4 Ways to Align Product Development with Investor Milestones

In our business, entrepreneurial founders often ask what they can do to create the most value for themselves. After 23 years and participating in hundreds of medtech stories, I believe creating founder value has a lot to do with focusing on value an investor would recognize.

The lean medtech startup journey is about investment efficiency and risk mitigation. It envisions the startup as a series of experiments, prioritized by risks. Unsurprisingly, the typical technical phase-gates in a development process correspond quite well with typical investor milestones.

The pre-seed round typically happens in the conceptual development phase, culminating in a seed round once the conceptual development gate is passed. The A round often happens about when an alpha prototype is ready and tested. Sometimes there’s a second A round to fund clinical testing and detailed product design. The B round often happens when the Beta/commercial prototype is tested, clinical testing is done, initial market regulatory approval has been submitted, and launch preparations are underway. These technical milestones typically correspond to major reductions in investor/business risk.

We have found realized exit value is often heavily influenced by product/consumable margin and scalability, but early market companies don’t have the scale to achieve margins yet. (Navigating that judo trick is a topic for a future article.)

Aligning all technical activities around the investor gates typically means, in practice, the whole company must be aligned around lean startup milestones and risk mitigations. Easy to say, but we often see misalignments inside companies on how to prioritize different risks. How should you compare relative value of improved firmware vs. usability insight vs. a regulatory approach vs. an IP strategy vs. technical proof-of-concept vs. better user needs assessment? How good is good enough in each of those areas? In practice this dance is infinitely complex. Unless the approach is very deliberate a lot of effort can be wasted resulting in unnecessary founder dilution, which can become critical later. 

1. Never Gild the Lily 
Each round of prototyping and proof of concept should never be more refined than necessary. The prototype is for a specific limited purpose—perhaps to prove a technical challenge can be overcome, or some influential users will endorse the concept. Maybe it’s to develop a core concept so IP can be filed, or so early clinical or animal data can be gathered. What is the fastest and cheapest way the desired outcome can be reached? Investors have a lot of big picture concerns on their minds.

2. Teach People What Matters 
The approach of minimalism by investor milestone is often counterintuitive to engineers. They believe they’re trying to optimize overall cost and timeline and often want to make each prototype as good as it can be to save money later. However, the startup company is spending dollars, not shares. If the company is successful in reducing risks and proving value, shares will become more valuable later. Spending future shares to address issues with present prototypes is more effective, even if it costs extra later. We’ve found once engineers understand the game, they are more than capable of finding the right compromises. Business leaders often forget those on the design front lines make judgments every day on how much to refine design aspects. The better their knowledge of the context, the better their decisions will be. 

A client had once presold their technology to another company on the condition they could achieve certain clinical demonstrations. Anything beyond that demonstration was money they’d never see again and would get no return on. Once the engineers understood that goal, they could focus solely on requirements for a speedy and cost-effective clinical demonstration. 

Another client needed to demonstrate market traction as quickly as possible and placed lower weight on margin. Early market validation would allow them to resolve their biggest business risk. We could first focus on speed, then margin and manufacturability improvements in a second iteration. The client raised the capital needed for launch and rollout—without aligning the engineers to these business goals, they might have chosen different priorities in their technical work. 

3. Technical Milestones Are Really in Service of Business Questions 
Another typical corollary is that technical milestones are really in service of business questions. The technical team easily forgets this. A working prototype is only useful in that it produces evidence: usability data, animal data, or clinical results.

One client wanted 300 clinical prototypes in the conceptual development stage. It was unusual, but the patient risk was “non-significant” and the business question was an important one. They wanted to prove the disease state they were looking for could be detected in the field. Even at the cost of a more formal trial later, they were willing to pay to get information early, likely a good business decision. 

The biggest and trickiest business question is “does anybody care?” It’s also a difficult question to tackle in early going. That’s where the lean medtech startup differs from the more agile internet SaaS startups. In this industry, we don’t get the luxury of selling things prematurely; there are regulatory barriers in place for good reasons. We must find other ways to access market proxies. Sometimes we make usability prototypes simply to let target users test the product and get a feel for whether they would use it in practice. The result can be a strong investor signal.

4. Don’t Lock in Specs Too Early 
Another thing people often miss is how to achieve the best solution they’re entitled to. The key point of the lean medtech startup, in our experience, is incrementally working out the best business value proposition that maps the clinical indication and technical approach together. Sometimes, even those evolve—preserving some ambiguity until later allows the right amount of flexibility, and that flexibility is potential. The right creative team can find a better solution than had been originally imagined. 

For example, a few years ago we had a surgical project involving a laser, and we received a fairly detailed spec for a design for manufacturability exercise for a handpiece. We got about halfway through that project and the engineer suddenly realized, “Oh my gosh, what this company actually wants here is not a design for manufacturability, what they want is a favorable exit.” Their business trajectory and their narrative was they wanted to sell the company and wanted to sell this product off for many millions of dollars and have a big impact.

He could see the value of the transaction was going to be driven by the disposable margin. It wasn’t about the design for manufacturability per se—because the buyer would redesign it later—and the proof-of-concept was already established for the technology. The key challenge was about demonstrating high margin potential for the key consumable element, which meant getting an expensive exotic optical fiber as short as possible. That approach really transformed the project and a few months later they did the exit for many more millions of dollars than they had hoped for. A substantial amount of that value was driven by the engineer’s insight, which had nothing to do with the spec. 

While matching activities to investor milestones in a medtech startup seems straightforward, in practice it is anything but easy. Having everybody aligned on the goal is a good start but isn’t sufficient. Different people will naturally have different interpretations of what those goals mean. I hope the principles I have laid out here are useful guides for how to align your technical team’s activities in support of your lean medtech startup journey. 

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Scott Phillips has a degree in engineering physics from the University of British Columbia. Prior to starting StarFish, he worked in lithium battery development and manufacturing, UV spectroscopy instrumentation and hi-fi audio speakers. Under his leadership StarFish has grown into a diverse professional organization with clients around the world and 100 percent focus on medical devices. Scott is a chair of the LifeSciences British Columbia board, member of the 2022 VIATEC Board of Directors, Fellow of The Canadian Academy of Engineering, winner of the EY Entrepreneur Of The Year 2017 Pacific Awards Technology category, 2017 recipient of the VIATEC Technology Champion award, and volunteers with Junior Achievement, Entrepreneurs Organization, and University of British Columbia.