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MedTech Startups: a VC Perspective

MedTech Startups: a VC Perspective

5 points to build a MedTech startup according to Venture Capitalists

Giammarco Pacifico & Federica Montrone
December 06, 2023

Saving lives and improving health conditions are the ultimate goals of those innovating the medical device world.

Of course, there are a lot of hurdles in this journey, a good idea no matter how disruptive it is, needs to undergo the never-ending review from quality, and regulatory affairs and be validated not only technologically-wise but also from a clinical standpoint.

But how does all of this take place?

To make it out of the “valley of death” the period between initial investment and creation of a commercially viable product (see the image below), sooner or later any startup has to turn to a Venture Capital firm. They are the ones who ultimately decide whether a crazy idea might have a viable future.

Credit: NIST

If you are out there figuring out what to focus on and you’re maybe contemplating the idea of starting your own VC-backed company, here is a short review of the boxes a medical device company has to tick to be judged as a good opportunity from an investor standpoint.

The following points come from this article authored by Juan-Pablo Mas, (Action Potential Venture Capital, GlaxoSmithKline, Palo Alto, CA) and Brian Hsueh (Department of Bioengineering, Stanford University School of Medicine, Stanford, CA).

Is there a Market? Is This Market Worth Entering?

As the ultimate goal is to make the investment profitable, one has to make sure or at least assess that the value proposition of the startup has good potential.

Is your product effectively improving the patient experience? Or is your product so good to disrupt the physician inertia to its common practice?

Those are common questions that an investor would try to get an answer to have a taste of how promising your product is and how big it is chance to have a market afterwards.

Generally speaking, devices can belong to two types of markets:

Limited market size with very few competitors, like orphan disease
Broad market size with lots of competitors, like diabetes and obesity

From a VC perspective, the latter is more interesting because even if riskier, the large market opportunity (and potential financial returns) make it more suitable for their risk profile.

VCs are looking for large market opportunities because of the way their investment model is built. For example, out of a portfolio of 20-30 companies, they are looking for 1-2 companies to become very successful and return ~100x of their investment. Only in this way, they can offset most of the companies’ failing while returning money to their investors.

If the market opportunity is not big enough, it would be unreasonable for them to make that investment. If you are curious about this, here is a more in-depth overview of a Venture Capital deal.

Is it a product or a company?

Many times startups develop new products or components which can easily be integrated into already existing products of another medtech company. Other times a startup develops a disruptive product with the chance to gain its piece of the market, which might be more attractive from an investor standpoint.

Moreover, to make a more compelling case and increase the chances of success, it is better to target a specific application, which is something to always take into account when resources are finite while building a more solid reputation in a field.

Demonstrate a specific focus, plan, and traction for a lead application. Of course, avoid circular logic such as “if you build it, they will come”

An investor perspective on forming and funding your medical device start-up - Mas, J. P., & Hsueh, B. (2017).

Do you have any Intellectual Property?

In the medical device field, it is almost essential to have the innovation protected through patents. Indeed it still is one of the top fields that solidly develops upon patent filing.

The IP is also relevant from an investor's point of view because it determines how much the current and future market share can be protected over time. In general, an investor is interested if the product is patentable, or if the claims are defensible when already patented while having freedom to operate.

It’s important to keep in mind that a patent is an important but insufficient condition to build a successful product. Almost all patents end up being worthless but the few who do can change an entire industry.

Who is the team?

From an investor perspective, it is important to have the right people on board to ensure critical milestones are met for the next stage of the company.

However, the most important team player remains the CEO, essential to driving the company's success. Especially at the beginning of a company, the founder coincides with the CEO. However, sooner or later it might be needed to hand over the lead to someone with the proper expertise as CEO to guide the company’s growth to the next level.

Quite often CEO careers end up being affected by the paradoxes of success, with little room at a certain point to do anything but step back for the company’s benefit.

How and where do you search for funding?

Ultimately, the type of investors shall meet certain criteria to best suit the company's needs at a specific moment of the company.

At an early stage, the best options are grants. Those are very competitive but in general, are non-diluitive and could pave the way to larger private investments in the future.

Other starting options are private investors like family and friends (when financially savvy and available to allocate some capital to a risk investment) and angel investors.

However at a certain point, when you have already demonstrated a proof of concept, it will be time to turn your prototype into a real product, which requires a large amount of money.

This is the time when you would rather turn to Institutional Venture Capitalists. As a founder, you should wisely judge who you bring on board as a shareholder and even more who joins as a Board member.

The best way is to dig deeper into what the fund does and how the investor leading your round can add value to the company. Figure out these:

Does the fund have a market focus?
Does the fund have experience in your field?
Does the partner bring some value to your subfield in particular?
Does the fund have a focus in terms of funding stage?

Depending on your stage and focus these questions will have different answers. However, keep in mind that those are the people you are going to work with for several years: investing time to build a healthy long-lasting relationship will certainly pay off.

This week's top scientific reads

The efficacy of combination therapies in oncology (Nature)
A window into the world of astrocytes (Science)
The genes behind rare diseases (MedRxiv)
Your mouth tells you when to stop eating (Nature)
Zoom fatigue is scientifically true (Nature Scientific Reports)

Read a summary of these articles here.

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