For medtech startups getting through the doors of venture capitalists can be a tricky business. However, non-VC sources of finance are growing rapidly and giving entrepreneurs more choices than in the past. Alison Warner looks at four alternative funding options
Here’s a headline to cheer the weary medtech entrepreneur. In Q3 2015, venture capital funding for the sector hit $821 million, the most since Q2 2011, according to the MoneyTree Report from PWC and the National Venture Capital Association.
But you don’t have to drill down too far into the figures to have your jubilation tempered. Most of the cash went to the ‘big boys’, who were already close to market with their product. The picture for start-ups and small firms was much less rosy, with the total number of deals just exceeding 1995’s all-time low.
So what’s an SME to do? VCs are often the richest source of funding for ideas that require significant capital to develop, and if their appetite for investment isn’t there, is it simply case of accepting defeat before you begin? Before you assign your big idea to the wastepaper bin, take a look at some of the other funding options out there. They may get your company off the ground and make you more attractive to VCs in the medium- to long-term.
Bootstrapping is a lovely term for using your own funds. ‘This has some advantages over seeking investment, whether it be debt or equity,’ says Adam Cox, veteran financial journalist and lecturer.
‘Compared with debt, it means there’s no interest to pay and no need to pay off the principal when the debt comes due. Compared to equity, it means you have a bigger share of the venture than you would otherwise,’ says Cox. What’s more it keeps you lean and flexible, and can help you take advantage of a market opportunity without having to wait to get investors on board.
‘The downside,’ explains Cox, ‘is that you’re tying up your own money and, if the venture doesn’t succeed, you take the hit.’ And there’s another big ‘but’ in this scenario, says Dr Mark Kelleher, who has worked in three pre-IPO companies and two post-IPOs in the medtech and biotech sectors. ‘It takes a lot of money to get a lab together and to get regulatory approval before you can even start selling a product into the most conservative market (doctors) with the most parsimonious payers (Insurance companies).’
That’s not to say it can’t be done: ‘A friend of mine put a second-hand, real-time thermocycler PCR machine on a credit card and rented a bench for a while. He came up with a great assay,’ says Kelleher. ‘But then what? He still needs to find the funds to get a lab started.’
If you don’t have your own deep pockets, it may be worth exploring one of the newer funding options – startup competitions. It worked for Samantha Payne and Joel Gibbard, co-founders of Open Bionics, which uses 3D printing technology to create affordable robotic prosthetics for amputees.
‘There are a lot of reasons for entering a competition,’ says Payne. ‘It gives your business a platform and it throws you into new networks; you get publicity, an introduction to investors and sometimes funding. Depending on where you are in your product cycle competitions can be incredibly helpful. We gained our initial funding by pitching in startup competitions,’ she adds. ‘We were placed second in Intel’s “Make it Wearable” competition, winning $200,000. That enabled us to get prototyping and hiring,’ she says.
A lot of column inches have been given over both online and in print to this ‘new’ form of funding and investment. Its evangelists see crowdfunding as a game-changer, whereas the more seasoned investor views it as a funding source to be treated with cautious optimism.
‘Crowdfunding disintermediates the firms that normally make money by providing or arranging investment capital,’ explains financial journalist Cox. ‘It allows an entrepreneur to make his or her case directly with a wide number of investors, without the middlemen.’ But is it a realistic funding source for medtech startups? ‘If you can find something that grabs the public’s attention, then why not?’ says Dr Jamie Ferguson, Deputy Head of Technology Transfer, Chemistry and Biophysics at Isis Innovation Ltd. And that’s the key to success with this option – an attractive proposition that can be easily grasped by a large number of investors, which is not, however, something that is often an easy ask for medtech projects in the early stages of their development.
Another thing to consider is that it’s not unusual for medtech projects to be seeking funding of hundreds of thousands of dollars just for initial R&D. Many of those attracted to crowdsourcing are micro-investors who are willing to take high risks with a very small amounts of funding, so raising the money you need might not be as easy as you think.
That’s not to say that it should be dismissed altogether. In an interview with MedCity News, Solomon Nabatiyan, co-founder of crowdfunding site TechMoola, advises that start-ups look at crowdfunding to support a discrete ‘point-A-to-point-B’ type of project. ‘Crowdfunding is not suited for entering at a conceptual point,’ he says, adding that where it can be useful is after early development work has been done and funds are needed for technology validation or testing of an early prototype.
For those medtech firms unable to access personal funding or that don’t have the element of showmanship required to get crowdfunding or win competitions, there are, of course, incubators.
‘Incubators are often the best way for medtech companies to get a start. Hardware and scientific equipment is expensive, and there may also be patent costs,’ says Applications Scientist, Dr Michelle Bingham. ‘An ex-colleague of mine used his severance money to become a patent agent as a way to cut the required costs for the product he is developing in his home office. Last thing I heard he was having to look for lab space because investors want to see the product, so he feels he needs an official space.’
Anita Thornberry is Director of the Medtech Campus at Anglia Ruskin University, which aims to help UK medtech firms not only address these resourcing and funding issues but to bring their product closer to market. ‘We operate our own proof-of-concept scheme where eligible businesses can access a range of support valued at £12,000 across two stages,’ says Thornberry. This includes: subsidised business accommodation, world-class academic support and professional business mentoring, alongside support towards high-quality prototyping, testing and clinical trials.
‘The idea is that the products are refined by our academics and checked with clinical experts. We do not demand a share of the business or IP,’ says Thornberry. ‘Our interest is in making strategic partnerships with companies for collaborative bids and extracting the research for our academic use.
‘The benefit for the medtech start-up is that we ensure the product is fit for purpose and that there is a need for it,’ says Thornberry. Having this strong business case can then help start-ups looking for second-stage funding because it ‘can help provide VCs with comfort around viability’, she says.
And so we complete this look at funding with a return to venture capital. While competition is fierce, commercially strong ideas do still get backing. The trick is to avoid approaching VCs if you’re still at the concept stage.
‘Medtech is risky, so it’s best to get as far down the line as you can,’ says Open Bionics’ Samantha Payne. ‘This will ensure your company gets a higher valuation as there is less risk involved for them.’
‘Captive or corporate VCs, which are the venturing arms of a larger companies, are worth looking at,’ says Isis Innovation’s Dr Ferguson. ‘One is GSK’s, for example. They typically invest in companies that are either developing technologies that their parent company is interested in or maybe in those that are acquisition targets.’
The aim is to make it easier for larger investors to see the bigger picture. ‘VCs are not looking for a typical Dragon’s Den scenario,’ adds Dr Ferguson. Your chances of securing funds become much greater, ‘if you’re further down the line, if you’ve done your due diligence and got regulatory approval to sell your product, it reduces the horizon to sale and/or exit for VCs’, he says.
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