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The Les Kilpatrick. Students to Start-ups. Entrepreneurial Skills Workshop Series. Start-up to Exit Workshop 6: Midcourse corrections. Schedule My background Midcourse correction Start-up process I do not like to make presentations

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Students to Start-ups


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    1. The Les Kilpatrick Students to Start-ups Entrepreneurial Skills Workshop Series Start-up to Exit Workshop 6: Midcourse corrections

    2. Schedule • My background • Midcourse correction • Start-up process • I do not like to make presentations *You all need to participate in the discussion (ask questions)** Help the process: Write down two questions • What do I want to learn about midcourse corrections? • What do I want to learn about the start-up process?

    3. Workshop #6 - Objectives • Discuss the cause of major deviations in the start-up process and how to manage these events “Midcourse corrections during the evolution of a start-up” • Discuss some tools you can use to manage the process • Help you gain a better understanding of the “start-up” process through my experience

    4. George Wallace Background

    5. Personal 50 years old Married, 3 Daughters (25 yrs, 24 yrs, 20 yrs) 2 Colorado,1 UCI 29 years in medical devices (last 20 years in OC) Active lifestyle, fitness, sports, beach….OC BMI 29

    6. Why I am here? Serial entrepreneur in medical devices (Orange County) Raised significant venture capital Managed companies from start to exit Still starting and managing medical device companies Some level of success in this process I like entrepreneurs (informed risk takers)  Some of You? * I have worked through many “midcourse corrections”

    7. Professional Experience Edwards Labs – sales, sales management, marketing, marketing management Vaser Inc. – VP Marketing & Sales, clinical & regulatory Applied Medical – VP Sales, general management Micro Therapeutics, Inc. (MTI) – Founder, CEO, Independent Director Intersect Partners – Founder, CEO, Director • Sub-Q, Inc. • Trans1, Inc. • ReShape Medical, Inc. • MindFrame, Inc. • Altura Interventional, Inc. SV Life Sciences – Venture Partner

    8. Interest in Start-Ups – Early Stage Companies American Edwards Laboratories, Inc. (1980) Entrepreneurs Advanced Cardiovascular Systems, Inc. (1982-1985) Exciting/ $’s • Balloon angioplasty • Friend was an early employee • Successful sale to Eli Lilly (IOX) Cardiometrics, Inc. (1986) Tech Development • Continuous cardiac output • Investor consultant – previous experience • Changed directions – technology • Cram down financing/revise split  sold later • Lost most of my invested capital $25K Vaser, Inc. (1986-1989) Reg/Clin strategy • Laser angioplasty – peripheral/coronary Reimbursement • VP Sales & Marketing (Regulatory/Clinical Affairs) BOD communication • Marginal clinical results • Recommended direction change/restart (Business Plan) • Fired – All of my options returned

    9. Definitions Start-up – from the beginning Individually driven – “entrepreneur” • Define the business opportunity – not the invention? • Develop the product • Take the early risk! Develop a detailed plan • Resources required • Timing • Financing/exit • Communication tool! Lesson learned from an early entrepreneur “Informed Risk Taking”

    10. An Early Entrepreneur – Christopher Columbus • Opportunity – more direct route to Asia (land & trading) • Plan – maps, resources, time • Financing – Spain (ships & supplies) Terms • Assumption miss – ran into America’s “Midcourse Correction” Columbus Spain “Americas” “Asia”

    11. Definition - Midcourse Correction Assumes you are on a journey Opportunity Assumes you have a map Plan Assumes an unexpected event Wrong assumption “Negative & Positive” Assumes you still plan on going You are still in charge, to the destination you did not get fired Assumes you may have to Resources, time, returns modify your plan “Communicate to Stakeholders”

    12. Start-Up Experience – Founder Companies Micro Therapeutics, Inc. (1993) – neuro/cath lab Sub-Q, Inc. (1995) – vascular/cath lab TranS1, Inc. (1997) – orthopedic/spine ReShape Medical, Inc. (2003) – obesity MindFrame, Inc. (2006) – neuro/cath lab Altura Interventional, Inc. (2008) – vascular/AAA repair Review History of the company Midcourse corrections Outcome

    13. Midcourse Corrections

    14. Micro Therapeutics, Inc. (1993) – (MTIX) History Business strategy developed while working full time (Andy Cragg, MD) 4th business plan became MTI (significant planning) All cost ($100K) were absorbed by Founders (20-30 hrs/wk) Notified employer of intention to leave (terminated 30 days) Seed financing – “friends & family” (investing in You!) Sent out 15 business plans to qualified venture groups Presented to 7 venture groups in 3 cities over 2 weeks • Received a term sheet on day 3 • Negotiated term & presented in parallel • Signed term sheet & closed financing in 9-10 weeks Management & facility in place (financing) Business strategy / product development • Peripheral blood clot therapy (2 products) • Neuro/hemorrhagic stroke – aneurysm & AVM embolization

