Archive for January, 2015

header_02The Marlinspike* CEO
An in-depth management guide for C-Suite executives, investors and advisors.
by Jim McHugh – McHugh Co. jim@mchughco.com and a member of Gerbsman Partners Board of Intellectual Captial

January 2015

In this issue:
The Blizzard and The Superbowl
CEOs: Does Your Team Have Control of the Ball?
Technology Telltales: Evernote Revisited


The Blizzard and The Superbowl

Happy New Year! Thank you again for reading The Marlinspike CEO. My purpose in writing these is not to give you all the answers (not possible…) but it’s to make you think more about a particular aspect of running a company in a different way. Or, to cause you to think about a subject you may be ignoring?

Today’s topic is related to something you probably have heard about recently (unless you live under a rock). Footballs, processes, roles and playbooks…

For those of you in the Northeast, I thought this newsletter would help pass the time on your snow day. For those of you in places that are sunny and warm, we understand your predicament!

Please keep sending along your comments…I always enjoy reading them.

Go Pats,


Also check out a new, helpful way to scan documents in Technology Telltails
“The only players who survive in the pros are the ones able to manage all their responsibilities.” — Tom Brady, Quarterback of the New England Patriots

Football, rugby, or any other sport organized around a finely-tuned playbook, requires coaches and staff to understand their roles and and for players to execute plays in both familiar or unplanned situations. Each player is fully aware of his role and responsibilities, the roles of others and has studied the plays. A solid playbook enables a cohesive team to maintain control of the ball (even off the field…) and win.

Does your company’s playbook have:

1.  unclear roles and responsibilities?
2.  players with missing skills?
3.  undefined or unfollowed business processes?
This all too common, weak people/process combination creates lots of broken plays, corporate fumbles, pig piles, tangled situations and outright conflict over ‘who does what and how’.

Thinking Horizontally

Many organizations are driven (dominated?) by a particular function such as engineering, sales, production, or in the case of professional service firms, project delivery. I’ve worked with strong CEOs who are able to push the business forward by being grounded in one of these personal skill sets. This functional strength can be a real asset, and in many cases, it was the driving force that launched the company and enabled it to grow.

As a company’s overall operations increase in complexity, great execution only happens if all the business functions work together seamlessly. However, some of the same CEOs that are grounded in one strong functional skill set don’t make needed changes to their process/operational playbook as the company evolves. The CEO may ignore or trivialize the importance of looking at the overall business ‘horizontally’.

The Line of Scrimmage

Most of the confusion I’ve experienced related to process playbooks has been in organizations that have a complex sales process that involves:

contracts/proposals that have unique conditions
custom or semi-custom products
customer orders with product/service specifications that could change from order to order
high customer expectations related to quality, testing, product acceptance
Examples of businesses that fit these order profiles are: precision machining, various professional service firms, specialty custom industrial manufacturers, chemical formulations, and lots of others you could name.

Piling On –> Breakdowns in Key Processes = Trouble

What happens when the process playbook doesn’t exist, is getting dusty on the shelf, or needs a complete overhaul?

Piling on happens when: a) sales doesn’t get the order specs correct…there are flaws in design, scope, terms; b) estimating creates an inaccurately costed order with incorrect pricing; c) engineering designs what sales specified but not what the customer ordered; d) manufacturing builds what engineering designed; e) the product fails customer tests; f) rework is needed; g) and now you have a real mess

What are some of the negative impacts on the business performance when a company doesn’t have a clear playbook or deviates from the process playbook? Here’s a sample:

the NFL gets involved 🙂
dissatisfied customers (Stuck in the Rut)
lost customers
poor financial performance – losses, cash flow hurt
quality deficiencies
production mistakes
internal conflict over cross functional issues and personalities
demoralized employees
Solutions: How to prevent pig piles, fumbled balls and losing the game

1) Establish process flows for unique as well as routine projects and stick to them.

2) Based on the particular process, define clear roles and responsibilities. I do this. You do that. Hold people accountable.

3) Establish a clear communication system horizontally across the process chain and vertically through management so that glitches are caught early.

