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VC Funding Is Not Worth MedTech’s Time, says Chris Velis, MedCap Advisors

M&A specialist says Medtech should turn away from traditional funding models and look to new sources of funding.

When it comes to getting funding for medical devices, says Chris Velis, Chairman and CEO of MedCap Advisors, start-ups and small- to mid-level companies have never been so challenged. First, venture capital has not recovered from the recession. “Pensions were affected and misallocated, and now many VCs are becoming what is known as zombie funds,” Velis says. It’s going to take a full economic recovery until VCs are back in a healthy mode of action, he says.

At the same time, says Velis, the medical device industry is facing three uncertainties (Velis is fond of trifectas). The first form of uncertainty is regulatory submissions. Velis admits some efforts from FDA have gotten better, but still notes that for biologics and combination products the system is still overly complicated and confusing. The second form of uncertainty is the device tax. “It’s ironic, that government is trying to lower healthcare costs, while arbitrarily adding costs in,” Velis says. In addition to adding uncertainty, the device tax has added a layer of fear and anxiety. “When you have this tax, that will really affect mid-level companies and could put small companies out of business, you have to wonder whether this starts to look like protection for big industry players," Velis observes. The third form of uncertainty is reimbursement. Velis says he doesn’t understand why clinically efficacious products that save lives languish for years trying to get reimbursement.

“I know of two products on the market that have similar therapeutic actions,” says Velis. One has a disposable that costs about $600 for each use. The other does not use a disposable. And yet, the product with the higher per-use cost has reimbursement, but the other product doesn’t.”

These challenges demonstrate a new environment for funding and efforts to get capital.

“The VC companies are going to be mad at me for saying this, but the time and energy spent in chasing VCs should be limited. At this point they are a waste of time,” Velis says.

So the question is, where can capital come from? Velis has several funding source options and advice for how to appeal to each.

Family offices can be a rich source of funding, he says. These are private, family-owned companies that are looking to build their family wealth. They can sometimes invest $3 million, $5 million, or even $10 million for the right technology. And they don’t have a time horizon, like VCs might. However, these benefits make family offices both hard to read and, more importantly, hard to find. “Most of them don’t want advertise, Velis says. For example, Velis says the only one he knows about that would be comfortable sharing its name is the Wall family, which owns Volcano.

Another source of funding is Angel investors. Velis says these can be a valuable source, but each investor may only be able to bring $25,000- $100,000 to the table. Collecting the needed amounts for a business can mean bringing in and coordinating with a lot of different stakeholders early on.

One other valuable source is sovereigns. Countries such as UAE, Oman, Ireland, and Singapore have shown willingness to invest in medical technology. The tradeoff is, however, that they want many aspects of R&D, development, or manufacturing to happen in their country. “This could be a brain drain for technology here in the United States,” Velis says.

The most important source of capital in Velis’s mind is strategic companies. Not necessarily as investors, but as partners. A start-up with a single product can take advantage of a partner’s distribution channels, network, and relationships.

As far as advice for companies looking for funding, Velis has three (another trifecta) key pieces of advice:

  1. Think as creatively about your funding and you would about product development. When going after one of the four funding sources, you will have to change your pitch and align with the investor’s needs. “Think about who is your audience,” Velis says.
  2. Get to generating revenue as fast as possible. That means don’t languish for a 510(k) when you can get a CE Mark. “Don’t delay getting your product to patients,” he says. Doing so will help alleviate risk.
  3. Be capital efficient. The days of overfunding companies are over, Velis says. VCs were paid by the amount they put in the market, but new funding sources are going to want to see efficiency and want their dollars to go as far as possible. Being efficient with capital, says Velis is going to be the competitive advantage of the future. In addition, firms have to know where to cut costs and where not to, Velis says. “You can’t blow development costs out of proportion and then add a markup to the price of the product.” On the other hand, don’t sacrifice customer service in the name of efficiency.

 

Velis wants medical technology to be better, and he defines better with a three-item list. “To be better, you have to reduce costs, reduce suffering, and save lives.” Now that’s a trifecta we can all get behind.

Heather Thompson

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