Start-up to Exit

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The Les Kilpatrick
Students to Start-ups
Entrepreneurial Skills Workshop Series

• Start-up to Exit
• Workshop 6 Midcourse corrections

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• 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?

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• 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

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• George Wallace
• Background

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• 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

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• 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

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• 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

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• 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 Reimburse
  ment
• VP Sales Marketing (Regulatory/Clinical
  Affairs) BOD communication
• Marginal clinical results

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• 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

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• 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 Americas Midcourse
  Correction

Columbus
Spain
Americas
Asia
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• 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

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• 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

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• Midcourse Corrections

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• 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

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• 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
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• 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?

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• 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

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• 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

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• 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)

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• 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

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• 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?

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• 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

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• 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
• RD/marketing group
• Sales management

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• Sub-Q, Inc.
• Midcourse correction 2(B) financing/exit
• Situation
• BSC has option to purchase _at_ 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

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• 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?

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• 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

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• 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

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• 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

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• 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

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• 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?

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• 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

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• 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
• RD 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

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• 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)

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• 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

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• 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 RD transfer recruiting
• Prepare for Series B financing

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• ReShape Medical, Inc.
• Midcourse correction 4 management
• What did we do?
• Revised the operating plan for earlier management
• Hired a recruiter targeted experienced CEOs
• 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 RD knowledge vendor contacts

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• 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

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• 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)

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• MindFrame, Inc. (2006)
• History
• Neuro opportunity investigated with industry RD
  executive
• Business strategy developed with RD 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

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• 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

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• 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)

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• 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

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• 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 communicationrevised
  plan
• Bigger the change, more communication required

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• 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

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• 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)

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• Start-Up Process

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• 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

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• 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

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• 5-7 Year Operating Plan
• Develop your own opportunity specific model
• PL
• 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

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Milestones 2008
1st OUS Clinicals 11/08
OUS Clinicals Complete 06/09
CE Mark Approval 09/09
IDE Approval 10/09
US Trial Start 11/09
Hire CEO 02/10
File 510(k) 11/10
Complete US Trial 04/11
FDA Approval 11/11
1M Series A Extension 06/09
Series A Cash Out 12/09
Series B Financing 11/09

• Examples

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• Intersect Partners, LLC Medical Device
  Incubator
• George Wallace Andrew Cragg, MD (Interventional
  Radiology)
• Medical device incubator start manage
  multiple companies simultaneously
• 3 experienced RD managers/engineers, 1 business
  development analyst
• 5,000 sq. ft./San Clemente Quality System
  supports multiple opportunities
• Consultants vendors experts in IP, legal,
  development, quality, regulatory clinical
• Define opportunities, start and finance
  companies, develop products
• Equity ownership, development fees
• Twice as fast on half the capital

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• Medical Device Start-Up Process (Communications)
• Define the un-met clinical need
• Develop a plan to address this need
• Raise capital to finance your plan
• Recruit needed resources
• Develop your product or service
• Prove that your product works Intersect Partners
• Gain approval to sell your product
• Market penetration
• Served market
• Un-served marked
• The Plan

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• Intersect Partners Incubation
• Internally developed (all functions)
• Review 3-5 un-met clinical problems
• Develop unique solutions (device)
• IP protection prototyping
• Develop business strategy plan
• Review with venture firm (SV Life Sciences)
• Select best opportunity and negotiate financing
  (more than 1)
• Develop the product to clinical proof of concept
• Recruit management team
• Support at BOD level (Exit?)
• Manage 3 opportunities different states

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• Intersect Partners Incubation
• Externally generated (partial functions)
• From venture firms, entrepreneurs, physicians,
  investors, industry contacts
• Different phases of development financing
• Negotiated fees ownership
• Have not completed a deal yet
• Dont like the area or approach (opportunity)
• Control of process (vs. financing)

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• Intersect Partners, LLC - Capabilities