Saturday, April 22, 2006

Public-Private Investment Synergy Helps Grow Startup Firms

Stories in today's Pittsburgh Post-Gazette and this week's Pittsburgh Business Times report that medSage Technologies has just raised over $770,000 in new venture funding, 50% more than its original goal for this funding round. This is good news for the company and for the Pittsburgh Region.

But there's a bigger story behind medSage. It's a good example of how the region's technology development organizations can encourage private investment in startup firms.

What is medSage Technologies? The company has developed a combination of web-based software and a proprietary voice recognition system to enable home health care providers to better manage supply re-orders, medication refills, and equipment rentals. This is a significant and growing market, in light of the aging population nationally and the trend toward providing more health care in home settings rather than in expensive hospitals or nursing homes. Innovations that cut costs and improve the quality of service can be a win-win for the health care system and the patients it cares for.

But like any startup, a key is finding the capital needed to develop the product/service and obtain customers. After the initial "family & friends" investments, the second phase of funding for medSage came from a combination of private angel investors and two local technology development organizations -- the Idea Foundry and the Pittsburgh Life Sciences Greenhouse, which worked together to make a combined $200,000 pre-seed investment. The third phase of funding, which medSage completed last year, included an investment by Innovation Works as well as Blue Tree Allied Angels and individual investors. Innovation Works also participated in the latest round.

medSage has credited Idea Foundry, Innovation Works, and the Life Sciences Greenhouse as having played a critical role in its success to date. It wasn't just the technical assistance or the money the three organizations provided, although those were extremely important. The validation they provided, i.e., the willingness of the organizations to invest in the company, helped encourage private angel investors to do so, too. This was particularly important during a period when angels were very "tired," i.e., they had a lot of money invested in companies without getting a return, due to the state of the economy and the venture market. The majority of investments medSage received in each funding round came from private investors, but the funding from the non-profit economic development agencies (which in turn came from both public and philanthropic sources) was catalytic. Without the funding from Idea Foundry, Innovation Works, and the Life Sciences Greenhouse, the private investments might not have been made, and the company might have failed, not due to bad technology or a bad business model, but the difficulty of finding adequate investment in a timely fashion. State budget cuts for these organizations could hurt their ability to help other startup companies attract private investment.

medSage is also an example of how some startup companies can grow without traditional venture fund investment, as Post-Gazette reporter Cori Shropshire described in more detail in her April 19 story. Since the Pittsburgh Region has fewer venture capital funds than would be desirable, it's good that not every company needs to pursue the venture capital route, but the region also needs more angel investors here, too. One route is to have more high net worth individuals join groups like Blue Tree Allied Angels; another is the creation of an Angel Fund in which individuals can invest, such as the fund that Innovation Works is currently setting up.

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