4) Management, through training, repetition, and even incentives, needs to reinforce the use of the process playbook. In organizations that tend to operate in a seat-of-the-pants mode, this may be the most difficult problem to solve.

5) Revisit processes on a regular basis. What’s working? What needs tweaking? Changes in personnel, especially when the products involve technical expertise, might invite revisions to the playbook.

Does your company have control of the ball? If not, are you ready to ‘think horizontally’ and get your playbook in order?

Read Full Post »

Gerbsman Partners (www.gerbsmanpartners.com) has been retained by Palyon Medical Corp. (www.palyonmedical.com) to solicit interest for the acquisition of all, or substantially all of Palyon Medical Assets.

Headquartered in Santa Clarita, California, Palyon Medical was in the process of developing the P1005 Programmable Implantable Drug Delivery System and the M21 Constant Flow Implantable Drug Delivery System, drug delivery systems primarily for the treatment of spasticity and intractable pain. The company has identified applications of the technology for other medically important and commercially attractive conditions where chronic, localized drug delivery address unmet medical need. The core technology platform was originally developed and acquired from Fresenius Medical in Germany. Palyon Medical has a small wholly owned subsidiary in Bad Homburg, Germany that has been involved the development aspects of the pump and is in the process of being shut down.


The information in this memorandum does not constitute the whole or any part of an offer or a contract.

The information contained in this memorandum relating to the Palyon Medical Corp. Assets has been supplied by Palyon Medical Corp. It has not been independently investigated or verified by Gerbsman Partners or their respective agents.

Potential purchasers should not rely on any information contained in this memorandum or provided by Gerbsman Partners (or their respective staff, agents, and attorneys) in connection herewith, whether transmitted orally or in writing as a statement, opinion, or representation of fact. Interested parties should satisfy themselves through independent investigations as they or their legal and financial advisors see fit.

Gerbsman Partners, and their respective staff, agents, and attorneys, (i) disclaim any and all implied warranties concerning the truth, accuracy, and completeness of any information provided in connection herewith and (ii) do not accept liability for the information, including that contained in this memorandum, whether that liability arises by reasons of Palyon Medical Corp.s’ or Gerbsman Partners’ negligence or otherwise.

Any sale of the Palyon Medical Corp. Assets will be made on an “as-is,” “where-is,” and “with all faults” basis, without any warranties, representations, or guarantees, either express or implied, of any kind, nature, or type whatsoever from, or on behalf of Palyon Medical Corp. and Gerbsman Partners. Without limiting the generality of the foregoing, Palyon Medical Corp. and Gerbsman Partners and their respective staff, agents, and attorneys, hereby expressly disclaim any and all implied warranties concerning the condition of the Palyon Medical Corp. Assets and any portions thereof, including, but not limited to, environmental conditions, compliance with any government regulations or requirements, the implied warranties of habitability, merchantability, or fitness for a particular purpose.

This memorandum contains confidential information and is not to be supplied to any person without Gerbsman Partners’ prior consent. This memorandum and the information contained herein are subject to the non-disclosure agreement attached hereto as Exhibit A.

Company Profile

Palyon Medical develops and manufactures implantable drug delivery systems for the treatment of unmet medical needs where chronic, localized delivery is required. The initial applications of the technology are in the fields of chronic pain and spasticity. Other potential indications include pulmonary hypertension, diabetes, lysosomal storage disorders and other neurodegenerative diseases. Spun out in 2003 from Fresenius Medical, the technology has been proven in over 100 patients. Palyon has an extensive patent portfolio with 21 US issued, 20 pending, 11 issued Europe and 2 active EP patents.

In 2009, Palyon Medical raised $21 MM in Series A funding. The proceeds were targeted to complete the transformation of Palyon’s constant flow pump into a programmable pump for the US market. Baird Venture Partners led the round with Hambrecht & Quist Capital Management, Fountain Healthcare Partners, BB Biotech Ventures, Cross Atlantic Partners and Arcus Ventures also participating in the transaction. In 2013, the company raised an additional $17 million in Series B funding, from the current investors and one additional individual investor to facilitate EU registration and initial commercialization.

