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How one ambitious Irish start-up became a Mainstay of venture investment

September 19th, 2014

The Dublin-based Mainstay Medical offers a rare insight into how a startup with a great idea goes about bringing a life-changing product to the market, reports Ian Campbell.

A cure for lower back pain might sound like a tantalising start-up pitch, but the circuitous journey that Mainstay Medical has taken – from MinnesotaMinneapolis, to Swords, Co Dublin – highlights that there is no easy route to market for a medical device company, however good the idea.

This is a sector where every step is hard earned; where you need committed investors from the outset and a focused team that can edge you towards regulatory approval and commercialisation.

Mainstay is targeting a multi-billion dollar market with a neuromodulation implant, ReActiv8, which stimulates nerves in the back to stimulate muscle contractions. Employing 22 people, with eight based in Ireland, the firm is now trialling its treatment around Europe and Australia. A year from now it hopes to get European CE Mark approval that opens the door to commercialisation.

North America and FDA approval will be the next phase, but Peter Crosby, president and chief executive of Mainstay, has been in the game too long to take anything for granted. “We have some pretty exciting data from the trials and there’s potential for a very large business, but like any early stage company it is not without its risks,” he says.

To take a full implantable device to market takes years and millions of dollars. Unlike other technology startups, which only look for serious funding after they have acquired some customers, med tech firms need high levels of early stage investment. For Mainstay, a first funding round of $6m in 2010 was used to make sure the idea works. The next round in 2012 raised the $20m to bring the product to clinical trials and get it ready for market.

A consequence of the need for large early stage investment is that med-tech startups tend to be run by seasoned professionals and backed by equally expert financiers.

They know the sector inside out. Australian Peter Crosby has been chief executive or chairman of seven medical device companies in four countries. Its American founder, Dr Dan Sachs, is a serial entrepreneur who initially set it up in a Minneapolis cluster of similar companies.

So how did they end up in Europe? Venture capital is a bit of a fashion industry, according to Crosby, and interest in medical devices has blown hot and cold in the US for the last decade. But there were other factors that persuaded Mainstay a move to Europe might be a good idea.

The company was formed in 2008 at the start of the recession, when US investors were less interested in startups than picking up bargains around established businesses that were struggling.

Following the money to Europe soon led Mainstay to float on the Euronext, Paris, the pan-European stock exchange that has proved to be a good place for early stage med tech companies to list and attract investment. The firm also floated on the Enterprise Securities Market of the Irish Stock Exchange.

And why Ireland? Manus Rogan, co-founder and managing partner of Irish VC, Fountain Healthcare Partners, picks up the story. “We took the lead in the $20m funding round which involved relocating Mainstay to somewhere in Europe. It came down to Switzerland or Ireland. We played a major role in persuading them to set up here,” he explains.

With a strong pharma/medical device sector, where more than 500 companies employ over 50,000 people, Rogan says it’s easy to make the case for Ireland. Crosby was impressed and sees some value in the ecosystem, but makes the point that most of the activity has been around large multinationals.

“Ireland has a great presence in the sector but not with early stage companies. So we are forging a new path, but a new path in a great forest with lots of trees.”

A benefit of the multinational presence is a rich talent pool, something that helped Fountain as it spent the last 10 years building its business around the sector. “All the skills are a great resource for venture-backed companies,” says Rogan.

The decision to invest in Mainstay was made because the company ticked crucial boxes for Fountain. Rogan liked the people, the technology and the space they were targeting. “We saw a huge market opportunity that was poorly served with minimal competition. Their data looked promising so we put our money to work to ask key questions in clinical trials,” he says.

“Hopefully it leads to products that will be approved by the regulator and subsequently marketed, but there is a big body of work ahead. That’s the nature of what we do.”

Press him on the appeal of such high-risk investment strategies and he comes back with compelling statistics.

“Of the 7,000 known diseases there are treatments for only 500. There is a lot still to be done,” he says.

“New apps and social media are nice to have, but what society really needs is new drugs, medical devices and diagnostics.”

Rogan describes the VC/startup relationship as a courtship and eventual marriage, with both parties in it together for the good times and bad. To extend the analogy, it helps if both sides have been married before. Mutual experience is vital, as Peter Crosby explains.

“If a VC is talking about investing in a medical device company for the first time, I know I’m asking for trouble. Most of the early board meetings would be taken up with teaching someone. With experienced investors like Fountain, we get straight down to business,” he says. “And it works both ways. The VC doesn’t want to have to waste time teaching the CEO their job.”

With such high stakes and early stage interest from the VC community, you could be forgiven for thinking that exit strategies are a regular topic for discussion at board meetings. Not so, according to Crosby.

“Thinking about acquisition early on is generally a disaster. You have to focus on the business and growing the business,” he says. “Our strategy is to build, a successful global company that’s profitable and creates value for our shareholders. If someone else recognises that value, then fine, let’s have a conversation. But anyone who tells me they are building a company to sell is delusional.”

There is nothing delusional about the results of the early trials, where 74pc of patients reported a clinically important improvement in back pain and 85pc an improvement in quality of life. Mainstay Medical is one to watch.

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