    15. Micro Therapeutics, Inc. Midcourse correction #1 – product development Situation 3 product development programs in parallel • Infusion catheters – late development / process • Mechanical thrombectomy – design validation • Brain aneurysm embolization – concept testing Brain aneurysm testing – balloon exclusion/scleroses • 2 pigs died immediately • 1 pig died in follow-up testing } Did not work

    16. Micro Therapeutics, Inc. Midcourse correction #1 – product development What are you thinking? Group Balloon, catheter, protocol, model, agent did not work? What am I going to tell my investors? What am I going to tell the employees? What if I take that product out of the plan? How much time, money & milestones are on this project? Is there a better way to achieve the objective? Can I achieve the plan with a different approach? Do we have the capability/resources?

    17. Micro Therapeutics, Inc. Midcourse correction #1 – product development What did I do? Reviewed case results – can we make it work? Hired a Ph.D. biochemist with device experience Reviewed other approaches – 3 categories/56 ideas Re-planned the project – longer & more money Talked to the investors & BOD (discussed options) • Accomplishments with current capital • Financing strategy changes/return at exit Moved forward with the “NEW STRATEGY”

    18. Micro Therapeutics, Inc. Midcourse correction #1 – product development How did the company do? Completed the revised aneurysm product Completed a successful Series B financing Completed development & introduced both peripheral/BCT products Completed development of full line of neuro support products Raised capital from corporate investors (distribution) Initiated clinical trials on 2 neuro products Completed an IPO Raised private equity in public market (PIPE) Change of control financing (Warburg/ev3) / merger Currently neuro division of ev3 ($250M) * More time & money – successful investment

    19. Sub-Q, Inc. (1995) History Business strategy developed while running MTI (release) This is when Intersect Partners was formed ($100K) Sub-Q formation much easier 2nd time (much larger existing market) Two rounds of seed financing – “friends & family” Raised small Series A from a “known” second tier VC Converted consulting team to full time employees VP/GM raised Series B (very difficult) – talked to 4 groups George Wallace leaves MTI and joins Sub-Q as CEO Sub-Q completes and files PMA – Vascular Closure Device Start the Series B financing with venture & corporate targets Went to big medical meeting to negotiate terms sheet (TCT)

    20. Sub-Q, Inc. Midcourse correction #2 – financing/exit Situation Initiated commercialization in US (direct) Completing development on second generation product (clinicals) Raising $10 million to $15 million (continue commercialization) Less than $1 million ($400K/month burn) Negotiated “Bridge” financing (timing) Left for TCT to meet with 4 venture groups/4 corporate groups ** 9/11 ATTACK ** Did not get to Washington DC for TCT No return calls from venture or corporate groups

    21. Sub-Q, Inc. Midcourse correction #2 – financing/exit What are you thinking? Group Were any potential investors on those planes? Will anyone want to invest in this environment? Can I continue commercialization in this environment? Will my existing investors still complete the “Bridge” financing? How long will the “Bridge” need to last?

    22. Sub-Q, Inc. Midcourse correction #2 – financing/exit What did we do? Put a pause on the commercialization process – convert to clinical Went back to vendors and asked for payment terms Revised the plan to lower burn, stretch cash Went back to investors/BOD with revised “Bridge” plan Contacted current potential venture investors (none died) Contacted current potential corporate groups (none died) Focused financing on corporate groups for financing vs. purchase Completed corporate financing with BSC (financing/distribution/purchase option) Corporate Financing Talked to 4 groups Signed term sheet with “another” group “Last minute” term sheet came in from BSC

    23. Sub-Q, Inc. Midcourse correction #2 – financing/exit How did the Company do? Completed the financing • $15 million ($10M + 5M tranche) • Worldwide distribution with sales minimums • Option to purchase the company at pre-determined value (2 time periods) Trained the BSC sales organization (target specialist) Support target account introduction (1st generation) Completed 2nd generation clinicals OUS Prepared for manufacturing ramp up (BSC audit) 1 yr. later – first option to purchase • Business development/Sr. management • R&D/marketing group • Sales management

    24. Sub-Q, Inc. Midcourse correction #2(B) – financing/exit Situation BSC has option to purchase @ $100 million They are challenging the design, but positive Second generation product addresses remaining issues BSC is distracted by roll out of drug eluting stents If BSC does not exercise the option, $5M financing required We are confident they will meet and exercise option to purchase BSC declines the purchase option Want the performance of the next generation Sales force focus on drug eluting stents

    25. Sub-Q, Inc. Midcourse correction #2(B) – financing/exit What are you thinking? Group Why did they really turn this down? • Price – better price after rejection • No longer interested in the space • Focus on stents (sales force) • Did we miss the performance? Will BSC be interested based on Generation II? Will BSC invest the second $5 million? Will BSC buy up to the minimums? How will other potential investors/buyers view this? What will my investors/BOD reaction be?