In 2013 Palyon conducted a single center clinical pilot study in Austria. See Regulatory and Clinical Assets section, below. The trial, scheduled for 10 patients was closed after 7 patients were enrolled due to suboptimal delivery accuracy. Palyon has identified what it believes is the root cause of this flow rate issue and has implemented design and controls to mitigate such an occurrence in the future.

In December of 2014, the Board of Directors of Palyon Medical made a strategic decision to maximize value at Palyon Medical and as such, have retained Gerbsman Partners to do a “Date Certain M&A Process”.

Value Proposition

Palyon Medical believes its assets are attractive for a number of reasons:

1.  Manufacturers in this market segment have dominated the implantable pump industry but have experienced recalls and other challenges related to device design. In our opinion, there is a need for a safer more consistent pump which leads to a significant commercial opportunity. To the best of our knowledge, other competitors in this field have made incremental advances but lack the safety and performance advantages that Palyon’s core technology provides.

2.  Palyon is able to offer a flexible platform that supports both constant flow and programmable pump products based upon a common core technology. Palyon has also demonstrated the viability of its implantable pump technology for insulin delivery.

Intellectual Property Assets

Palyon Medical has a strong and broad patent portfolio, which initiated through transfer of assignment from Fresenius Medical and subsequently grew through internal innovation management process. Palyon also has significant international patent coverage, with protection extending in various countries including US, Germany, Austria, France, Great Britain, Japan, Canada and Mexico.

Palyon patents provide a broad coverage for the core aspects of Palyon technology focusing on drug propulsion, safety, flow control, and key design and clinical features. We believe the following are some of the key areas where Palyon patents strength is unmatched:

· Only device that is capable of monitoring and accordingly adjust the flow rate with use of two sensors, providing a safe and accurate delivery

· Broad coverage on dual reservoir systems, which address a long-standing unmet clinical need for simultaneous delivery of two independent drugs

· Application for implantable insulin delivery using Palyon core technology, as a potential entry into the large diabetes market

U.S. Registered Trademarks

· Palyon (US) – 86/014,915

· Palyon (Community Trademark) – 005373774

U.S. Patent Portfolio

· 21 issued patents

· 20 pending US Patents

OUS patent Portfolio

· 11 issued patents, with varying coverage in Germany, France, GB, Spain, Italy, Japan etc.

· 2 active EP cases

o WO2013097956 – Implantable infusion pump capable of constant and variable flows, and with ability to adjust flow based on sensor input

o WO2014159866 – Dual rate implantable insulin pump with basal and bolus capability using Palyon core technology

Potential acquirers:

· Manufacturers and developers of implantable drug delivery systems

· Medical device and pharmaceutical companies developing targeted drug delivery systems

Core Technology Platform


Palyon utilizes a common core of unique and proven technology across a platform of implantable drug-delivery systems

Advanced Safety Features


P1005 Programmable Implantable Drug Delivery System Assets

The Palyon P1005 Programmable Implantable Drug Delivery System is based upon Palyon core technology

* Unparalleled accuracy from 100ul/day to 2000 ul/day due to flow monitoring and feedback control.

* The target 20 ml refill volume is modular and extensible to 40 ml.

* Propellant driven system provides laminar flow and long battery life (target 10 years)

* Able to detect catheter occlusion and pocket fill events.

* Palyon pump’s pressure sensors provide capabilities unique among implantable pumps.

t Real-time in-line flow control; pump self-adjusts to maintain programmed flow rate countering any changes in elevation or day-to-day variances in atmospheric pressure

t Maximum refill safety – sensors confirm presence of needle in refill port, avoid risk of potentially fatal “pocket fills”.

t Generates alert if catheter patency is compromised.

* Highly Accurate Laminar Flow

t Propellant drive and resistor capillary produce laminar flow, improved accuracy and stability of drug delivery.


