VCs Hope To Star in Own Version of Nip/Tuck –

When Gordie Nye joined Prism Venture Partners in August 2003, after more than 20 years of operating experience in the health care and consumer products markets, his immediate goal was to learn the venture market from an insider’s perspective. He then hoped to help Prism expand its life sciences technology practice into new niche areas. Of interest to Nye was the burgeoning field of noninvasive cosmetic surgery, which had received only a scant amount of VC dollars since a brief run on hair removal companies in the late 1990s.

Nye noted that more and more people were getting cosmetic procedures done, and he speculated that the trend should continue as baby boomers aged and as the technology improved to make such procedures easier and safer. “I think that there could be some real good opportunities in this space,” he says.

Nye expected entrepreneurs to jump at the chance to create the type of company in which he, and a number of other VCs, had expressed interest in backing. It was the “fund it, and they will come” principal. Moreover, Nye and others reasoned that noninvasive cosmetic surgery comes with a customer base of aging beauties, metrosexuals and neo-vanity plates, not to mention a cash-only business that negates reimbursement concerns.

But reason has been left at the doorstep in this case, as most life sciences entrepreneurs have dismissed noninvasive cosmetic surgery with a collective yawn of indifference. The result has been not just a lack of quality deal-flow, but also a lack of deal-flow quantity.

Robin Bellas, a general partner with Morgenthaler Ventures, reports having only seen two noninvasive cosmetic surgery deals over the past month, despite his having an affinity for the space. This mirrors what Nye has seen. “We’ve talked a couple of times about why so few of these companies are coming out,” Bellas says. “It’s definitely not for a lack of available capital or market potential.”

A Deeper Look

However, LipoSonix Inc., a Bothell, Wash.-based medical device company focused on noninvasive liposuction, may spark more interest in cosmetic surgery.

LipoSonix believes that it can remove about two pounds of fat in less than two hours without any of the scalpels, needles, pain or bruising commonly associated with traditional liposuction. The technique involves a handheld device that shoots ultrasonic waves beneath the skin, which, in turn, break up lipocytes, or fat cells. CEO Jens Quistgaard says that the recovery time is so short that people would schedule liposuction appointments during lunch breaks, just like they currently do with dentist visits.

LipoSonix-which was incubated by The Innovation Factory-received Series A and B funding from The Carlyle Group, Schroder Ventures Life Sciences, Versant Ventures and Accuitive Medical Ventures.

When LipoSonix launched its Series C funding round earlier this year, some 20 VC firms expressed interest in the deal, with eight going so far as to offer term sheets.

It didn’t matter that the pre-money valuation was $40 million. It didn’t even matter that LipoSonix had yet to test its product outside a Mexican clinic, or that company officials still aren’t certain where the fat cells go after being broken up by the ultrasound.

LipoSonix raised $27 million in a round led by Three Arch Partners, with new investors Delphi Ventures, Essex Woodlands Health Ventures and Pinnacle Ventures also participating. Venerable firms like Frazier Healthcare Ventures were shut out completely from the Series C.

“LipoSonix sounds too good to be true, but the potential is huge if it can actually deliver,” says Nye, whose firm decided not to submit a term sheet on the company. “Liposuction is big business even though it is an incredibly grueling experience for patients-which has become even more obvious due to the makeover shows on television-so you can only imagine what would happen if it were made into a simple, painless procedure.”

The LipoSonix device would generate revenue on a per-usage basis, which is similar to the radio frequency (RF) device that Thermage Inc. uses to tighten skin for facelifts and related procedures.

Thermage is probably the best-known noninvasive cosmetic surgery company that is venture-backed. It has received an estimated $250 million in free advertising, thanks in part to two appearances on The Oprah Winfrey Show. The company is expected to file for an IPO any day now, and could be one of the rare biotech offerings to hit its target price in 2004.

Thermage has raised about $45 million in VC funding since its 1995 inception, with investors including Institutional Venture Partners, Morgenthaler Ventures, Delphi Ventures, Draper Fisher Jurvetson ePlanet Ventures, Essex Woodlands Health Ventures and Technology Partners. Bob Byrnes, president and CEO of Thermage, declined to specify when the IPO would come, but he did say that his company has been cash-flow positive for over a year, and does not expect to raise any more venture funding.

No Viable M&A

The LipoSonix and Thermage examples make entrepreneurial disinterest in noninvasive cosmetic surgery even more curious. Why not create a company that VCs would fall over one another to invest in?

Sam Colella, managing director with Versant Ventures and a Thermage board member, believes that part of the problem involves a limited number of dermatological targets. “This isn’t like cardiovascular or the spine, where the opportunities seem limitless,” Colella says. “Dermatology is fairly narrow, and a lot of the areas-like laser hair removal or wrinkle creams-are well served.”

This lack of available breadth can be seen in the handful of companies that has braved the venture waters. Colella reports having recently seen a knock-off of Align Technology Inc., a venture-backed orthodontics company that went public in 2001 (and which currently is trading around 15% above its IPO offering price). Other investors add that a small group of RF-based facelift companies have made the rounds, but that Thermage has executed its marketing strategy so well that follow-on investments are viewed as too risky.

Another explanation for the lack of noninvasive cosmetic surgery startups could be that there still isn’t much of a proven exit market. Most life sciences company founders expect liquidity from the M&A market, as biotech IPO windows open and close with alarming regularity. The problem, however, is that buyers for this type of company have not yet been identified.

“I don’t think you can discuss this without pointing out that there is not a viable roster of acquiring companies when it comes time to exit these companies,” Nye says. “Everyone might believe that they’ll get bought by the implant maker in Santa Barbara [named Corp.], but there are only so many acquisitions that it’s going to make. Until companies like Johnson & Johnson really get involved, it could be tough for entrepreneurs to see liquidity.”