly expenses were averaging $250,000.
What Waggoner did was to see a promising source of capital right in front of him: Staar's 92 employees: He and each of his four top managers were meeting periodically to discuss developments on the IOL, and one day, Waggoner says, "we looked around at our operation, and realized that, with all our overhead, why not produce conventional cararact lenses as well?"
Out of that realization developed what Waggoner calls a "delegate" system of management. Its purpose is to come up with revenue-producing ideas that will help tide Staar over until it can begin selling the IOL. When managers get ideas for new products, they are free to pursue their projects in a small room set aside for that purpose. And once they get the green light to go ahead, they set up the financing through R&D partnerships which outside investors or through internal funding. Waggoner gives the managers a bonus to plow back into each project -- and to provide them with equity. If a project is successful and sales reach a certain, agreed-upon point after a year, royalties are added to the managers' earnings.
By the end of 1984, Staar had grossed $650,000 from sales of its conventional surgical lens, which it was able to manufacture with its existing equipment. Another R&D venture, surgical equipment for ophthalmologists, brought in an additional $650,000 in contract revenues. Other ideas on the drawing board include Staar Tool & Die, a subsidiary that would make precision tools for optical molding, and development of a wound-closure system for ophthalmologists.
Meanwhile, work on the IOL progresses, partially financed by these additional projects. With as many as seren start-up teams going at one time, Staar's R&D capacity is extraordinary for a small company, an advantage that may prove, over the long run, more important than the system's ability to help cover short-term capital shortages. After all, Staar has chosen an industry dominated by the giants, and one in which products are displaced by new technology every three years.