Delivery Device assets

· Design History File

· SolidWorks CAD models and detailed drawings

· Engineering documentation, test and analysis reports

· Embedded Software Code, Requirements and Test Procedures for Implantable Pump and RF Wand

· Software Code, Requirements and Test Procedures for Clinician Programmer

· Electronics System Design including schematics, PCB layout and component specifications for Pump and RF Wand

· Assembly fixtures and molds for injection molded components

· Manufacturing process layout and documentation

· Detailed assessment of the device design and requirements for transferring from clinical to commercial production

· Component Inventory for key parts

M21 Constant Flow Implantable Drug Delivery System Assets

The Palyon M21 Constant Flow Implantable Drug Delivery System is based upon Palyon core technology

* Modular with common design elements with Programmable Pump.

* Current target is 20 mL refill volume; modularity allows expansion to 40 mL.

* Unique flow regulator to prevent large fluctuations in flow resulting from environment changes

* Propellant and resistor technology ensures non-pulsating flow.

* Lightest and smooth contours with use of either Titanium or Polymeric material.

* Safety guard and radio-opaque catheter access port.

* Inherent low-pressure feedback on refill port to avoid pocket fills.

Delivery Device assets

· SolidWorks CAD models and prints

· Prototype parts


Marketing Assets

The marketing assets of Palyon Medical provide detailed business intelligence for companies developing competitive technologies for the treatment of spasticity and intractable pain.

· Implantable Pump EU Market Analysis

o List of EU Markets that accept CE Mark

o Market Regions Overview

o Competitors – Medtronic, Flowonix Medical Inc, Medallion Therapeutics, Tricumed Medizintechnik GmhH, Codman (J&J)

o Differentiating Constant Flow vs Programmable Pumps

o Business opportunity for Constant Flow Pumps

Potential Acquirers:

· Companies developing technologies for the treatment of intractable pain and spasticity

· Companies focused on developing therapeutics for localized delivery to specific regions in the body – e.g. liver, brain, spinal cord, pulmonary veins etc.

· Drug delivery companies seeking to broader their technology offerings and product development capabilities.

· Orthopedic / Neurostimulation companies seeking to broaden their product offering to their target customers.

Manufacturing and Physical Assets
Palyon Medical has applied a strategy to combine internal engineering resources for product development, in collaboration with external contract manufacturing. Hence Palyon physical assets reside at both locations, at Palyon facility in Santa Clarita as well as at Palyon Contract Manufacturer in San Jose, California. These equipment are used in manufacturing, testing and product development.

A partial list of physical assets used in manufacturing includes two autoclaves, two large incubators, highly accurate scales with isolation chambers, environment chambers/ovens, packaging and forming machine from Medipack, ultrasonic cleaners, UV curing equipment, pressure sensors, pressure controllers, vacuum pumps and chambers, microscopes, syringe pumps etc.

A partial list of physical assets used in product development includes multiple pressure sensors and controller, National instrument equipment, soldering equipment, ovens, Sensirion flow measurement, various lab tools and gages, large glove box, multimeters, sound pressure meters, ultrasonic cleaner, various injection molds, sensors and actuators, microscope with built-in camera, test fixtures etc.

Regulatory and Clinical Assets

Clinical Study

Palyon Medical sponsored an open label, prospective, pilot study on the use of the Palyon Model P1001 Programmable Pump System to deliver preservative-free morphine sulfate, for the treatment of patients with chronic pain that has not responded to other types of treatment. Through this study Palyon Medical planned to characterize the safety and performance of this drug delivery platform.

The proposed study was performed at a single site in Austria:
Kabeg Klinicum Klagenfurt
Feschnigstrasse 11
A-9020 Klagenfurt am Wöthersee
Prim. Univ. Prof. Dr. Rudolf Likar MSc, Principal Investigator

The study enrollment plan included of up to ten patients. The primary study endpoint was the proportion of subjects free of serious adverse events at six months after implant of the P1001 implantable drug delivery system.

Enrollment started in June 2013; seven subjects were enrolled. Of these, three received a pump implantation. In addition to the three enrolled patients who received a pump implantation, three observational patients (not enrolled in the study) were implanted with Palyon pumps prior to the start of the study. A total of six patients were implanted with a Palyon pump.