    26. Sub-Q, Inc. Midcourse correction #2(B) – financing/exit What did we do? We pressed BSC for the basis of their decision • Too much sales time required (effect on stents) • Second generation may address this in future • Lack of management commitment – competitive technology Negotiated a plan to go direct with BSC Accelerated development of Generation II and III products Completed the $5 million BSC financing Went back to other corporate groups to determine interest Expanded sales & clinical specialists and moved forward direct

    27. Sub-Q, Inc. Midcourse correction #2(B) – financing/exit How did the Company do? Sales began to increase, cash burn increased faster Introduced Generation II product with improved results Accelerated Generation III product development Determined that commercialization would require 2 yrs. longer & $20M Corporate interest from 4 groups (including BSC) all with distribution Terminated all marketing & sales activities/people Focused on Generation III product & corporate deal Three term sheets (BSC) Accepted term sheet for purchase from relatively unknown group Never completed the deal Successfully completed a “SMOKE” sale

    28. TranS1, Inc. (1997) History Business strategy developed while running MTI, managing Sub-Q Used consultants to manage development process Two rounds of seed and Series A raised without management Completed successful clinicals OUS Determined 510K on first product was feasible

    29. TranS1, Inc. Midcourse correction #3 – achieve milestones early (positive) Situation Everything was ahead of schedule • Product development • Clinical validation • Regulatory approval process Created a need for resources • Financing • Dedicated management • Commercialization strategy George Wallace was not available • CEO, MTI • Managing Sub-Q part time • Supporting TranS1

    30. TranS1, Inc. Midcourse correction #3 – achieve milestones early (positive) What are you thinking? Group Should we hire resources local & George Wallace manage? Hire CEO local? Hire CEO & move company to this location? Raise money (Series B) then hire management?

    31. TranS1, Inc. Midcourse correction #3 – achieve milestones early (positive) What did we do? We hired a recruiter and targeted So Cal & Minneapolis We scrubbed our network for candidates Hired an experienced CEO in Wilmington N.C. (early stage/known) Moved the company

    32. TranS1, Inc. Midcourse correction #3 – achieve milestones early (positive) How did the Company do? Transition to Wilmington was smooth Product development & clinical trials on both products continued positive Recruited strong management team • R&D V.P. (TranS1 consultant) • Regulatory (former FDA director) • Sales & marketing (veteran/spine) Secured Series B & Series C venture financing (terms) Launched the 1st product IPO in 2007 (TSON) Growing public company

    33. ReShape Medical, Inc. (2003) History George Wallace sells Sub-Q, starts as Venture Partner (SV Life Science) Working on multiple projects at Intersect Partners including obesity Complete the business strategy and present to SVLS “first” Term sheet for “Seed” financing Intersect Partners completes concept development under contract Present to 4 potential Series A investors Complete Series A financing ($4.5M) Complete development and prepare for OUS clinicals US regulatory strategy will be critical (bad history)

    34. ReShape Medical, Inc. Midcourse correction #4 – management Situation Product design & testing were 90% complete OUS clinical trials were set up and ready to go Discussion with FDA were positive (without commitment) We had money in the bank to complete near term milestones George Wallace suggested hiring CEO early

    35. ReShape Medical, Inc. Midcourse correction #4 – management What are you thinking? Group Product development is complete Positive experience at TranS1 (new model) Management of the US regulatory strategy is key Management of the OUS clinicals requires significant resources Allows time for R&D transfer & recruiting Prepare for Series B financing

    36. ReShape Medical, Inc. Midcourse correction #4 – management What did we do? Revised the operating plan for earlier management Hired a recruiter & targeted “experienced CEO’s” Scrubbed our networks for candidates Hired an experienced CEO in Minneapolis, MN • Heavy negotiation for severance agreement • Managed & sold two prior early stage companies • Former GE Medical executive Moved the company to Minneapolis • Facility • Recruit key people • Transfer R&D knowledge & vendor contacts

