Everyone has the next big new idea, and in medtech, they don’t come cheap. But companies also don’t have to be valued in the billions of dollars to make an impact or get an idea moving forward.  

The funding environment is highly regulated and will continue to be into the foreseeable future, as it protects the consumers from monopolies and obscene prices (above and beyond what the medical technology industry is used to). This atmosphere has allowed investors to get creative with finding capital and to expand existing funding vehicles. In the past several years, alternate versions of sourcing have become more prevalent for devices and technology, which previously have been kept in the shadows or for “those in the know.”

Finding capital for new ideas and innovation can come in many shapes and sizes; there is not a one-stop shop or way to complete it. Many innovations use each of the capital raising tools listed below to move from early stage (often non-traditional) to traditional funding, but others raise capital solely from traditional funding. There are others, of course, that completely skip traditional funding methods and raise capital in non-conventional ways. Most medtech companies fund new ideas and innovation through acquisition or initial public offerings (IPOs).  There is no right way, except what feels right for company management, culture, and shareholders.
Traditional sources of medtech funding include:

• Venture Capital: Typically investing in deals in the range of $10 million to $50 million, with a turn rate of two to four years with at least a five-fold increase in value. Venture capital is investing equity into a company and looks to partner with the entrepreneur to help grow and manage risk. There needs to be a significant increase in the value of the business in a short amount of time.
• Private Equity: Typically investing after venture capital (VC), often buying from VC firms once the companies have entered their growth stage. Private equity (PE) deals typically range from $25 million to $300 million, are retained for an average of three to seven years, and expect at least a five-fold growth rate, depending on the amount invested. In the medical technology space, PE firms look to solidify the growth of the company, position it for a strategic sale, or determine the strategic value the technology can have within certain sectors. The company is growth positive and showing a profit, which allows for continued profits and growth while reinvesting back into the business for development. This is often the stage that a medtech company is in before going public.

As general innovation around the world continued to grow over the last two decades, the money spent on medical technology continued to decrease. Medtech’s share of venture capital fell from 13 percent in 1992 to just 4 percent in 2014, according to an Advanced Medical Technology Association (AdvaMed) report released in October 2016. Ashley Wittorf, executive director of AdvaMed Accel, said in a statement accompanying the report, “This report lays out in stark terms the challenges facing not only medtech startups, but the entire ecosystem that supports innovation in our industry.” This created the need to progress the structures that were working behind the scenes to become more mainstream.

Among the non-traditional sources of funding are:

• Angel investments: This is also known as seed funding and/or the family and friends round of funding. Its value can range from $100 to an amount of the contributor’s choice, typically up to $100,000 per person. The investors don’t necessarily have to be qualified medical professionals and they usually are known to the founders or management team personally. Recently, groups of angels have formed networks to collectively have a larger investing platform, which allows their dollars to go further. Angel investors typically expect a return on investment between 10- and 20-fold.
• Crowd Funding: On the surface, this method might seem unconventional, but it can be effective. This technique works by raising small sums of money from a large number of people on the Internet. There are two models of crowdfunding that several medtech companies have used successfully. One is a donation-based funding model where people donate toward a business goal based in return for the product or other gifts (i.e., Fisher Wallace Labs’ Kortex on Indiegogo which raised over $200,000 for a new product launch). The other model is investment crowdfunding, in which startups sell ownership stakes online in exchange for equity or debt.
• Family Offices: Family offices manage the financial and investment side of an affluent individual, family, or group of families and often are directed to invest in specific sectors, such as healthcare or medical technology. In past years, family offices have filled a very important gap within the medtech investing space, as they can provide capital from $1 million up to $50 million and oftentimes higher when they are in a collective with other family offices. This collective is known as a direct investing vehicle (an example is LLEX Partners). Family offices perform their own diligence process, can provide management and leadership if needed, and can either directly invest in a lead or assume a co-investor position at any stage of the innovation, often in the Series A or B round. Family offices are self-directed and in past years have shown double digit returns, while the market and hedge funds have only been performing at 7 percent to 8 percent.
• Innovation Labs: Healthcare innovation incubators and accelerators worldwide are helping entrepreneurs grow and develop startup companies with funding, mentorship, and investment resources. They provide space, support, and resources for innovation and also work to obtain the necessary funding to take the innovation to the next level. Several labs are application-based and others are pay-for-space models, though many are tied to OEMs who are looking to innovate and create a sustainable source for innovation.

Finding the Right Capital
Depending on the type of capital a company and/or idea is looking for usually will dictate the source of the capital. Brand new ideas will naturally start with angel investors, crowd funding, innovation labs, and family offices, as they are the vehicles to fund novel technologies, take the biggest risk, and often produce the highest returns. On average, 70 percent of early-stage medtech deals do not make it past the first round of funding (Seed or Series A). Of those that make it, approximately 50 percent of those close their full Series B round funding, typically with VC or PE firms. 

There are even more particulars within each funding discipline. Capital is sometimes dependent on geography, sector, and stage (early-, middle-, or late-stage). Each investment firm is also looking for their own unique financing strategy and internal investment criteria. For example, OrbiMed Advisors LLC looks to invest in private and public equity and royalty opportunities within the life sciences sector with a specialty in “innovations that will help ensure humanity lives healthier, longer, and more productive lives.” But within a similar sector, MVC Capital Inc. looks to invest mainly in medical device contract manufacturers specializing in disposables.

Just as there are lobbyists in Washington to connect companies with policymakers, there are capital consultants that connect medtech companies with the appropriate sources of capital. As in any industry, it’s about the connections, but it’s also about the people who are making the connections and helping finance the deals. Having experts who are medtech industry veterans (or whatever industry the developed idea or technology might be viable for), creates a significant advantage for the technology. It also gives companies an additional team member who is also conversant in the language of both the technology and the financial side.

Applications for Medtech
The cyclical growth consolidation nature of medical technology requires a constant stream of new ideas to “feed the beast.” Without new ideas, the industry would come to a halt, and more importantly the patients the industry serves would never see innovation. As the past 30 years have proven, medical technology growth has led innovation within life sciences and has significantly improved the healthcare system and the planet’s overall health.

Alternate sources of capital, along with digital and connected health platforms, appear to be reversing the trend of reduced medtech capital investment. Thus, innovation that combines medical devices with data collection might be the springboard to wet the appetite for continued future funding. The push for bundled payments and reductions in time and costs will also be significant factors that investors are now keenly aware of at any level of investment. Both consumers and investors are becoming savvier, and the industry now has an opportunity to provide that for them.

This presents a powerful opportunity for the medtech community to continue innovation while recognizing that it cannot be done alone. Innovation without capital will perpetuate a great idea, but if no one knows about it, how much impact can it make? Capital is a vehicle that can help move innovation from idea to action to impact. 

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Marissa Fayer is an 18-year medtech executive, entrepreneur, and philanthropist whose mission is to advance growth and prosperity for organizations and the communities in which they operate. Fayer is the president of Fayer Consulting LLC, the CEO of the non-profit HERHealthEQ, and a partner at LLEX Partners. Her expertise and vision help life science companies grow with operational excellence and assume the responsibility to bring about a more giving global community with health and opportunity.