This is How Medical Device Startups are Raising Money in 2021
From government grants and venture capital to family offices and SPACs, this year medical device startups have a variety of ways to raise funds.
For medical device startups, getting a product ready for the market as efficiently and effectively as possible is the name of the game. The steps from concept to commercialization are immense and include development, clinical trials, crafting a go-to-market strategy, and more. And of course, the costs associated with each of these steps is also immense, which is why fundraising at each phase is essential.
When it comes to securing finances, there is good news and bad news. The bad news is that raising capital is competitive. Companies need to understand that they aren’t only competing with startups and companies in their own space. Even when investment groups are committed to a specific industry or stage of development, they will likely evaluate hundreds of opportunities each year. Even if you are transforming one sector in the healthcare space for the better, there may be another company just as revolutionary that is demonstrating bigger returns.
But here is the good news. Today there are more avenues to raise money than ever before, with organizations, companies, and individuals all seeking products to invest in. The trick is understanding how the fundraising landscape is evolving, what your options are, and the pros and cons of each.
Here’s How Medical Device Startups are Fundraising this Year
Successful medical device executives are starting with a compelling product story that shows potential investors exactly where they are going and how they will get there. They verify every number in their presentation with multiple data points. They speak to the segment of the market that they will impact (rarely can a device win across the board in a large market).
Once they have their pitch ready to go, it’s time to get funding. Here are some of the most viable ways that medical device startups are getting the money they need to advance their products.
Small Business Innovation Research (SBIR) Grants
The SBIR program was established under the Small Business Innovation Development Act of 1982. The purpose of the program was to strengthen innovative small business concerns in Federally-funded R&D. Since 2019, more than $54.3 billion has been distributed.
SBIR grants are popular among growing medical device companies. They are dilution-free and companies are eligible to apply if they:
- Are organized for profit, with a place of business located in the US
- Are more than 50% owned and controlled by one or more individuals who are citizens or permanent resident aliens of the US, or by other small business concerns that are each more than 50% owned and controlled by one or more citizens or permanent resident aliens of the US
- Have no more than 500 employees, including affiliates
For some product concepts that are very early stage or deemed a bit too risky for other investors, these grants can be a great funding opportunity.
Angel Investor Networks
Angel investor networks have grown in popularity, allowing investors to secure a stake in promising companies. The definition and function of an angel investor is determined by securities law. An angel investor is an individual whose income is $200,000, or joint income is $300,000, in the two most recent years, with an expectation of meeting that income again, or by an individual with individual or joint net wealth of $1 million (excluding primary residence). Angel investor networks allow these individuals to pool their contributions and are often active, rather than passive, investors.
Some angel networks related to medical device startups include the Life Science Angels, Desert Angels, and Tech Coast Angels. While the average angel investment is around $38,000, angels can invest up to about $2 million, typically focusing on early-stage companies. MedTech angels tend to make investment decisions based on their past experiences and are often successful business or healthcare professionals.
If your medical device is solving or improving a critical health challenge, such as diabetes or cancer, you may want to seek a partnership with a non-profit. These partnerships tend to focus on products that are in the development stage, such as JDRF’s support of the early stages of the continuous glucose monitor and artificial pancreas.
Yet, nonprofits are expanding their scope and getting involved in companies at different stages as well. According to Med Device Online, “PureTech Ventures launched called the Valley of Life, which brings together investors and not-for-profits to achieve common financial and mission-driven goals. The program aims to assist select startups bridge the so-called biomedical ‘valley of death’ between angel and VC funding.”
Venture Capital Funds
Venture capital funds are one of the most common ways that medical device startups seek funding. There are a few key elements that executives need to know about VCs:
1. In almost all cases, VC funds are beholden to their members and the promise of a specific ROI. These funds are required to place an investment – they can’t sit on their money.
2. VC funds typically have criteria for the companies that they invest in and are public about it. Always research the group before approaching them. Do not try to square hole, round peg an engagement. If your company doesn’t fit their scope, move on to another fund.
3. Generally speaking, VCs are on an average 10-year timetable. During that time they raise capital, identify deals, manage the portfolio, then facilitate an exit.
While requirements vary between Series A, Series B and beyond, VCs have clear expectations related to the internal rate of return (IRR) or return on investment (ROI). Depending on the stage, expectations can vary from 20x ROI and 30-40% IRR for early or 3-5x ROI or 10% IRR for late.