    37. ReShape Medical, Inc. Midcourse correction #4 – management How did the Company do? Transition did not go well • CEO decisions were questioned at early stage • CEO did not like the Intersect Partner contract • CEO treated Intersect personnel poorly • CEO terminated all consulting relationships • CEO hired average people Product development issues & delays came up CEO attacked Intersect Partners over issues & delays CEO approach BOD about Intersect termination BOD decided to terminate CEO & pay severance

    38. ReShape Medical, Inc. Midcourse correction #4 – management What did Company do? Manage the departure of the CEO Revise the operating plan under Intersect Partners management Extend the Series A financing by $3 million Terminate the employees/close Minneapolis facility Complete the design & testing & start OUS clinicals Design improvements & OUS testing Met with FDA on US clinical trial design Start recruiter on CEO search (So Cal target) Hired CEO (OC) recruited team Initiated transfer from Intersect Partners Completed Series B financing (new plan) Completed 100th OUS clinical Focused on US clinical trial strategy (PMA)

    39. MindFrame, Inc. (2006) History Neuro opportunity investigated with industry R&D executive Business strategy developed with R&D executive Presented business strategy to SVLS (ReShape Medical) Term sheet for “Seed” financing (with full time employee) Intersect & employee complete concept development (3 products) Present to 2 venture groups with neuro experience (Series A) SV Life Sciences submits term sheet as sole investor * Complete OUS clinicals/US clinicals, exit early * Return metrics work for single investor/not multiple Product development focuses on single approach

    40. MindFrame, Inc. Midcourse correction #5 – unanticipated clinical results Situation Product design & testing demonstrated positive results Two competitors were building the market with inferior products New product testing was showing encouraging results MindFrame had an experienced neuro team Waited two months for our first patient Treated our first patient • Product worked well (as designed) • Poor clinical result Treated two additional patients – same results

    41. MindFrame, Inc. Midcourse correction #5 – unanticipated clinical results What are you thinking? Group There must be an issue with patient selection The physician might not be using the product correctly Did the product work the way it was suppose to? Why did competitive products work in similar circumstances? Will the physician, hospital & other investigators continue? My plan has just changed significantly (cash)

    42. MindFrame, Inc. Midcourse correction #5 – unanticipated clinical results What did we do? Suspended clinicals at 1st clinical site Reviewed case results with clinical experts Modified the protocol • Age of blood clot • Length of blood clot • Location of blood clot Completed site expansion process to improve enrollment Modified the device so that it is longer Proposed 5 different operating plans to BOD * Clinical results prior to financing or sale

    43. MindFrame, Inc. Midcourse correction #5 – unanticipated clinical results How did the Company do? Reduced burn rate by 50%, buy time • Intersect Partners fees • Operating expenses Expanded clinical sites Completed product change Looking for patients

    44. “Midcourse Correction” Takeaways • Deviation from your plan happen continuously • Change in your assumptions • Identification of a critical need • Significant event • Midcourse corrections can be generated by negative & positive events • Direction changes require communication–revised plan Bigger the change, more communication required

    45. Midcourse Correction Timing – “Anytime” • Company formation • Intellectual property development • Financing • Product development • Clinical evaluation • Regulatory approval • Marketing & sales • Reimbursement • Distribution • Product offering • Pricing • Promotion • Exit

    46. Lessons – Midcourse Corrections • Take time to plan • Challenge your assumptions • Model sensitivity of changes • Have contingency plans for key assumptions • Model changes caused by events or results & communicate • Communicate informally & formally on all key changes • Only change your operating plan formally (BOD)

    47. Start-Up Process

    48. Developing Your Plan Your plan is the best communications tool you have in the start-up process Communications Requirements • Investors – individuals, venture capital, private equity, corporations, debt, Wall St. • Team – management, employees, BOD • Advisors – lawyers, accountants, consultants, vendors, banks • Customers – physicians and hospitals * Every plan will change continuously * Major changes require communications

    49. The Planning Process (example) • Start from the exit and work backwards (opportunity value) • Build value through the accomplishment of key milestones • Define the key assumptions & resources required for each milestone “Series Investing” • Measure & report each key assumption • Review results against plan with management & advisors frequently “Good & Bad Results” “Planning is a Communications Process”

    50. 5-7 Year Operating Plan • Develop your own opportunity specific model • P&L • Balance Sheet • Cash Flow • Make it flexible; model changes • Sub document (detail) • Project schedule /cost • Clinical data accumulation / cost (OUS/US) • Hiring plan • Regulatory time line • Milestones