Five Serious Adverse Events (SAEs) were observed in enrolled subjects. Three of the SAEs in enrolled subjects involved over-delivery of medication to the subject. As a result of over-delivery, the pump reservoir became empty sooner than expected, causing the subject to experience withdrawal symptoms. One observational patient also experienced this event. In all cases, medication successfully resolved the issue. The other two Serious Adverse Events in enrolled subjects were also successfully resolved. No adverse events were observed in the four subjects who were enrolled but did not receive a pump implantation.

All enrolled subjects with implanted pumps received drug therapy from the device. Subjects typically experienced expected drug-related adverse events, such as restlessness, dizziness, headache, nausea, and other symptoms, that are commonly seen in patients who are just starting therapy with a drug pump.

No subject or observational patient experienced an unexpected adverse event. All refill procedures were completed successfully. No life-threatening events of any kind were observed. However, device-related problems caused pump explant in all cases where a pump was implanted. These device-related problems included premature battery depletion in each of the three observational patients. This technical issue was successfully addressed by the time the next three subjects were implanted.

Because implanted pumps did not perform as expected, Palyon stopped the study on 26 Sep 2013. By the end of September 2013, all implanted subjects were explanted. All subject participation was withdrawn. All subjects and observational patients continued to receive alternative therapy at the study site.

The study is closed. All filings associated with study closure have been completed. Palyon believes that the technical issues observed during the clinical study are well addressed in the improved pump design and quality system procedures represented by the P1005 system. Over 1.5 years of real time test data demonstrated that the solutions put in place to solve the premature battery depletion were effective.


Palyon Medical implemented a full Quality Management System per EN ISO 13845:2003. In 2013, Palyon received certification of compliance to this standard from LNE/GMED, a French Notified Body. As a cost-savings measure, Palyon allowed this certificate to expire. Palyon believes that re-certification could be easily achieved following a Quality System audit by a Notified Body.

Achieving CE-mark for Palyon’s next-generation pump system, such as the P1005, will depend critically on completing the device design and testing, which is in progress. Following completion of the device technical file, examination of the technical file by a Notified Body will be required for CE certification.

Potential Acquirers:

· Companies developing technologies for the treatment of intractable pain and spasticity

Key Personnel (Palyon Medical Corporation.):

· Mike Sember-President and CEO

o Mike has more than 40 years of comprehensive experience working with public and private pharmaceutical, biotech and medical device companies in the U.S. and Europe. He has experience in the areas of R&D, business development, and corporate finance, including involvement with over 100 licensing transactions and corporate acquisitions. Previously, Mike served in senior positions with Marion Laboratories (now called Marion Merrell Dow) and Elan Corporation. He has served on the Boards of 14 public and private companies and also on the Advisory Boards of several venture capital firms.

· Manish Vaishya, PhD -Chief Technology Officer/ VP of R&D, Manufacturing

o Manish has over 20 years of experience in a broad range of industries, with organizations including Palyon, Advanced Bionics and Siemens. His role spans technical leadership, program management and manufacturing. He has successfully led many innovations, with 3 issued and 15 pending patents in fields of digital control, acoustics and implantable insulin pump. While leading the research and development teams, his particular focus has been on design, analysis, manufacturability and reliability.

· Jay Yonemoto – VP of Program Management / Business Development

o Over 25 years of experience in the medical device industry, developing both Class II and III devices; serving in engineering leadership and program management roles at companies such as Medtronic Minimed and St Jude Medical as well as smaller companies such as Palyon Medical and Chad Therapeutics. He has experience in electrical/software driven devices such as surgical generators, oxygen conserving devices, implantable cardio defibrillators and external as well as implantable pumps.

· Chris Reiser, PhD – Director of Clinical, Regulatory and Quality Affairs

o Chris has worked in medical device companies for over 20 years, applying his technical expertise to all aspects of the product life cycle. He developed state-of-the-art quality systems covering all aspects of quality and regulatory functional deployment, and has directed pivotal device trials in the USA and EU. His expertise includes Class II/III devices in multiple medical specialties, covering surgical tools, disposables, active and passive implantables, and medical electrical equipment. He has served as VP/Director extensively in start-ups (Palyon, Spectranetics, Lasertechnic, Cymer) and in large companies (Boston Scientific, J&J).

