The Deal
Wednesday, October 22, 
2:20 am

by Clifford Carlsen
[Posted on January 7, 2008 - 4:53 PM]

Medical device startup Aragon Surgical Inc. raised $25 million in a Series B round of venture capital with the hopes of having five products on the market within two years.

In a statement on Monday, Jan. 7, Aragon said new investors Bay City Capital of San Francisco and Integral Capital Partners of Menlo Park, Calif., joined original investors Delphi Ventures and Onset Ventures, both of Menlo Park. They formed Palo Alto, Calif.-based Aragon in May 2005 to advance radio frequency technology developed at Stanford University Medical School for use in laproscopic and other surgeries. Bay City Capital was the lead investor in the most recent round.

The company spent an initial $500,000 to explore the market and establish the viability of technology, then raised $5.5 million from the initial investors to complete products and early regulatory trials. Aragon then raised the current round to bring products to market and build a sales and marketing infrastructure.

Aragon CEO David Edelstein would not disclose a valuation for the round but said in an interview the company won an increase in pricing over its previous investment, and that the company was able to attract top-tier investors and enough money to fully fund bringing all its products to market.

Aragon already has one product on the market --it acquired an approved but unlaunched device that creates an opening for laparoscopic surgery from VeriSure Inc. last March. Edelstein said the product is noncompetitive and complementary to its own products in development, which use radio frequency energy to create and seal incisions in gynecological, colorectal and general surgery, and gives the company a leg up in the market as it develops its multiproduct strategy.

Edelstein said he joined Aragon shortly after leaving Delphi and Onset portfolio company Novasys Medical Inc. of Newark, Calif., after shepherding its first products to the market. He had been Novasys' vice president of clinical affairs and chief medical officer. He said he was attracted by Aragon's proprietary technology and the opportunity to bring products to market quickly that would present a clear economic case for hospitals in reducing costs by speeding up surgeries and making them safer.

"A bunch of companies make electronic tools that seal and divide tissue, but what I really liked was the company's really simple mission statement to make the OR go more quickly and safely," Edelstein said. "I have performed surgeries and taught surgeries for many years, and this presented a very straightforward economic model for hospitals to save money and increase margins."

Edelstein said health insurance reimbursements are based on procedures, not on equipment, and that anything that reduces the time that a patient is on the operating table boosts the bottom line. He said the company already has generated data supporting its economic model, and that it has begun the regulatory process that will bring two products to market by the end of this year and another two by the end of 2009.

Nick Pliam, a venture partner with Bay City Capital, said initial data from trials supported the company's thesis and that reducing operating room time is an increasing focus of hospitals and clinics. He said quicker surgeries also improve patient outcomes, and that the company's data showed greater safety and efficacy results as well.

"Cutting time is a big deal for hospitals and surgeons, and it is better for patients," Pliam said. "Aragon Surgical is developing a platform of surgical products which offer clear and unique value propositions to surgeons, patients, and operating facilities."

Aragon's acquisition of VeriSure in an all-stock deal from angel investors gave the company some initial brand presence to establish customer relationships before introducing its broader line of products, and Edelstein said the product, introduced in October as the Aragon Surgical LapCap, will be much more attractive in a broad product line than as an independent product.

Edelstein said the company did not use an outside financial adviser in raising the new funding and met its objective of raising the round from top-tier U.S.-based investors. The company had legal work on the deal from John Sellers of Heller Ehrman LLP in Menlo Park, and investors were represented by Scott Elliott of Ropes & Gray LLP in San Francisco.

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