Medtech entrepreneurs: What do investors want?


This week I attended the 15th MedTech Investing Europe conference, in London. Around 35 fascinating companies presented or attended, looking for levels of investment ranging from £500k to £15 million. Two of the panels concentrated on investors – both VC and corporates. What lessons are there for medical device entrepreneurs?  And what kind of investor did everyone want to meet?

What’s your niche focus?

Firstly, a quick run through some of the technologies and companies. The range was wide both in focus and in terms of development stage. Interestingly, many companies had managed to get as far as early commercialization stage on very limited funds. Many companies could also be potential game changers in their respective niche markets. Encouragingly, virtually all of the companies were focused on a tightly defined niche. Some examples I met included:

  • Altrika – skin-cell based products for treatment of burns and chronic wounds
  • Dentak Implants – a new-generation short-length dental implant with enhanced load carrying capacity
  • DiscGenics – stem cells to treat spinal disc degeneration
  • EndoSphere – an endoscopically inserted duodenal implant for treatment of obesity and type 2 diabetes
  • Excorp Medical – a bioartificial liver system to treat liver failure
  • Glide Pharma – a drug delivery platform company using solid dose form injections
  • Hygieia – a smart guidance system to enable better control of insulin management for diabetics
  • Likvor – a device to detect normal pressure hydrocephalus – an oft misdiagnosed caused of dementia
  • Orthos – synthetic bone substitute products for orthopedic and spinal bone implants
  • Oxtex – self-expanding devices for soft tissue expansion use in reconstructive surgery
  • Phagenesis – treatment of dysphagia caused by acute brain injuries
  • Sapheon – a simple solution for treatment of varicose veins
  • TheraCoat – a polymer based system for direct drug delivery for bladder cancer treatment
  • Vascular Flow Technologies – vascular grafts which re-establish laminar blood flow in damaged/ blocked arteries

The range of entrepreneurs I met was as equally fascinating (or even more so) – everything from seasoned veterans of the medical devices industry to first-timers; from  ex-VCs to ex-corporate folks; and from doctors to engineers to business majors.

I was also impressed by the number of entrepreneurs from historically well funded locales for innovation and start-ups – such as the US and Israel. This is no doubt in part driven by Europe’s lower regulatory burden (CE mark vs. FDA approval) and hence how to get to market early in Europe.

Are there any investors in the room?

The event was also well-attended by a number of investors. These were mostly VCs with a few corporates. Due to stage of investment and funds sought, there was very little in the way of angel investors present.

Turning to investors then, and their wants, what do medical devices entrepreneurs need to know? I spoke to many of the investors, listened to what they found interesting, what they were less convinced by, and what they are seeking for their own investments.

The corporate investor panel included Stryker and Medtronic. These were represented as strategic partners (i.e. corporates) rather than corporate VCs (for a run through the differences, see a recent post: Corporate VCs v VC firms: Are your investors aligned?)

Key traits identified by the panel as important for potential investments into emerging medtech companies included the following:

  • strong IP protection
  • attractive healthcare economics
  • good clinical benefit
  • follow on products (potential or in development)
  • good portfolio fit with existing business and product lines
  • focus on the business – i.e. demonstrate you’re working to commercialize your product, not just develop neat technology
  • early revenues – these don’t have to be so strong as to peg a valuation multiple, but at least to demonstrate early commercial validation by paying customers (more detail in post: The 2 most important things for medtech entrepreneurs)
  • a clear road-map for product development – even if you’re some way off hitting certain milestones, showing a detailed plan gives buyers comfort that your project is well-thought out
  • a well-defined commercial strategy, with a country by country plan
  • consider early collaborations – gain traction, revenues and collaborative expertise (but beware: DON’T get into deals which restrict your commercial options and effectively give the whole company away)

The second panel was populated by three VCs active in medical devices – Abingworth, NBGI and Gilde.

Two interesting things came out of this panel.

Firstly, the venture capital model is undergoing major structural change. Previously, following the US, the model was for VCs in Europe to raise sizeable funds and to be the primary source of go-to capital for emerging medtech entrepreneurs. The rationale behind this was that exits flush with large returns would enable recycling of funds into next generation companies. This would enable dollars under management to grow and enable a virtuous cycle.

But it hasn’t quite worked out this way in Europe. Whether you blame poor asset class returns, financial recession, drip-feeding of companies that stalls growth, or lack of entrepreneurs in Europe who know how to dream and build big – it doesn’t matter. The point is, lack of solid consistent returns has led to limited partners being less keen on investing.

In the new venture capital cycle, the panel suggested the following is occurring – more support from governments and family offices (FOs) or Super Angels at the seed stage. Of course, business angels have long supported start-up ventures in medtech – I work with several companies who have successfully tapped such resources.