In any case, while seeking VC backing is a popular avenue for medical device startups, VC money is not easy money. It requires immense due diligence from the company to be successful. To learn more about how VCs make investment choices, click here.
Family Offices and Individual Investors
Family office venture capital groups are less formal in their approach than a VC fund and are often mission-driven, independent families. Family offices can be more flexible than VCs and don’t often have timetables. They may also boast famous names, such as Cameron and Tyler Winklevoss of Facebook infamy.
Like VCs, family offices may have specific criteria for investments, so the same rules apply. Don’t try to make it work with a group that is outside your scope. Here you can find a list of 3 of the top family offices focused on healthcare and technology.
Like family offices, individual investors often understand the clinical need and are passionate, emphatic, and/or invested in the device. Investments might be smaller, like $10k-$100k at a time, but individuals can be valuable supporters and advocates for medical device startups. For example, if you have a physician investor, he or she is an instant evangelist and can help build an initial user base for your product.
Incubators and Accelerators
While incubators and accelerators are often seen as places that support, rather than fund, startups, sometimes these organizations provide some funds. Compared to other forms of funding, incubators and accelerators can be on the smaller side. In fact, Tom Vanderheyden, VP of Business Development and Commercialization at UnitedHealthcare has been said to describe the financial support provided by a healthcare accelerator that his group supports as “grants and Ramen money. But this support can help get younger companies to the next stage.
In addition, one of the biggest draws to an incubator or accelerator is the education and experience startups can receive – but we aren’t talking about mentorship. When it comes to fundraising, competing for investment funds from these groups provides entrepreneurs with experience in vying for funding, giving them a leg up when pursuing other avenues for capital.
There are also companies innovating in the incubator/accelerator space, such as PAVmed. This multiproduct medical device company selects products that they claim to advance “from concept to commercialization faster and with far less capital than typical medical device companies.”
Corporate Venture Capital
MedTech behemoths like Edwards Lifesciences and Medtronic have built empires by acquiring the most successful medical device startups and adding their innovations to their portfolios. Which is why these industry leaders are willing to invest in the development of the next disruptive therapeutic or device. Philips Ventures, for example, the company’s VC arm, invests in medical device startups and products that align with its strategic roadmap.
Strategic investment has big benefits. These companies are, without a doubt, well-established and provide the startup with access to an expansive network of critical insights that help shape and improve the product. And it goes without saying that the biggest benefit to this arrangement is that the startup has a path to acquisition.
But there are some other elements to consider. In partnering early with a strategic, companies often are trading their ability to keep proprietary technology and information confidential. And while having a path to a successful exit is a good thing, it will inherently limit or exclude other future strategic opportunities.
Special Purpose Acquisition Companies (SPACs)
For anyone tuned into Wall Street, SPACs, or special purpose acquisition companies, have enjoyed lots of attention the past two years. In fact, SPACs, also known as blank check companies, “raised a record $82.1 billion in 2020 as of Dec. 24 — a sixfold increase from (2019)’s record high, according to data from Dealogic.” These entities are formed in the absence of an actual product – they simply have a goal of acquiring a promising company.
While each SPAC focuses on a certain industry, there are many that are looking at MedTech. For companies that have their ducks in a row as it relates to ROI, clinical need, and market opportunity, a SPAC merger may be an option. And while these investment vehicles aren’t perfect and have been under scrutiny by the SEC, many believe SPACs are here to stay as a viable way to bring new companies to fruition.
Going Public Early
Some medical device startups who are already in the market may choose to go public early as a faster way to raise capital and grow the company. While this can be a viable choice for some, with a public offering comes a higher level of scrutiny and required transparency related to the SEC. This additional level of burden may be a limiting factor for many startups.
Successful Fundraising Requires Clear Direction
No matter how you choose to raise capital, having a great idea is not enough. Medical device executives know that staying focused on developing a clinically-sound product is fundamental, but ensuring that product can translate into a viable business is paramount. Ultimately, it is that business that investors are putting money into.
In many cases, you will have to prove ROI, but even in the case of grants and charitable contributions, those managing those funds have an obligation to support those medical device startups with the best chances of succeeding. And that success lies not just in efficacy, but in proving market viability. The better your product story – from development to commercialization – the better your chances in securing all forms of capital.
Jaunt partners with medical device startups and established MedTech companies to create clear paths to commercialization and ROI that investors can get behind. If you need help writing your product’s story, contact us today.