By Tricia Rodewald

September 29, 2011

4 Min Read
Trials, Tribulations, and Trends of Medical Device and Diagnostics Funding

funding.jpgAt an insightful AdvaMed 2011 panel discussion, investors weighed in on the state of medical device and diagnostics funding.

 

What’s the current environment for Angel Fund investors?

 

Allan May (Emergent Medical Partners): It’s a difficult time for medical device start-ups. The good news is that there’s a lot of money available in the system and, in general, medical device companies are being financed. Angel investors are particularly active in this area. 30%-35% of all the Angel groups in the country fund early-stage medtech investments and there are about 450 Angel groups active in the U.S. So there’s a strong interest in doing it.

 

The challenge is with Premarket Approvals (PMAs). The FDA, principally, has frozen most PMAs out of the system. This means that innovation in our healthcare system is severely under-challenged at the moment.

 

Some data suggests that as few as ten PMAs will be financed in the entire U.S. this year.

 

Diagnostics remains a tricky area. While the clinical need couldn’t be more obvious and compelling, there’s not a business model to help founders and investors get those products to commercialization in a capital-efficient way that makes a return on those investments. The same is true, at the moment, for healthcare IT.

 

Kevin Wasserstein (Versant Ventures) Venture Capital, as a whole, has underperformed in the last decade and disappointed relative to other asset classes. This trickle down affect has caused the investors who invest in Venture to move into other asset classes and/or think about reducing their allocation in Venture. With money taken out of Venture, the amount of capital available to flow into companies has been significantly reduced.

 

Investors are seeking liquidity on their returns, which greatly affects healthcare—medical devices in particular.

 

This behavior has driven many investors toward assets that are closer to liquidity or have a short-term path to liquidity. These timelines aren’t aligned with early-stage investing or investing in the next big idea.

 

This has caused a lot of Venture Capitalists to become risk-averse, which kind of takes the “venture” out of Venture Capital.

 

Brian Miller (Partner and Co-Founder of Linden Capital Partners): Our firm invests in companies with $5 million in cash flow and above so it’s beyond the Angel stage.  

 

When we’ve invested in businesses with FDA exposure we’re budgeting more and putting in more time, expenses, and capital, so that generally means that prices are coming down. There’s less cash flow so there’s less we can pay up front.

 

There is still plenty of capital in the Bio-sector. Funds that were raised before the recession really hit in 2007. Investors like us have a five year investment horizon, so a lot of capital that was raised in the boom times still needs to be put to work.

 

Many of my peers face situations where if they don’t invest the money, they’ll lose it. From there, they’ll be challenged to raise new funds. 2010, for example, was the lowest fundraising year since 2003. This means we can expect significant tightening of funds in 2012 and 2013 as capital becomes even more scarce.

 

Kevin Schimelfenig (SalesForce4Hire): Companies are starting to spend more time understanding a buyer’s process. For example, if you’re going to take a product into the operating room, you need to understand how that hospital is going to make a purchase. Companies that do that are doing very well.

 

Additionally, when looking at additional funding sources, it’s important to mirror your potential buyer and understand what their needs are.

 

It’s also important to look at the business wholeheartedly. What this means is that you can’t just assume someone is going to pay you because you have a test. You not only need to bring value to the patient, you need to bring value to the hospital, the patient, and the insurer. Just having a better product isn’t enough.

 

Additionally, the selling model is changing to the customer. That’s the potential acquirer down the road. This is another reason why it’s important to be very clear about how you’re structuring funding and who the ultimate buyers are.

 

While the funding waters are choppy at the moment, as a whole, investors are cautiously optimistic about the future of medical device and diagnostics funding. With an aging population world-wide and growing demand in emerging markets, the need for new medical innovations is there. At the end of the day, it will come down to how well medtech companies can understand and meet those needs.

Note: Earlier this year, we published a story on Kevin Schimelfenig's take on the device industry: Tackling the Challenge of Launching a New Medical Device

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