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September 2006 Presenters

AtriCure: The Atrial Fibrillation Solution

AtriCure is a cardiac medical device company focused on developing advanced products for the treatment of atrial fibrillation (AF) and stroke prevention. Mike Hooven, president, joined GCVA on September 19, 2006, to describe the challenges AtriCure has faced and overcome.

When the company incorporated in late 2000, there was no available cure for AF. Yet, AF is identified as one of two key unmet needs in medicine today. The condition is a rapid fibrillation in the upper chambers of the heart that affects 4-4.5 million people in the U.S. It is the major cause of stroke, whether it manifests with symptoms or is asymptomatic. There is a 1 in 4 risk of having AF; if you do have it, you have a 1 in 3 chance of having a stroke; if you have a stroke from AF, you are twice as likely to be bedridden from it.

AtriCure did not start out in this important and needful market. Instead, the company started in Mike's basement as Enable, making other types of medical devices for surgeons. With only $25,000 in start-up funds, Mike knew he had the basis for a strong company because he had the capability through his team for strong fundraising; innovative technology development; and the contacts to bring everything together.

Mike is a firm believer in clinician-entrepreneur interface for developing products. When starting out, he took four prototypes to University of Cincinnati and stood side by side with a surgeon in surgery, watching how the surgeon used the tools and identifying unmet needs. From this approach, Enable developed two technologies, Safe-tee and Elmore, that raised $425,000 for the company and gave them a $1 million valuation.

In 1994, one of the group's biggest breaks came when a company called CTS approached them to partner. Enable had moved to a 13,000 square foot facility that allowed them to grow as needed. They were working on a product for minimally invasive heart surgery. What they needed was money. "ArtriCure had a facility and prototypes, and we were working on our third product," Mike explains. "CTS needed those things, and they brought us stock in a company soon to go public." When CTS did go public, Enable received $9 million from 5% of their stock pre-IPO. "It's not usual for a start-up to fund another start-up," Mike laughs, "but that's how it happened here." This momentum allowed them to raise more funds, including $5 million in venture capital.

Enable continued to focus on cardiovascular medicine in 1999. They had a contract with CTS to manufacture bi-polar scissors, which disappeared when CTS was acquired. At this point, they had also identified AF as an opportunity area.

The AtriCure technology was developed in early 2000. Mike took the product for a test with an electrophysiologist and to his dismay, found it didn't work. He vowed not to leave the lab until he got it to work - then realized he was looking at the wrong market: while the prodect wasn't appropriate for an electrophysiologist, it was perfect for a surgeon.

Knowing venture capitalists would not give full value for Enable, the team decided to spin AtriCure out on its own in November 2000. It was financed through a $1 million bridge and focused on AF. They had unique, promising technology; a huge market potential; proven management; an existing infrastructure; and an experienced board. Things were looking good. Then disaster hit.

They were relying for cash flow on a contract Enable had for 10,000 units/month of endoscopic scissors. Unfortunately, when the customer received the first order, they contacted Enable and said the scissors didn't meet specs. Even though they did, Enable agreed to modify the specs and continue the supply. The response: "Don't rush, we just ordered a six-month supply from our existing supplier."

This was perhaps one of the lowest (of many) low times for Mike. They had to lay off people at Enable and weren't sure they'd be able to continue. Mike, in desperation, went to a conference with the AtriCure product. He began to talk to people. Luckily for him and AtriCure, Randy Wolfe, an expert in the field, was there and began to promote AtriCure as the "hot" new product. In an instant, fortune turned.

From here, it was all downhill. AtriCure received $5 million in venture capital in June, 2001, based on their demonstrated technology and market research with strong endorsement from leaders in the field, plus their experienced board and management. Mike believes this experience is key to success: "If you don't have a track record, align yourself with someone who does," he says.

Over the next three years, Enable hired almost all their people back and growth continued. June 2002 brought $21 million in venture capital. Mike feels this was the easiest round because they were already selling product. "We committed to make 20 clinical devices and ended up selling 350," he explains. "The product was tremendously well-received and had a high profit margin." This was key because it was not just people saying, "I love the product" - it was people actually buying the product. This was the opposite of Enable's situation, where love of the scissors product did not translate into sales since the product was not compelling enough for a surgeon to fight for, to push through the system.

Most recently, AtriCure executed a $50 million IPO in August 2005. "We needed this level of funding," says Mike, "but it's much different, much more difficult, being a public company than a private." Currently, 22 of the top 25 heart centers in the country use the AtriCure product, which is market leader in a large, rapidly growing market.

Mike faced many challenges in reaching this level of success, many of which were exacerbated by business conditions in Ohio. What does he believe Ohio can do to change this? Three things: people, infrastructure, and culture.

"Cincinnati does not have a great reputation for being innovative," Mike says wryly. "How do you change that? You get innovative people here." The easiest way, he feels, is to import them. These should be experienced entrepreneurs who know how to raise capital, develop technology, and market product.

Second, we need to provide environments where people experienced in developing technology can interact with leading clinicians and scientists. This partnership is a theme in Mike's discussion since he believes strongly that this is the only way to meet untapped needs.

Last, we need to change our culture. Everyone knows about Mark Twain's statement, "I want to be in Cincinnati when the world ends." We need to move our culture from this position to one that is cutting edge and supportive of new ideas. "Our $21 million second round was one of the largest VC financings in Ohio history," says Mike, "and AtriCure is the first IPO in Cincinnati in seven years." If we are to change this, funding has to be more easily available, and companies have to have the support they need to succeed.

If we address these three areas - people, infrastructure, and culture - more start-up medical device businesses should be attracted to Ohio, and should succeed once they're here.