Case Study

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HBR CASE STUDY

Good Money After Bad?
Jack Brandon’s initial idea has not panned out, and the cash is nearly gone. But he’s got a new plan. Will you back him a second time?

by John W. Mullins

F
Daniel Vasconcellos

overlooking the sparkling lights of San Francisco, Christian Harbinson gazed across the bay to the hills above Sausalito. “There’s nothing like a vigorous hike,” he thought,“to clear the mind before a crucial meeting.” It was a mild March evening, and the 35-year-old venture capitalist was reflecting on the recommendation he would have to make to his firm’s investment committee the next morning about Jack Brandon’s young company, Seven Peaks Technologies. Seven Peaks had developed an innovative device for cauterizing blood vessels during electrosurgery, and although the feedback from surgeons had been excellent, sales had been slow. The Palo Alto–based venture capital firm where Harbinson worked, Scharfstein Weekes, had invested $600,000 in Seven Peaks from its newly raised second fund of $100 million. SW’s current investment strategy focused on early-stage medical technology companies, and Seven Peaks was a typical investment for the firm, which liked to get in on promising ideas modestly and ROM A ROCKY PERCH

HBR’s cases, which are fictional, present common managerial dilemmas and offer concrete solutions from experts.

hbr.org

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March 2007

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Harvard Business Review

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HBR CASE STUDY

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Good Money After Bad?

then follow with additional rounds of capital after technological and market milestones had been met. The $600,000 was nearly gone; Harbinson and his colleagues had to decide whether to put more into the struggling company. Seven Peaks was looking for another $400,000 to develop a second product based on its proprietary technology, which enabled surgical instruments to do their work without sticking to

don had decided to take the leap and try to commercialize it on his own. He had used nearly $65,000 of his savings to build a rough prototype of a cauterization device. He chose cauterization because the alloy’s nonstick quality would make a real difference to the success of the procedure. Prototype in hand, Brandon approached investors in the medical devices arena to raise the capital necessary to make his device

The Launch
Brandon had certainly done his homework. As Harbinson knew from experience, word of mouth could make or break a new product in the industry; surgeons in particular liked to compare notes and talk to one another about new developments. To make sure he was on the right path, Brandon had given his prototype to a few surgeons he knew to learn what they thought of it. “Too large,” one of them said. “It will block my view of the surgical site.” Another told him, “I like how it works and saves me time, but it’s a lot of trouble to take it apart after each procedure in order to sterilize it.” Brandon redesigned his device based on the feedback, and after several months of diligent work, he won FDA approval. The redesign was smaller and thinner for better access to the surgical site and required no disassembly for sterilization. It was time to see how the market would react. Harbinson was equally impressed by Brandon’s showmanship. The Seven Peaks cauterizer made its debut at a surgical trade show in Atlanta. It was the talk of the fair. Brandon had bought some fish from a local market, and he did side-by-side operations on them with his device and with conventional instruments to demonstrate how the former could cauterize blood vessels in less than half the time. Everyone came to look, if only to see what was causing the smell of cooking fish. A few surgeons who ran their own clinics ordered the device on the spot, while others asked for follow-up calls. Two surgicalproducts distributors agreed to take on the cauterizer and offer it to their clients. Within a month, a couple of leading surgeons had become so excited by its effectiveness that they agreed...
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