Board of Directors: (previous and current)

Michael Sember , Chairman and CEO *

Nicole Walker, Robert W Baird- Chicago *

Dan Omstead, Tekla Capital Management (formerly H&Q)-Boston

Aidan King –Fountain Healthcare Partners-Dublin *

Juerg Eckhardt, BB Biotech-Zurich

Alfred Scheidegger, PhD- Nextech Invest Ltd-Zurich

* indicates current board member

The Bidding Process for Interested Buyers
Interested and qualified parties will be expected to sign a nondisclosure agreement (attached hereto as Exhibit A) to have access to key members of the management and intellectual capital teams and the due diligence “war room” documentation (the “Due Diligence Access”). Each interested party, as a consequence of the Due Diligence Access granted to it, shall be deemed to acknowledge and represent (i) that it is bound by the bidding procedures described herein; (ii) that it has an opportunity to inspect and examine the Palyon Medical Corp. Assets and to review all pertinent documents and information with respect thereto; (iii) that it is not relying upon any written or oral statements, representations, or warranties of Gerbsman Partners, or their respective staff, agents, or attorneys; and (iv) all such documents and reports have been provided solely for the convenience of the interested party, and Gerbsman Partners (and their respective, staff, agents, or attorneys) do not make any representations as to the accuracy or completeness of the same.

Following an initial round of due diligence, interested parties will be invited to participate with a sealed bid, for the acquisition of the Palyon Medical Corp. Assets. Sealed bids must be submitted so that it is actually received by Gerbsman Partners no later than Friday, March 6, 2015 at 3:00 p.m. Central Daylight Time (the “Bid Deadline”) at Palyon Medical Corp.s’ office, located at 28432 Constellation Road, Santa Clarita CA . Please also email steve@gerbsmanpartners.com with any bid.

Bids should identify those assets being tendered for in a specific and identifiable way.

Any person or other entity making a bid must be prepared to provide independent confirmation that they possess the financial resources to complete the purchase where applicable. All bids must be accompanied by a refundable deposit check in the amount of $200,000 (payable to Palyon Medical Corp., Inc.). The winning bidder will be notified within 3 business days of the Bid Deadline. Unsuccessful bidders will have their deposit returned to them within 3 business days of notification that they are the unsuccessful bidder.

Palyon Medical Corp. reserves the right to, in its sole discretion, accept or reject any bid, or withdraw any or all of the assets from sale. Interested parties should understand that it is expected that the highest and best bid submitted will be chosen as the winning bidder and bidders may not have the opportunity to improve their bids after submission.
Palyon Medical Corp. will require the successful bidder to close within a 7 day period. Any or all of the assets of Palyon Medical Corp. will be sold on an “as is, where is” basis, with no representation or warranties whatsoever.

All sales, transfer, and recording taxes, stamp taxes, or similar taxes, if any, relating to the sale of the Palyon Medical Corp. Assets shall be the sole responsibility of the successful bidder and shall be paid to Palyon Medical Corp. at the closing of each transaction.

For additional information, please see below and/or contact:

Steven R. Gerbsman

Gerbsman Partners

(415) 456-0628

Kenneth Hardesty

Gerbsman Partners

(408) 591-7528


Read Full Post »


Saw Chris Botti with friends last night.  THE BEST – highly recommend anyone that has not heard him or see him – do so.

I have seen Elvis, Harry Connick, Frank Sinatra, Josh Groban and others who put on a fantastic show and Chris Botti is up there with them.  Great Entertainer

Chris Botti web site

Read Full Post »

Machiavelli once said that “politics have no relation to morals.” But do politics have any relation to fashion? It’s a question that continues to rattle the very foundations of this republic — one that The Huffington Post attempted to tackle on the night of the biggest political speech of the year. We’re proud to present our exploration of #SOTUstyle.

