Today’s early-stage medical device companies face unprecedented challenges. How they respond to those challenges determines who survives and who fades away. Among the chief hurdles is a reduced amount of capital being invested in the medical device industry, and the potential exits have changed. FDA even has a role. So if reduced capital is shifting the way we do business, what can entrepreneurs do to improve their chances of getting funded?

In the old days, if you could do an IPO based on having a large market and some novel technology and the promise of building a business, you might have been able to go public, explains Paul LaViolette, venture partner with SV Life Sciences (Boston). “Without the public offering, now you have to go into the competitive arena of the strategic buyers. They can choose to buy you early, and we’ve seen that example with some notable exits in the percutaneous valve space, or they can wait and say ‘your technology is novel in its application, but we’re not sure how big it’s going to be. So we want that start-up company to carry it further before we’re going to buy it.’”

A significant change is that the exit options have decreased for venture funds that have large portfolios. “There is essentially no IPO market—not that IPOs were ever the primary source of liquidity in medtech, but it’s always been there,” says LaViolette. “The implication is that strategic buyers recognize that small companies aren’t likely to exit through IPO. With that threat no longer there, I would contend it shifts more power to the strategic buyers. They know they don’t have to compete with IPOs, so they’re not going to lose the opportunity to buy the company.

The VCs that do have money are looking to invest in capital-efficient deals, explains Dan Sachs, MD, an entrepreneur who has founded several start-ups—including Cardiac Concepts and Vertech—and raised funds for those ventures. “Entrepreneurs are wise to focus on opportunities that are not capital intensive,” says Sachs. “VCs are looking for shorter clinical endpoints.” He also notes that if you can use reimbursement codes that are already in place, it can shave years off the process for getting reimbursed.

LaViolette says that start-ups must now be very careful about where they look for money. He says that early-stage companies must get funded by seed capital and that only late-stage companies should approach VC firms for funding.
One key to attracting funding in this environment is to put the right people in place. “Choosing exceptional physicians to help guide product development, choosing a business opportunity that truly has outstanding growth potential, and surrounding yourself with a truly top-notch team are some of the keys to obtaining capital these days, says Josh Makower, MD, founder and CEO of ExploraMed, a medical device incubator.

Roger Brooks, President and CEO of Leading Edge Medical (Boulder, CO) says start-ups must hire the right people with the right experiences, which will allow them to make the right strategic decisions. “This will allow them to get the most done with the least amount of time and money,” he says.”

Because these challenges are so complex, it’s increasingly difficult for venture to back people who haven’t launched a company  before, says LaViolette. Even if you have a great idea, he says, “unless you have experienced management to navigate these treacherous waters, no one is going to feel comfortable that their investment is going to get paid back.”

Brooks explains that another key decision for an early-stage company is to choose a location that gives them the best access to the talent needed to move the company forward. “They need to put some thought into the key positions they need to fill and where the people would be located who have the right experience,” he says.
Finally, he points to the shifting of clinical trials, and thus innovation, to Europe. He suggests that start-up companies establish better networks in Europe and other places to do early clinical work outside of the United States. “My concern for our healthcare system is that we are encouraging more innovation to happen over in Europe and other parts of the world instead of the United States.”

Sherrie Conroy
sherrie.conroy@cancom.com