However, the Super Angels are business people who have reached serious levels of success themselves as entrepreneurs, thus having significant investable funds – sometimes $Billions – and entrepreneurial savvy in spades.They may act alone or together in loosely affiliated networks.

The VC funds including medical devices as a focus are thinner (i.e. smaller assets under management), and entrepreneurs have less reliance on just VCs as the go to investors. VCs are also deferring risk, preferring instead later stage opportunities which are near or at commercialization stage. (As someone who helps emerging medtechs with financings, I’ve witnessed this first hand).

So, entrepreneurs are having to be much more focused on lean management, virtual business models (see post on How virtual can your medtech start-up be?), scrappy seed financing (i.e. street-fight to get what you need) and bootstrapping their early stage ventures until they gain some of the features listed under corporates.

Super Angels – financing firepower to the rescue?

Secondly, this new cycle also means VCs will have to be much more collaborative with other investment partners. One of the VCs even quoted research to highlight that having corporate investors in the capital structure leads to better returns for all investors – and more than one corporate investor led to better terms still (maybe promoting an auction process when it comes to exit time?)

Multiple times, on the panel and informally, people were talking about and seeking the elusive Super Angels and FOs that will come to the financing rescue.

This could end up being a positive trend all round – term sheets will hopefully get simpler as different shareholders with different objectives have to learn how to work together. VCs will bring financial discipline; corporate investors will bring longer-term and strategic insights; and Super Angels can bring hardcore business savvy earned while building their own empires.

There are certainly less of these Super Angels around by absolute number, but when they want to play, boy can they play with some serious firepower. This was evidenced last week by CureVac, a vaccine biotech raising $104M from Dietmar Hopp, a multibillionaire founder of SAP. Who knows, with such backing maybe your company could take off?

Just in case you don’t know a multibillionaire software magnate who wants to cure cancer, my mantra for emerging medtech entrepreneurs, and indeed for ANY entrepreneur, would be:

GO LEAN, GO NICHE, GET SALES

(as described in post: Is Pharma’s perfect storm biotech’s greatest opportunity?)

Probably, the most important lesson is that each investor is different. It’s all well and good looking to raise money at a medtech investor conference – on the surface every one is interested in the same sector and looking for profitable opportunities. But once you get under the hood, investors’ interests are almost as wide as the range of companies listed above – all in medical devices, but each with a different focus.

Each has a focus and preference in terms of; therapeutic area and niches – from super niche to diversified; partners’ experience; investment size; stage of development; business models; level of active involvement – from founding and managing early stage investments through to large capital investments for late stage roll-outs; life of investments; and expected returns.

Learn the specifics of investors (VCs and others) that you would best fit for. And if you don’t know the specifics, find someone who does (see post: What every medtech entrepreneur should know about VCs.).

Finally, the most poignant advice I received at the conference was from a serial medtech entrepreneur, inventor and surgeon. It was advice he received early in his entrepreneurial career:

“If you want advice, ask for money; If you want money, ask for advice”

Addendum: I attended AdvaMed in Boston in October, and met a company which had raised $61 million from angels. This included 2 SuperAngels who between them had invested $25 million. The company is Cohera and is developing next generation tissue adhesives for use in surgery. I spoke with Cohera’s CEO – here are his lessons about raising SuperAngel money?

1. Set a minimum amount investors can subscribe to – for Cohera this was $250,000. It gives you posture, and means you have fewer investors to work with later (imagine handling a few hundred small investors – a full-time job in itself).

2. If you choose your SuperAngels well (i.e. where the investment is a small amount for them personally), your investors will likely give you a much longer-term perspective to build value.

This is the first in 2 articles about MTI Europe. The next post will be about Exit strategies for medtech.

This post is by Raman Minhas. If you’d like to meet in person, I’ll be at AdvaMed 2012 in Boston, 1-3 Oct.

Image: Blue Angel F-18 Super Hornet

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3 thoughts on “Medtech entrepreneurs: What do investors want?

  1. Raman,
    Any company with the characteristics you mentioned will not need financing. It will have already lined up and beaten their doors down.
    What about the more normal, lowly guys who aren’t quite so super-enpowered?
    Best,
    Steve

    • Steve,
      Thanks, great question. You’re right, if someone has achieved all or most of the traits mentioned, they should have investors beating a path to their door (should!). So, the list is meant more as a benchmark for entrepreneurs to aim for – the closer they get, the more likely they are to find the funding they seek.
      Also, any company will be on a continuum of achieving these facets – some more than others. But even for those that have achieved well, I still don’t see it as being home free – it’s all about execution, continuing beyond the suggested list and making sure you build on this foundation.
      Best,
      Raman

  2. Pingback: Exit strategies for medical devices | Medtech Value Investor

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