Revenue-Based Financing: A New Form of Growth Capital

Medical device innovation is an astronomically expensive and uniquely intensive endeavor. Research, product development, testing, regulatory approval, and manufacturing all add up to a significant price tag and laborious process. It’s a long road for equipment that can make the lives of healthcare patients better and reward the team of researchers, device developers, and scientists who pushed so hard for the innovation in the first place.
 
So what does a company do in between a product idea and product sales—that deep valley of revenue-free innovation that can extend for years? If you are a small company without the financial reserves of industry heavyweights like Stryker or Johnson & Johnson, that question can be hard to answer. Finding the right financial partner for your company’s unique needs is no easy task, but one small medical device innovator was able to accelerate their growth through revenue-based financing.
 
Xoran Technologies is a pioneer in medical cone beam computed tomography, one of the most useful forms of medical imaging technology. The company had a goal to take the technology used in diagnostics and imaging labs and make it available on-demand in surgical settings and in spine imaging. By shrinking the size of the imaging device, the company could make it available to patients at their point of care, resulting in instant imaging integrated into surgical navigation, like laparoscopic surgery settings.
 
To develop, test and commercialize this technology was a tall order. Xoran Technologies, founded by two University of Michigan research scientists in 2001, had the medical innovation side of the equation handled, but the business funding was still an open question. While searching for ways to fund the long product development and commercialization cycle, they came across the concept of revenue-based financing.
 
What is Revenue-Based Financing?
Unlike other funding models that deliver growth capital in exchange for equity in a company, revenue-based financing offers upfront capital for a percentage of revenues in the future. The idea appeals to many founders because they retain the ownership and operational control of the company they built, but still receive the lump-sum funding that can finance the next innovation or product in their company’s lifecycle.
 
Xoran Technologies coupled a $4 million grant from the National Institutes of Health with a $4 million matching investment from Decathlon Capital, the largest revenue-based financing company in the nation, and used the funding to launch into the development of a CT Scanning system for surgical navigation and spine imaging.
 
Xoran had already pioneered the elements of compact and precise CT scanning that would make this new innovation possible. Their xCAT IQ product was compact and maneuverable enough to be housed in cramped surgical rooms while having high image quality, projected in all multi-planar projections with highly precise geometric accuracy.
 
Many other medical technology companies have taken notice of this alternative financing, and have used it to grow as well. Heart Sync, Irrimax Corporation and SonaCare Medical are all companies within the industry who have also received revenue-based financing from Decathlon Capital. Both Heart Sync and Irrimax received funding in 2017 and 2018, respectively, and were able to carry out their growth plans to a point where they could repay their full investment and continue building their companies.
 
While there are many funding options for companies, revenue-based financing was the clear choice for Xoran and these other MedTech companies. For companies that are looking for growth funding without any dilution, revenue-based financing is an emerging area of the market that you are certain to hear more about in the future.

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John Borchers is the co-founder and managing director of Decathlon Capital. Prior to Decathlon Capital, Borchers spent 15 years with Crescendo Ventures where he was involved in the development of over 30 emerging growth businesses as an investor, board director, or advisor. Borchers was also the founding venture member of the Masterminds Forum, an invitation-only group of CIO and VP-Level Information Technology thought-leaders from Fortune 200 companies. Borchers received his MBA from Harvard University and a B.A. from the University of Richmond.