Early-stage med-tech funding out of reach for many firms

  • Article by: JIM SPENCER , Star Tribune
  • Updated: October 5, 2011 - 7:51 AM

A Shoreview company finds the potential for its apnea device more promising than financing hopes.

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Evan Johnston, Dymedix

WASHINGTON - For Evan Johnston, it was the entrepreneur's version of speed dating. The Minnesota businessman had exactly nine minutes to charm potential investors.

He worked the room at the AdvaMed Med Tech Conference last week the way he has countless times before. No script. No notes. Just a bunch of PowerPoint slides and plenty of direct eye contact.

As he spoke, he kept track of time on his iPhone stopwatch. With 60 other companies scheduled to make sales pitches, Johnston didn't want to be embarrassed by being forced off the stage.

Chasing funding for innovative new products has always been a pursuit that left entrepreneurs breathless. These days, in America's sputtering economy, it too often leaves them empty-handed. Competition for early-stage investment dollars is brutally competitive.

Johnston, president and chief operating officer of Dymedix Corp., hurtled through his spiel for a small device that treats sleep disturbances by beeping in the ear. He stressed America's $10 billion a year sleep disorder problem and the massive profit potential for those who could help solve a big part of it.

"The investment community has retreated because of the economy and regulations," said Johnston. "In the good old days, if you had a good idea, you'd find the money for it. Investors are hesitant to step into something right now."

In 2010, venture capital investments in Minnesota shrank to the lowest level in 15 years. Nationally, the number of deals being financed declined from 4,091 in 2007 to 3,460 in 2010, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association.

The decline in venture deals does nothing to help the beleaguered U.S. economy. Innovation creates jobs and has accounted for 60 percent of the growth in the U.S. economy since World War II, said College of St. Benedict economics professor Louis Johnston (no relation to Evan).

And yet entrepreneurs like Evan Johnston and Dymedix chairman and CEO Murty Chamarty must beg harder than ever as they travel the country looking for financial backers. Both men know that their Shoreview-based company has an intriguing product -- easy to use, noninvasive and reasonably priced. What neither man can say is if the gadget is alluring enough to raise the $5 million to $8 million needed for initial production costs from venture capitalists, financial institutions or big medical device companies.

"We've had people say, 'You're going to make someone a lot of money,' but their hands are tied," Johnston said.

Potential market

Chamarty and Johnston are quick to point out that sleep apnea, a snoring and breathing disorder, affects more than 55 million Americans. Roughly 90 percent of sufferers don't get treated, they say, because the currently available therapies are either expensive surgical implants, costing $30,000 to $35,000, or bulky, uncomfortable masks costing $1,500 to $2,000.

The Dymedix sleep apnea therapy device recently won an award from a sleep therapeutics rating company. So hope endures for the technology developed by electrical engineer Peter Stasz, who founded Dymedix in 1998. Johnston and Chamarty talk up Stasz's invention as a comfortable alternative to the bulky masks, called CPAP, that apnea suffers must now wear when they sleep.

"You don't sound or look like Darth Vader when you go to bed," Johnston said.

The Dymedix device includes a small nose monitor that detects the beginning of air obstruction that leads to apnea, then beeps a "sound energy pulse" into the ear canal to stimulate nerves which restore muscle tone that opens the airway. As they try to convince investors to take a chance, Johnston and Chamarty point to independent tests at the Mayo Clinic that show their device works.

"We had clinical validation studies done rather than just say, 'I invented something in my garage. Trust me,'" Johnston said.

Lots of interest, but ...

So far, Johnston and Chamarty have encountered lots of fascination, but zero funding. Their product needs roughly $25 million to make the apnea device commercially viable, they say.

To make their pitch more financially palatable, the pair ask for smaller "chunks" of capital, say $5 million. To date, even that has been too much to risk.

"The investment community has become very risk averse," said Johnston, who once worked for Synovis Surgical Innovations in St. Paul. "They want to see regulatory permits and even some trailing revenue. We have neither."

What they have, they remain convinced, is an innovation that will help tens of millions of Americans if Dymedix can just find the funding to get it to them. Johnston and Chamarty still didn't have an investor as they left the AdvaMed conference late Wednesday afternoon. But true to their entrepreneurial spirits, they continue to press on.

"We've talked to enough physicians and investors who agree that we have developed something important," Johnston said. "We aren't giving up yet."

Jim Spencer • 202-408-2752

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