Launching a medical device startup can be a risky venture. The complexity of bringing a medical device to market often involves designing innovative products, securing major capital investment, advancing the product through Food and Drug Administration regulatory processes, and then building a scalable value chain for the product to reach its customers. These are not simple hurdles to overcome. Without relevant industry experience and expertise, many medical device startups fail. So, how can startup founders approach commercialization of their innovative medical devices? How can they overcome these hurdles so that their products can contribute to the society’s well-being?
In this Kenan Insight, Mahka Moeen, associate professor of strategy and entrepreneurship and Sarah Graham Kenan Scholar at UNC Kenan-Flagler Business School, dives deeper into her research on how employee-founded startups in the medical device sector overcome this problem by forging partnerships with their former employers’ alliance partners. This research highlight is based on Moeen’s collaborative article with Shweta Gaonkar from the Johns Hopkins University Carey Business School, “Standing on the parent’s shoulder or in its shadow? Alliance partner overlap between employee spinouts and their parents,” published in the Strategic Management Journal.
What inspired you to look at medical device startups versus other industries?
Mahka Moeen: From a personal perspective, I am fascinated with how medical innovations have increased the human being’s life span and enhanced our quality of life. We are also at the cusp of major commercial breakthroughs in personalized and nano-enabled therapies, with the potential to further contribute to our health and well-being. This personal drive has motivated me to follow the story of current medical device founders, hoping that it can yield lessons for the next generation of founders.
From a research perspective, the rationale for examining medical devices is twofold. First, the FDA regulation of medical devices allows for public access to comprehensive datasets to track whether and when startups achieve various innovative and commercial milestones. Second, there are constantly new startups and innovation occurring in this space. Previous scholars in strategy and entrepreneurship have shown that many of these startups are founded by previous employees of major medical device firms. For someone interested in studying at the intersection of employee-founded startups and alliances, the medical device industry is appropriate.
Why are alliances important for these new startups?
Mahka Moeen: Once you start a medical device company, you can rarely go on your own. Instead of learning everything from scratch, startups can get help from firms that have already learned about the FDA regulatory process, made good connections with hospitals and doctors, and have strong brand recognition with patients. The alliances with these experienced partners become a major factor for startup success and survival in the long run.
Here is the dilemma! Because the startup is young and lacks experience, it desperately needs an alliance partner to survive. But, because the startup is young and lacks experience, these experienced partners are often hesitant to form an alliance with an unknown startup. Our research focuses on how medical device startups can break this deadlock.
We suggest a special group of startups to be founded by prior employees of medical devices firms. We call them employee-founded startups. At the time of founding, these startups have the benefit of their founders’ experiences from their employment time. Further, potential partners no longer view them as young, unknown startups and instead view them through their past connection with a known medical device firm. This can help employee-founded startups to have an advantage in finding alliance partners.
Your research looks at alliance partner overlap between the employee-founded startups and their former employer company. Explain some consequences when an overlap occurs.
Mahka Moeen: Our research looked at two factors that shape the alliance partner overlap. First, the more a startup’s technologies advance the former employer’s technologies, the more likely the startup is to ally with the former employer’s partners. However, the more a startup’s products compete in the same market as those of the former employer, the less likely the startup is to ally with the former employer’s partners. Essentially, we suggest the interaction between two forces: technology seeking and rivalry avoidance. A novel and advanced technology that builds on the former employer’s technologies attracts partners toward the startup, whereas encroaching on the former employer’s established markets invites rivalrous reactions and deters partners.
Our findings are based on a large-scale dataset of VC-funded medical device startups founded between 1990 and 2013 in the United States. For our statistical alliances, we track all alliances, patent applications and FDA-approved products of employee-founded startups and their former employers.
If employee-founded startups may be concerned about angering their former employers, why do they so often take their technology to use in their startups? Why wouldn’t the startup just innovate to avoid the possible issues?
Mahka Moeen: This question shows the tension between the two factors in our study. If you compete in your former employer’s product market and start selling a similar technology or the same product, the former employer becomes defensive. Previous scholars in strategy and entrepreneurship have shown the range of legal repercussions such as patent infringement lawsuits or enforcement of noncompete contract clauses. This entry from the startup into the former employer’s market is an act of competition – you’re going after your former employer’s customers. That is why one strategy is to use the same technology as the parent but in a different market. For example, if your parent firm developed laser technology for use in surgical settings, such as optometry, your startup may take that technology but enter the dermatology market. This allows for the startup to use the expertise and knowledge gained from the former employment but enter a market where it won’t tread on the former employer’s market share. The dermatology space will have different doctors, different patients, and different settings, and this might appeal to an alliance partner too.
What else do you look forward to in your research about medical device startups?
Mahka Moeen: Medical device startup founders come from a range of backgrounds and experiences beyond employee-founded startups. When academic scientists in university labs invent medical solutions, they may choose to commercialize their scientific achievements within a startup. So, we can have academic-founded startups. Further, medical doctors, nurses and technicians are the frequent users of medical devices. It is possible that they find an opportunity to make better medical devices and seek to commercialize their solutions in a startup. So, we can have user-founded startups. The next research involves comparing the commercialization paths pursued by these startups.