Fundraising advice for medical device startups – 7 tips for angel funding, 3 more for VC funding

Not that this advice is any guarantee of success in fundraising but it’s fun to read what an angel investor and a VC fund manager have to say about how startups approach them, position themselves, and make their pitches.

Both articles are from MedCity News and were written at AdvaMed 2013. The angel investor article is a brief interview with Allan May, the founder and chairman of Life Science Angels who spoke at the Angel Investment Forum. The VC advice comes from Paul Grand, managing director at Research Corporation Technologies Ventures, a life sciences firm focused primarily on medical devices.

For startups fundraising from angel investors,

  • Your intellectual property (IP) may be the most important indicator of valuation and whether you will be successful in your funding quest. Investors need to plan an exit before they invest. Because the most likely exit is via acquisition by a larger medical device company, and medical device companies hoard patents like misers, it’s in everyone’s interest to have the strongest possible IP portfolio.
  • Unless you have a successful startup track record, a stellar team, and potential for a very large exit in 3-5 years, avoid VCs and focus on angel investors. They are willing to invest in smaller, less perfect deals than VCs.
  • Whether you want it or not and whether you like it or not, expect your investors to take a personal interest in your startup and the way you run it. That means lots of phone and face time giving updates and answering questions…and listening to advice.
  • Because angel investor consolidation has become the norm in raising Series A and beyond, investors will know each other. They won’t invest with others they don’t like, trust, or respect. Same holds for your board members – choose them carefully as they are a direct reflection on you.
  • Mr. May also said “This isn’t about picking technologies, it’s about picking people.” My experience suggests that for most early stage entrepreneurs, your technology qualifies you for consideration while your reputation, track record, and interpersonal skills can usually disqualify you.
  • As for how much money you should raise, “The amount of money you should raise is the smallest amount of money that can have the biggest impact on your valuation in the shortest period of time.” That’s a cute way of saying it’s easier to raise the next round at an increased valuation…because you executed your plan and achieved your goals.
  • This last bit of advice is my favorite and probably the most practical in the interview:  Get someone who knows the angel investor to take the business plan to them. . . “Getting into the pile [of business plans] is not a success.”

From the VC fundraising perspective,

  • Be sure to research the VC firm and the partner before the pitch and adjust appropriately. Every VC is different. Do your homework online and through your network. If you are at the level of pitching to VCs, there should be no surprises.
  • Make sure your startup team has the right experience and is correctly sized. These days, you can run a virtual or lean company a long way toward commercialization without expensive full-time executives. There are plenty of freelancers, contractors, and consultants ready and eager to help…”at the beginning, you just need the founder and the engineers…”
  • If all you have is an idea and technical/clinical skill you should wait a bit before approaching VCs. You are unlikely to get a signed nondisclosure agreement, much less early stage financing from VCs if you make your pitch too early. There are incubators and seed investors who can help you become ready for VC investment. As discussed above, consider angel investment as an alternative to VC funding.

Takeaways: Medical device fundraising is hard but there are steps you can take to improve your chances of success. Make sure you know the expectations and criteria of the people and firms to whom you are pitching. Make sure your startup is a good fit with your prospective investors. Just like Goldilocks and the three bears, you must position the opportunity you’re presenting as not too small, not too big…not too early, not too late. 

Read more:

Need angel funding for your early-stage healthcare startup? 7 smart tips from investor Allan May – MedCity News.

Three big mistakes medical device companies make when pitching VCs – MedCity News.

How to Get Payors to Pay For Your Medical Device | MDDI Medical Device and Diagnostic Industry News

You and your medical device development team have created an exciting new widget. You’re gearing up for a costly product launch. How do you make sure health insurers will reimburse hospitals for purchasing your device?

It’s a very important question because hospitals will not purchase your device unless they are confident that they will receive reimbursement from the payor (insurance company).

If your widget is the same as existing products except it’s cheaper, congratulations. You’ve developed what could be considered a commodity product. You can take advantage of existing reimbursement codes (CPT and DRG) and explain the codes to the physicians and decision-makers at the hospital. You can sell your device on the basis that it saves money.

If you have created a really new widget that is unlike other devices, congratulations again. You’ve developed a differentiated product. Your reimbursement effort is just beginning.

