With tougher regulations and more complicated reimbursements, money is thinner on the ground. To learn more about options for funding a new medtech innovation – from healthcare venture capital to crowdfunding – we spoke to Wende Hutton, healthcare investor and general partner at global venture capital firm Canaan Partners
In addition to traditional healthcare venture capital, there’s also strategic venture capital, which is a big source of funding right now. This involves large companies like Medtronic and Boston Scientific, which provide funding through their venture capital arms. They have more of a ‘strategic overlay’ to their investing. Large companies invest primarily in next-generation products that might augment core business units and enhance franchise value say, in interventional cardiology or ophthalmic surgical products.
Some corporate players are choosing to partner more often with startups because they know that funding is thin on the ground at the moment and they want to keep the engine feeding their R&D pipelines running.
The third broad source of funding is angel investors, family and friends. There are formal angel groups, but there are also many entrepreneurs who get started with money from family, friends and former colleagues.
Over the last decade, there has been a dramatic shift in how medtech startups are funded; ten years ago, more than 80 per cent of funding would have come from venture capital, now it’s only about 20 to 30 per cent.
Medtech isn’t a sector where you’re going to back a 25-year-old with a wild idea in the way you might see on the tech side – unless that 25-year-old has a PhD or a huge wealth of expertise in their field. Venture capitalists tend to back proven experts. We want entrepreneurs to have all the knowledge base for that particular field; we don’t want them learning about a field or a device on the job.
VCs also tend to go for large market opportunities, probably in excess of US$500 million. We look for opportunities where there is a reduced reimbursement risk and where the economic value of the new technology will work out well in a European socialised medicine environment, as well as in a procedure-based environment in the US. We also look for opportunities where there is some evidence that the device will actually work clinically, and where it has been developed far enough to ‘have legs’.
Most significantly, with traditional funding, an entrepreneur tends to get the benefit of having active board members, who can help with areas such as recruitment and board governance, as well as offering a broader perspective.
Traditional healthcare venture capital funding can also help with future financing rounds. In contrast, if you opt for crowdfunding, you have no idea whether you can go back to that source in future. If you have venture-capital or strategic-venture capital money, you have some security around your funding strategy. When a venture firm invests, it reserves money for future rounds – so it may be part of the source for additional funding.
It’s hard to get funding from some of the more traditional healthcare venture capital sources because expectations are high right now. Healthcare venture capital has been a tough area to make money in over the last ten years, as the regulatory bar and reimbursement risks have risen.
A decade ago, a lot of VCs invested under one set of assumptions and then found themselves in the middle of a ten-year slog that cost US$80 million. They didn’t make money on those deals and, as a result, have retreated. There’s much less funding available now.
There are different risks with crowdfunding. One is that there might not be any further rounds of funding forthcoming after the initial one. It’s also likely that you will still need to find additional funding sources. If an entrepreneur needs to raise US$20 million to $30 million overall, for example, it’s unlikely that he will achieve that through crowdfunding alone.
You will also be raising funds from a group of unknown people and so will be answering to a number of investors – some of whom might be knowledgeable about medtech, while others might know nothing at all. This means you will have the cash but not necessarily the expertise or ongoing support your company needs.
This synergistic approach can work. We expect that initial funding sources for startups will be likely to come from crowdfunding or from angels, family and friends. If you don’t have alternatives, crowdfunding is a good option; it can help you get started in the early days and to take your company forward to the point where it might be of interest to healthcare venture capital investors and other traditional sources. Since the regulations bar has been set so high, VCs want to see more progress before they jump in. Crowdfunding is potentially a great way for an entrepreneur to get an idea off the ground, build some prototypes, file some patents, and do some initial pre-clinical testing to provide proof of concept.
Entrepreneurs need to think about capital-efficient ways to prove their technology early on. Essentially, they shouldn’t be paying to build a company until a company is actually ready to be built.
You're the expert! Write for The Engine or share your articles, papers and researchAdd your content
Add your content
Sign up for Ignition, our regular, ideas-packed newsletter