According to this story on CNNMoney.com, “During the first half of 2007 VCs invested $4.8 billion in biotechnology and medical devices.” This is not just a blip on the radar.

Venture cap firms poured $2.6 billion into life sciences during the
first quarter, setting a single-quarter record. In the second quarter
VCs set a record for the number of deals signed with 223.

With all that competition for top rate investment opportunities, VCs need to either take a different approach to the market, or look beyond the conventional template for life science startups. Third Rock Ventures is doing both. The large venture firms, with their billion-dollar funds, have moved their investment focus to late-stage, near-approval products leaving a big gap at the early stage.With their just announced
$378 million fund Third Rock is going after early stage technology,
and moving the VC business model from investment-centric to a company-creation model.

According to partner Kevin Starr, “We're looking for great ideas we can turn into what we call product
engines. We take those kernels of ideas and innovation, then we turn
that into what we call a product engine company.” Third Rock wants to create a broad
scientific, biological, medical, intellectual platform can target multiple markets, disease areas or product segments.

The big untapped investment opportunity that I see in the medical device market is disruptive. Other high tech markets – banking, telecommunications, aviation – have experienced several waves of disruptive technologies that have increased product capabilities, reduced price, and greatly enlarged markets. The bastions of embedded system medical devices have thus far held off such transformations, but there are a number of such products working their way to market.

There could be a lot more disruptive medical devices transforming the medical device industry, but there are 2 principal barriers. Few entrepreneurs embody the deep understanding of the health care market with the knowledge and skills to create truly disruptive new medical devices. And if anything, potential investors are more conservative and conventional in their evaluation of investment opportunities than medical device execs.

The result is everyone seeking intellectual property (IP) that creates a long term competitive advantage – fully locked-in with air-tight patents. Very little of the disruptive technologies that have transformed other industries were based on “secret sauce” – in fact, usually the opposite has been true as new industry standards lowered costs and complexity for everyone and made a lot of new millionaires. Just look around Silicon Valley.

There will always be a few new “block buster” drugs, or novel medical devices that are dependent on IP for their long term success. An even bigger opportunity is the transformation of entire product categories by disruptive technologies that are based on industry standards or open source. This is where the conventional life sciences guys scratch and shake their heads. This disruption is creeping in around the margins of more conventional companies as a way to reduce costs and time to market. I've yet to see anyone (especially investors) visionary enough to tackle disruption head on.

Some day, some day…