If you haven’t done so yet, now would be a good time to engage with a reimbursement consultant. Perhaps your new widget can fit within existing reimbursement codes. If not, the path will be long and involved to get a new code – a topic worthy of its own post, perhaps even a chapter in a book.

In a discussion at AdvaMed 2013, Alan Muney, chief medical officer at Cigna, said Cigna asks three questions when considering coverage for a new device:

1. Has the new technology been proven by studies in peer-reviewed journals?
2. Has the new technology produced better outcomes than current technologies?
3. Does the new technology produce the same outcomes as current technologies but at a lower cost?

These seem like reasonable questions. Although Dr. Muney did not explicitly say so, I’m assuming that you need only answer “yes” to one of these questions in order to be considered for coverage for your device. The questions all have implications, however.

First, to have a study published in a peer-reviewed journal generally means you must conduct a randomized clinical study with enough statistical “power” to make a definitive conclusion. In this context, “proven” means that the new technology has equivalent or superior clinical efficacy to the existing “gold standard” technology. And you already know that clinical studies are expensive and take a long time to conduct.

Second, “outcomes” are more focused on patient health than on a comparison with other technologies. You will need to conduct a clinical study, but with different endpoints measuring different things. The study may last longer and involve more patients, all of which will cost more money and involve more risk to you, your company, and your investors.

The third question adds costs to the equation, not just the procurement costs of your device but the Big Picture costs: does your technology reduce or increase overall costs to the healthcare system? At this point, you may need to consult with a healthcare economist to determine what to measure and how to measure it. And proving cost claims usually involves conducting a big, expensive clinical study. Of course, if you prove better outcomes at reduced cost to the healthcare system, congratulations again. Your product should be adopted rapidly and your focus will shift to keeping up with demand.

Takeaways: Obtaining medical device reimbursement is complicated and risky. It increases costs and time to market for many medical devices. You can’t go to market without knowing how (or if) your device will be reimbursed by insurers. During your business planning process, you should have an idea as to which of the three questions raised by the Cigna CMO you can positively answer for your device. That response should also help inform the size, cost, and duration of the clinical study you will need to conduct. And that will be an important component of the capital you need to raise for commercialization,

Read more: Cigna CMO Explains How to Get Payors to Pony Up For Your Device | MDDI Medical Device and Diagnostic Industry News Products and Suppliers.

Startups beware. A potential “death sentence” awaits the uninformed.

A fine example of unintended consequences, the JOBS act (Jumpstart Our Business Startups) was supposed to make it easier for startup companies to raise capital and to talk about their financing needs without getting into hot water with the SEC. The law was passed with bipartisan support, and was signed into law by President Obama on April 5, 2012.

As this GeekWire article points out, the new law has made it somewhat easier for startups to conduct IPOs. Unfortunately, that’s the last thing a startup does before it gets transformed into a public company.

The provisions of the JOBS act can actually jeopardize the fundraising activities of a startup during the critically important early stage, before significant capital has been raised and probably before the companies can afford expensive attorneys to advise them.

The main issue with the JOBS act from a startup perspective is that it has complicated rather than simplified the rules around “general solicitation,” the prohibition against publicly offering equity in the company in exchange for investment. The prohibition applies to participation in pitch events, very common forums where startup CEOs present their pitches to a crowd containing a mixture of people, including (it is hoped) a few angel investors.

At least one Internet-based angel investor “crowdsourcing” site, Poliwogg, is counting on the new law to attract novice angel investors to its online marketplace for healthcare company investment opportunities. It remains to be seen if the details of the regulations have a chilling effect on what could be an important resource for early stage startups and for prospective angel investors.

Dan Rosen, a prominent Seattle angel investor who was interviewed for the GeekWire article, pointed out that the “death sentence” can occur if a startup makes two mistakes regarding general solicitation. The penalty from the SEC is a one year prohibition against fundraising. That would sink most startups.

What’s next? A number of organizations are lobbying for changes to the law or at least a more lenient interpretation by the SEC. Given the polarized climate in Washington, D.C., it may take some time for this issue to be resolved.