How did we stumble upon this idea? Well, we realized that asking members of Congress political questions as they walk the halls on their way to the State of the Union is a time-honored tradition — in fact, it’s so time-honored, it’s become a little dated. So we decided last year to confront lawmakers with the one question their communications teams might not have given them a pre-packaged answer for: Who are you wearing?

This year, as we headed to the Capitol to do it all again, we took not just our cameras but also our in-house style expert, Lauren Rothman, author of Style Bible: What To Wear To Work. We donned our personal best, too, in the hopes that we might inspire some on-trend choices to next year’s address (or maybe just a little daring leather at a committee hearing this spring).

From TV-friendly bright colors to wives picking out clothes, the answers were not disappointing — and we got a couple of incredible stand-outs.

Watch the video above to hear which designers your top elected representatives, including leaders from both parties like Sen. Marco Rubio (R-Fla.) and Sen. Chuck Schumer (D-N.Y.), were wearing to hear President Barack Obama make his big speech. And let us know — in the comments section below, or on Twitter using the hashtag #SOTUstyle — whose ensembles you loved or hated.

We’ll get you started with this rather, um, interesting sighting we made early in the night:


Go to link below to see this video – really good

Read Full Post »

VC Firms Rain Down Cash on Tech Startups, Is Bubble Brewing?

By BRANDON BAILEY AP Technology Writer

Cash rained down on startups in 2014, as venture capitalists poured a whopping $48.3 billion into new U.S. companies — levels not seen since before the dot-com bubble burst in 2001. Strong technology IPOs are luring investors chasing the next big return, but with valuations this high, critics suggest some investors may be setting themselves up for a major fall.

“It’s not that many businesses aren’t viable, but the question is, what are you paying for them?” said Mark Cannice, a professor of entrepreneurship at the University of San Francisco.

Venture funding surged more than 60 percent in 2014 from the prior year, most often fueling software and biotechnology companies, according to a new “MoneyTree Report” issued by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters. But the money wasn’t spread around to buoy many more companies. A few just got huge piles of cash.

Last year saw a record 47 “mega-deals,” defined as investments of more than $100 million. That’s nearly twice as many as reported in 2013, said Mark McCaffrey of PricewaterhouseCoopers, who leads the accounting and consulting firm’s global software practice.

Uber Technologies, the ride-hailing service disrupting the transportation industry and generating plenty of press, received the top two biggest rounds of investment last year. Each raised $1.2 billion for Uber, and the company’s value is now pegged at $41 billion. Other major deals included $542 million (mostly from Google Inc.) invested in Magic Leap Inc., a secretive startup working on virtual reality technology; $500 million in Vice Media, which operates online news and video channels; and $485 million in SnapChat, the popular messaging service.

What’s driving those deals?

U.S. tech startups are proving they can reach vast global markets and reap sizable revenue, said McCaffrey. And there are more investors eager to get a piece of that return — private equity and hedge funds and corporate investment divisions are vying with traditional venture capitalists to back promising startups. But critics say some companies may never make enough money to justify the sky-high valuations.

The worries harken back to the go-go year of 2000, when the dot-com boom drove venture funding to a peak of $105 billion. But then a wave of new Internet companies crested and collapsed, many of them failing to ever make money. Venture funding bottomed at $19.7 billion by 2003 and spent the last decade bobbing in a $20 billion to $30 billion range before making the big leap last year.

Several experts expect funding this year to continue at a similar rate. Commercial software companies, especially those that offer cybersecurity services and tools for analyzing large amounts of data, are expected to be big draws in 2015, along with biotech and health technology.

So are we approaching another bubble?

Most experts won’t go that far, but are raising concerns about so-called “froth” in the market. Robert Ackerman, managing director and founder of Silicon Valley venture firm Allegis Capital, is convinced new software and communications startups are revolutionizing the world’s economy. However, beyond the risk of investors losing money, Ackerman said some companies may see these cash windfalls as permission to burn through money at an excessive rate, rather than spending at a level justified by their own realistic earnings potential.

“There really is an unprecedented level of innovation that is taking place,” he said. “What I worry about is how the excess of capital is affecting valuations and expectations.”

Read Full Post »

Older Posts »