Medtech entrepreneurs agree that it’s still tough to find funding at the Series A level. Here’s their advice about how to find it.
To get to the bottom of what’s going on, I reached out to entrepreneurs at the Series A stage, as well as bankers, startup accelerator programs and industry observers. The result is a three-part series:
- Part 1 looks at what is driving the underlying trends.
- Part 2 looks at these trends from the entrepreneur’s perspective.
- Part 3, the present and final article, gives advice from the trenches, to guide entrepreneurs looking to tune up their business plans to be in the best position when Series A comes around.
Read on the find out about the best types of investors to have and how to find them, what types of organizations offer valuable help, regulatory tips, the special issues in digital health and advice on running your startup.
The best types of investors and how to find them
While smart and connected capital has always been the best, finding it at Series A is a challenge.
Jennifer Fried, CEO of Explorer Surgical, explains it this way: She wanted to have a lead investor with a deep understanding of Explorer’s space and experience in healthcare IT all the way to exit.
“This is hard to find,” Fried said.
All CEOs at this early stage rely on angel investors in some amount, more so when their companies do not fall into categories well understood by more traditional investors. Revon Systems, for example, is involved in software as a medical device (SaMD) — which is more of a new category. “We have a group of sophisticated angel investors, that have been tremendous coaches — for example advising about the dynamics of the pharmaceutical industry’s value-based contracts and pharma’s digital strategy, bringing expertise from their other investing,” CEO Ted Smith said.
Many founders reported that key opinion leaders (KOLs) in their specialty areas often both validated their ideas and became early investors.
“If you can substantiate your idea with a supportive KOL, it helps tick an investor requirement,” said Jonathan Norris, managing director at Silicon Valley Bank.
Norris counsels to entrepreneurs to ask what their investment sector looks like.
“Of the 20 companies funded last year, who invested, who’s on the board, who are the scientific advisors? Try and leverage those relationships,” Norris said. “It’s not just number of deals a firm is doing it’s the specifics of what they are investing in. If you are in the [digital health] space this is how you’ll find interested tech investors.”
Helpful organizations: accelerators and incubators
For Eximis Surgical, accelerators such as MedTech Innovator (MTI) helped. “Accelerators like MedTech Innovator (MTI) definitely helped. “They serve as a validation; the people who select us understand the value of what we’re doing,” CEO Kristin Johnson said.
Johnson recently joined Springboard, an organization that supports women-led companies for similar reasons. “In joining, we’re getting connections and advice from people who have been successful in our area before. With MTI, I love that it’s global, pulling in all kinds of expertise and bringing in a diverse set of companies and not just the founders.”
Fried at Explorer Surgical agreed, “I’m a huge proponent of them. What’s most valuable is the network of people. You get to know 20 CEOs that are in a similar space, going through similar challenges, and even potentially selling to some of the same customers.”
As accelerators have gained momentum in recent years so has the involvement of the large medtech companies in providing mentoring to them. Paul Grand, CEO of MTI notes,
“The strategics in our industry know their pipeline for future products are these startup companies,” said Paul Grand, CEO of MTI. ” They’ve realized that earlier relationships with these companies can yield better outcomes. It’s why Johnson and Johnson has JLABS in many innovation hubs, and W.L. Gore has opened an Innovation Center in Silicon Valley. For entrepreneurs, it’s never too early to talk to potential partners or investors.”
Nanowear was involved in four non-equity accelerators — MTI, Plug and Play, StartX, and Google Launchpad Studio. Nanowear CEO Venk Varadan said he learned many different things across the industry just from being around other companies as well as former founders and CEOs.
Norris at Silicon Valley Bank suggests considering the ones you might think are just tech-focused, as some are embracing the healthcare side.
Trade associations are helpful, too
These can bring a lot of value to small resource-strapped companies. Smith at Revon is very positive on their role. He sits on the executive leadership group for digital health at AdvaMed and the health and fitness board at the Consumer Technology Association. He thinks they are especially useful when trying to do something new in an industry where there are established players, many of whom are potentially exits or channel partners for your company.
“It’s the single best investment we’ve made working with these associations, mitigating [how] isolated we felt as a small company. I don’t have the money to hire the kind of talent they bring to bear on navigating both the CMS and the FDA.” Smith said.
Smith also noted there is a distinctly different venture community for healthcare versus technology. “These associations have different mindsets. It’s very useful to get both perspectives, especially in new areas where business models or care pathways are not yet fully established. It also keeps me aligned with the FDA’s current velocity on [digital health], like what’s considered decision support and what’s a regulated device.”
It used to be that companies in digital were trying to avoid FDA attention, this is no longer true. Because entrepreneurs are by definition pioneering they counsel getting early clarity from the FDA, or other appropriate regulatory bodies around the world. Regular interaction with FDA and constant monitoring of the novel pre-cert process has become critical.
“Our 20-month interaction with FDA for our first 510(k) was extremely rigorous, but it actually helped our business and vastly strengthened our IP filings, further defending our core technology,” Varadan said.