Takeaways: Startup CEOs should educate themselves about the provisions of the JOBS act as it applies to them. As the saying goes, ignorance of the law is no excuse. I’ve been reading the blog of a Seattle attorney who has a special interest in this matter, William Carleton. You can reach his blog here: http://www.wac6.com/ It’s also wise to engage a corporate attorney who is experienced in startups and startup financing law. Yes it’s expensive but it may be the best insurance you can buy for your startup.

Read more: The messy side of the JOBS act, and the potential ‘death sentence’ for startups – GeekWire.

Crowdfunding for Medical Devices

The notion of crowdfunding early stage medical device development is spreading. By now everyone is familiar with Kickstarter and the many examples of companies that have successfully raised funds by appealing to large numbers of “average Joe/Jill” supporters. There are more than a few copycats now that Kickstarter has been successful. Most, however, do not encourage or permit crowdfunding of medical devices.

http://blogs-images.forbes.com/85broads/files/2012/03/crowdfunding-photo.jpg
Image from Forbes.com

There is obviously a funding gap for many early stage medical device companies. Venture capitalists have abandoned the early market except for blue chip prospects. Angel investors have become extremely risk-averse in my opinion and have functionally replaced VCs (although not the big VC investments of 10-15 years ago). Between federal budget sequestration and increased competition, grants from NIH, CDC, NSF, and DoD have dried up and take too long to be a reliable source of funds for most startups.

As usual, savvy entrepreneurs to the rescue! Here are a few specialized sites that are crowdfunding medical device startups:

  • Medstartr “Patients, Doctors, and Companies Funding Healthcare Innovation.”
  • Poliwogg “Put Your Money Where Your Passion Is”
  • indiegogo “The world’s funding platform. Fund what matters to you.
  • b-a-medfounder “A uniquely positioned crowdfunding platform dedicated to medical device invention and innovation projects.”
  • healthfundr “Accelerate health innovation. Invest in the companies shaping the future of health.
  • microryza “FOLLOW & FUND SCIENTIFIC RESEARCH

Many of these sites and organizations are new and do not have a track record. Most are focused on investors who want to put in a small amount of capital. Perhaps they are angel investment neophytes who are just starting out or maybe they prefer to make lots of small investments. Who knows? Others seem to focus on “donors” who are essentially giving a gift to the company, again, for very personal reasons. In any event, all of the crowdfunding sites seem like resources to investigate for early stage startups looking for that first $100k or so of seed funding.

It will be interesting to see how these services develop. As many of you know, early stage investors can get diluted down to almost nothing in terms of equity very quickly. And although medical devices cost only a fraction of what a biotech drug might cost to develop, it still requires a minimum of a few million dollars in capital to get a Class II device to market. If that funding is stretched out over a few rounds, the early stage investors almost certainly won’t get much, if any, return on their investments.

It remains to be seen if a relatively obscure and small niche like medical device development can attract sufficiently large numbers of investors. It’s also a big unknown if the proliferation of crowdfunding sites prevents any of them from reaching a critical mass of investors.

There are caveats in using these services, of course. Just as investors perform due diligence on you and your startup, so must you conduct your own diligence on the crowdfunders. Keep in mind also that these are for-profit businesses, not charities. They will take a percentage of the funds you raise. One popular crowdfunding model takes a percentage if you raise your target amount and a larger percentage if you fail to achieve your fundraising goal. I suppose that’s intended to be an incentive for you to work hard to promote your offer.

There is also some uncertainty about how these sites screen for accredited investors and avoid the laws against general solicitation. I’m certainly not well-versed in these matters but I’ve been keeping up with recent new regulations issued by the SEC on a blog written by a Seattle attorney, William Carleton. Read it here: Counselor @ Law.

There is also an older, more established online funding presence at AngelList.

Takeaways: Crowdfunding is a relatively new funding option for medical device startup CEOs and CFOs to consider. Add this option to your fundraising toolbox. Keep in mind that these investors may be less financially sophisticated and less experienced than the typical angel investors you are accustomed to dealing with. Some of these investors may be making decisions based on emotion. I strongly recommend consulting an attorney before signing up with any of these services and at least getting a thorough review of the service’s terms and conditions.

Read more: Inventor launches crowdfunding hub for medical devices – FierceMedicalDevices.