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Will Minnesota health IT startup survive its rocky start?

Health IT company OnPoint Medical Diagnostics could be the silver lining of the collapsed Minnesota incubator Healthcare IP Partners.

Health IT company OnPoint Medical Diagnostics could be the silver lining of the collapsed Minnesota incubator Healthcare IP Partners.

Healthcare IP Partners fell to pieces in less than two years after trying to commercialize Mayo Clinic technology, such as the kind used by OnPoint. Most of the five spinoffs have uncertain futures.

But OnPoint seems to be recovering from a rocky start, which included temporarily losing its license to Mayo due to lack of funds, said the company’s President William Cavanaugh.

However, currently, it has $1.3 million in the bank and is planning to raise another $5 million. Further, the company is expecting to go public through a reverse merger with a public shell at the end of the month. OnPoint has been completely separated from the failed incubator and intends to be “squeaky clean” and transparent with respect to its finances, Cavanaugh added, an obvious reference to what apparently led to Healthcare IP Partners’ fall.

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“We project revenue of $60 million in five years,” Cavanaugh said of OnPoint’s financial future.

His confidence stems from what he says is the potential of the Mayo technology the company has licensed. OnPoint’s software automates a mandatory accreditation process required of hospitals and imaging centers to get federal reimbursement for MRI scans. A federal mandate to require regular accreditation is set to go in effect in January 2012. Private insurers are already requiring accreditation, Cavanaugh explained.

“The software automates the process that would normally take an institution 45 to 60 minutes per (MRI) scanner per day down to seconds,” he said.

Delivered as software as a service over the web, it can also alert imaging technologists to check the scanners when image quality begins to deteriorate.

But having the technology, however promising, is not enough for a startup. It needs capital. And in a few months after being formed, OnPoint had burned through $320,000 in cash raised from eight angel investors, Cavanaugh said. It also had debt on its books from startup and other costs owed to Healthcare IP Partners, the incubator. On top of that, it lost its license from Mayo having no money to pay for a scheduled payment.

As head of the insolvent company, Cavanaugh did not collect a salary for several months and contemplated throwing in the towel. He even spoke with a former employer who said Cavanaugh would be welcome back.

But Cavanaugh didn’t want to let investors down, he said. In exchange for more shares in OnPoint, Cavanaugh decided to stay on and devise a new strategy for raising capital.

The incubator’s co-founders — Rochester-based real estate developer Gus Chafoulias and the person he named chairman, Carl George — agreed to give up 5.5 million in shares. (George resigned from the incubator that initially nurtured OnPoint in July.)

The debt that OnPoint owed was converted into equity and redistributed among existing investors in HIPP. And late last year, it was able to raise $1.5 million, of which $1.3 million sits in a bank.

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Free of debt, Cavanaugh teamed up with an investment bank to issue convertible promissory notes to investors to raise money. Those notes will be converted to equity in three years. So far $800,000 has been raised through this financing round and Cavanaugh said he expects the round will close at $1.5 million.

An expert in entrepreneurial finance and a former University of Minnesota senior lecturer at the Carlson School of Management said turnaround success, especially at very early stage companies, is rare. Now Cavanaugh is looking to go public and have OnPoint’s stock trading over the counter,

Only time will tell whether OnPoint will succeed. The odds are not favorable at early stage companies, said an expert in entrepreneurial finance.

“Turnarounds by and large have a high risk of failure,” said Dr. Dileep Rao, former senior lecturer at the Carlson School of Management, author and president of Golden Valley-based InterFinance Corp. “The risk in early stage companies is even higher.”