Nothing Ventured, Nothing Gained. An Uncertain Outlook for Hearing Care

by Clifford Carey @ EarQ Group, Inc.



Our industry is no stranger to mergers and acquisitions, corporate buyouts, and consolidation; however, a new trend is garnering some attention.

Venture Capital (VC) backed start-ups are making strides to upset the current R&D model of traditional hearing aid manufacturers.

With large sums being given to unproven firms for hearing care solutions yet to be developed, one has to ask: where will these investments take us and what does it mean for our profession?

Let's assume for a moment that most of us don't have an economics degree or investment background and may need to be caught up to speed.

First, what in the world in venture capital anyway? Venture dollars, commonly, are those invested in illiquid projects with a high element of risk -like new companies or emerging technologies. Venture money can also play a large role in a company's growth or when a company begins to commercialize its idea or innovation. These are long term investments with results ranging anywhere from massive payouts to total loss. See a list of Venture Capital firms active in the medical device field.

How is this different from private equity? Classically, private equity firms acquire full, or majority ownership of the companies in which they invest resulting in total control after the buyout. Think EQT's acquisition of Siemens Audiology Solutions in November of 2014. Often, private equity firms acquire, expand, then spin off parts -or the whole- of the company for profit. That's not to imply that there is any evidence of an impending spinoff from EQT.

A quick note on investment series, or ‘rounds' —something we'll reference throughout the piece. Many startups begin with a seed investment to get off the ground. This type of investment is one of the most risky. Seed investment is true speculation as the emerging entity is most likely still focused on developing day-to-day infrastructure and procedures and covering operating costs. Often the investor believes in the concept or the people behind it without the benefit of a proven end product.

If seed investment from an outside source is not needed to lay the groundwork, series A, or round A, investment may be where a startup receives its first breathe of life. Series A funds are frequently used to support wider development, production, distribution or entry into new markets. A series B investment can be linked to team or facility expansion or the acquisition of new techniques or technology as the company grows. This is where a company could experience the most venture activity. In fact, an estimated 80% or more of the money invested by venture capitalists goes into building the infrastructure required to grow the business.

And while many may interpret series C funding as the last round, there technically isn't a limit on how many funding rounds a startup can pursue. However, investors who get in early on a startup might not execute funding without an anti-dilution agreement which may preclude that startup from seeking investments from too many sources.

So let's review some recent VC activity in hearing care. Last summer, David Copithorne of the blog Hearing Mojo wrote of newcomers iHear Medical, who was efforting a low cost invisible hearing aid, and the forward-integrated, nearly-invisible hearing aid from EarGo, who'd received $13 million during series A funding (1, 2). Since then, iHear received the FDA's first approval for an over the counter hearing test and secured $6.8 million in series B and C funding while EarGo scooped up $25 million in their own series B funding. At the time of publication, iHear products, after a delayed launched, were available to U.S customers and shipping anywhere between 4-8 weeks. EarGo, on the other hand, was not taking orders on their website amid reviews from users disappointed by performance, battery life, and long term cost of ownership.

Of late, hearing healthcare-focused venture money has only continued its ramp up. Silicon Valley based Earlens netted $51 million in VC from a collection of recognizable names including Medtronic and the industry's own Cochlear for a deep-insertion device which is administered by a trained audiologist or otolaryngologist (ENT). On the other coast, Boston locals Decibel Therapeutics proved their drug-based solution to be worth $52 million in series A funding from a group including the venture arm of GlaxoSmithKline, which may look to inject antibodies into the ear to slow or cure hearing loss. According to the Wall Street Journal, we'll see hearing care venture spend since 1999 crest $1 billion in 2016.

So, why is this happening? The WSJ's Brian Gormley points to the aging of the American population driving money into related health conditions like hearing loss. Silvering Boomers, rising healthcare costs, and an increase in those seeking treatment under the Affordable Care Act, have created something akin to a gold rush. "There's a real demand for high-quality, moderate-cost healthcare," says Mark Kirsch, a principal at the law firm Gray Plant Mooty, leading to a spike in franchised urgent-care centers, dental, hearing-aid, and massage clinics, chiropractors, testing labs, billing services, and other specialties.

Add to that the inability of the standard research and development and distribution models from traditional hearing care solutions sources to reach significant underserved population segments and VC investors along with consumer electronics giants like Samsung, Apple, and Bose are licking their collective chops.

In these uncertain times, hearing care professionals must define their role as an essential part of the solutions delivery process. Time and again I've heard executives from hearing industry manufactures tell rooms full of audiologists and licensed specialists it is their technical knowledge and manipulation that allows those companies' devices to perform. I would argue that even that element could be fashioned into an OTC or home delivery model.

No, it is the artistry of the hearing professional in crafting an earmold for ideal comfort and performance, the rehabilitative guidance and compassion —the human touch- of the audiologist, the medical diligence and scientific verification of the process itself, along with the investments in their local communities from the independent practice owners that will differentiate and define a hearing solutions delivery model for the future; something, indeed, worth investing in.

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