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The challenge of securing seed and pre-seed financing for companies in the medical devices and diagnostics sector remains as high as ever.
These companies face early and ongoing challenges in terms of success and sustainability due to the inherent risk and long commercialization process that is almost always regulated by the FDA.
Raising $15 million is much easier than raising $500,000.
I’ve worked with founders of Medical Device and Diagnostics Companies to develop financing plans, as well as to obtain the early capital they needed to grow their businesses. Through all the years, one reality has remained constant: It is much easier to raise 15 million dollars than $500,000.
Sources of capital become readily available at these levels when the company is ready for a larger investment. Venture capital firms, which have been the main source of funding for medical devices and diagnostics businesses that are beyond seed stage and pre-seed level, make themselves easily visible and accessible. All have easy-to-use websites which clearly outline the investment strategy and characteristics of the potential portfolio companies. These websites publish bios of the members and their contact details, which makes it easy to reach out. These same teams constantly search for investment opportunities, attending the numerous venture fairs and capital conferences as well as company showcases and trade shows that advanced diagnostics and medical devices companies attend.
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What makes for a seed or pre-seed company in the medical devices and diagnostics industry? And why are some companies able to secure funding early, while others struggle to do so? While the answer is neither simple nor universal, it does reveal that certain requirements have remained the same over the years while new innovations are helping these companies secure pre-seed and seed funding.
All investors continue to base their first investment decision on the management or founder team. Investors, and especially early-stage ones, are most interested in people. More experienced or capable founders and management teams have a higher chance of getting early funding. It is a fact.
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It is also consistent that the East Coast and the Mid-Atlantic have a lack of sources of funding for pre-seed and seed medical devices and diagnostics. Very few early-stage funds target seed and pre-seed companies in the medical device and diagnostics industry. Many angel groups focusing on the region also have not been able to provide significant early-stage funding to medical device companies and diagnostics firms. Many angel groups, which were long hailed as a solution for the shortage of funds at early stages, are now investing their capital in series A investments led by venture capital firms, instead of deploying it upstream, where they would be most needed.
The statements I made about angel groups will make many of my friends, who are in charge of these groups, angry. But I cannot help but say what I think.
There are some recent developments that have been beneficial to seed and pre-seed medical device and diagnostics firms seeking capital at an early stage. The family office sector is a major source of funding for seed and pre-seed medical device and diagnostics firms. Family offices are formed by wealthy families who segregate their money and then hire an investment and management team. This team will invest in businesses or other investments. Family offices are a subset within the world of private equity and venture capital. They differ from these funds in that they do not have limited partners and don’t usually have an established fund life. In the past five to ten years there has been an increase in family office investments into pre-seed and seed medical devices and diagnostics firms. I anticipate this trend will continue.
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The increased activity in incubators and accelerators, especially for companies involved with medical devices and diagnostics, is another positive trend. Major universities, too, have long supported early-stage diagnostics and medical devices companies by providing them with research and academic resources, laboratory space and, in some cases, early capital, either in dollars or kind. The trend will continue, but it has recently been boosted by the involvement of more “second-tier” or regional universities. They are seeing a surge in innovation and supporting this by providing direct resources or inviting third parties to help their businesses.
Medical device and diagnostics firms are also increasingly adopting the venture studio model. Venture studios are formed by academic centers, research centres, and clinics where innovations take place. Professionals with experience in moving technologies from the conception stage to product development manage and house the technologies. Venture studios provide talent, space and funding for these medical devices and diagnostics startups. They are then spun off into their new companies, ready to receive a Series A investment, rather than a seed or pre-seed.
Individual investors are now more willing to invest in medical devices and diagnostics firms for longer periods of time and with greater amounts than they were in previous years. This is a welcome development. Early investors are now being asked to invest more and for longer in diagnostics and medical devices companies. The path to more substantial capital has become increasingly difficult. Early investors are more likely to be successful in companies with these early investors. Recent trends indicate more investors are rising up to this challenge.
Early stage companies in the medical devices and diagnostics industry need great founders. They also require distinguishable technologies or products that can meet unmet requirements or replace current treatments. A defined, credible commercialization path is essential, as well as a capability to gain significant market share. These companies continue to have a difficult time securing funding, especially at the pre-seed and seed stage. This will probably always be true, but the increasing activity of incubators, accelerators and universities and research centres, as well as early investors who are willing to invest longer or deeper, all contribute to giving these medical device and diagnostics early-stage companies more opportunities to get the funding they need. This means that these early-stage medical device and diagnostics businesses will still face the same challenges, but there are signs of an emerging new standard for pre-seed and seed stage companies.
The Authors
Partner, Duane Morris
Michael S. Harrington is a Duane Morris partner who represents companies at the early and growth stages in technology, clean tech, healthcare and life sciences.