Industry observers including Norris at Silicon Valley Bank and Rick Beberman noted that the approvals path can add considerably to the valuation. “FDA approval helps provide some IP for companies that aren’t typically blessed with a lots of it, and also provides comfort to funding sources that what you’re doing is real,” Beberman said.The SVB data (above) shows higher exit valuations for de novo and PMA types of product. “Five years ago traditional VCs were nervous about PMAs but now those deals are getting to exit earlier and better value,” Norris said. When he sees incremental devices, such as 510(k), he wonders whether it’s a VC fundable company or not, or whether they’d be better talking to strategics for a distribution deal that might morph into an M&A. He notes these kinds of deals typically don’t get venture style returns.
The special challenges in digital health
The evolution of digital health was initially in the consumer world, such as fitness trackers. But now Varadan notes the realization has shifted to what he likens to the dubbed age of enlightenment in tech cycles, “The problem is 30% of our population is on Medicaid, or uninsured. These people cannot pay out of pocket for a $400 watch even if it might save their life. They may if it looks or feels awesome, but the purchase isn’t because it’s going to save their life.”
Varadan notes these devices did not get the expected traction in “need-to-have” chronic disease markets. “But the realization that healthcare is a 50-times-bigger market still exists, and consumer health and wellness is now targeting the ‘need to have’ sick patients. The right tech with the right distribution models is the ask now,” Varadan said.
“I think the enlightenment curve is figuring out your tech, data integrity while proving clinical-based outcomes that are meaningful to providers, along with understanding your distribution model and, most importantly to investors, who’s going to pay… because the average consumer has proven time and time again that they will not pay out of pocket for digital health products,” Varadan said.
Because digital health is seen as currently more attractive to a broader group of investors, it behooves startups to do what Beberman encourages which is to highlight your digital health bona fides to appeal to digital capital and, if relevant, adding Bluetooth connectivity would increase value. But, as noted earlier in this series, its important not to seek digital credentials if not justified by benefits to the customer.
“I cringe when I hear people discussing how they’re going to provide the clinician with a dashboard,” Beberman said. “You’ve got busy doctors who don’t have the luxury of viewing another dashboard. The same applies to AI being overused, and there is a continuing debate over how much data is actually useful.”
Because it’s often possible in digital to get early versions into the market with less capital than in traditional device markets, this puts an extra burden on companies. “Without question before Series A people want to see revenues as evidence you’re gaining traction,” Beberman said.
Running your startup
Varadan at Nanowear thinks this deep immersion in your market is critical. “I think we, as digital health companies, need to consistently camp out in hospitals by getting angel investors and advisors that let you smell, breathe and feel the process of a hospital, how the individual business units and workflow processes happen, how it extends beyond the hospital — beyond the must-go conferences and trade shows. We can’t get stuck in the rut of thinking that because a certain tech or digital health product is so awesome somebody will find a place for it in a complex healthcare system.”
Hospitals are often flooded with tech, so Varadan advises focusing on finding the most valuable pain points you can address. At Nanowear, he had many potential applications for their technology but chose heart failure as their first because it was the biggest unmet clinical need for hospital systems and Medicare/Medicaid reimbursement penalties for readmission.
And a startup’s reimbursement route often leads to the likely early adopters in the hospital provider world. The Integrated Delivery Networks (IDNs) are a good example of systems that are willing to adopt new tech earlier on.
Regarding your shaping of the expectations of investors, entrepreneurs encourage giving yourself more headroom, and preparing ahead of time for the inevitable diligence process. On timing Fried notes in healthcare that sales cycles are long and that hitting your funding milestones will take longer than you think. “So raise a little bit more than you initially think and give yourself more buffer time to get the next round. It can take months and sometimes years to build relationships before somebody will write a check.”
It also helps, as Fried puts it, “to have good legal hygiene.”
“It helps shorten the diligence period when you’ve planned ahead for the five-page diligence request,” Fried said.
Make sure you’re delivering on customer ROI, Beberman said. It’s advice echoed by many. Make sure you’ve got a solid revenue base and a growing set of customers who will vouch for you. This all helps in terms of valuation.
Everyone agrees the importance of your value proposition. Grand notes many companies applying to the MTI accelerator program don’t yet have it down. “Know definitively who your stakeholders are and what value you offer them. Be able to articulate that in a short description, with evidence to back it up,” Grand said.
Norris sums up the challenge echoed by all: “Simple take away, it’s hard, it’s always been hard, the list of investors interested in medtech is more stratified than ever. A huge number of folks doing a small number of deals makes it harder to get your hands around. Be as smart as you can, understand the market, get good advisors for feedback. This will help lead you to your best investors.”
Varadan added: “It’s a long slog, but don’t give up on the mission. We’re here for a reason. We could all likely make more certain money elsewhere …c hanging healthcare has got to be mission-oriented first.”
Bill Evans is an individual consultant to the medtech and digital health industries, and an expert in helping companies leverage user centered design to create market winning products that improve outcomes, and help lower overall costs. Until recently, and for 25 years, he was the founder and former innovation SVP at the medical design consultancy, Bridge Design (San Francisco), now a Ximedica company. He can be contacted at email@example.com
The opinions expressed in this blog post are the author’s only and do not necessarily reflect those of MedicalDesignandOutsourcing.com or its employees.