Honesty is a virtue to which we all aspire, but in the game of funding an emerging med tech company sometimes the straight story and a nickel won’t buy you a cup of coffee. Most entrepreneurs, particularly the engineering types who tend to invent medical devices, aren’t deliberate fib-tellers. They are passionate about their innovations, confident of their capabilities, and eager to make an impact on healthcare and the market. Their visionary tales are often compelling and credible, and may be just that - tales, unsullied by the current realities of our industry. Here are five works of fiction commonly heard on the med tech fundraising trail:
1. The device works – we’ve tested it in our lab / in pigs / in China
Achieving market-ready performance for a new medical device, which includes not just safety and efficacy but also reliability, acceptable user pain-in-the-ass factor, and viable COGS at market pricing, is all about design iterations. For engineers, this is fun; for investors, not so much. Not only do devices interact with a wide variety of patients in the real world, they are also going to be handled by an array of human care providers in many different settings. Until we get into clinical trials, or even early market launch, we don’t know what we don’t know about how the device will work, or whether it really meets customer requirements.
2. We’ll be on the market in X years [+/- in Europe]
Those timelines we put in our pitch decks to potential investors are, understandably, reflective of the most optimistically smooth sequence of events- when stars and moon align, and a gentle tailwind blows from the north. Some glaring falsehoods include omission of crucial and time intensive steps like V&V, ordering custom tooling, contracting with clinical sites, creating a regulatory package, and so on. One of my favorites is showing full market launch virtually on the same day as regulatory approval – I have yet to see this happen. And while Europe is still a good place to seek a faster regulatory milestone for PMA devices, many of the same time sinks apply on that side of the Atlantic (and then some).
3. We will get acquired before expensive US IDE trials / commercial launch
While a few large med tech acquisitions have occurred prior to pivotal data or commercialization, in reality they are pretty rare. The large med tech companies are most hungry for quickly accretive transactions, and may place some cheap technology bets (Medtronic claims to be on the hunt for early tech acquisitions). Development-stage deals are increasingly heavily back-ended to account for regulatory and commercial (mainly reimbursement) risk. Without strategic exit possibilities during development, the amount of capital and time required for a meaningful payday for investors is often well beyond what most companies estimate. The modest opening in the med tech IPO window somewhat tempers this whopper, but the companies that went public in the last year had each raised $50-$150M+ prior to their IPOs, and most were commercial in the US or very close to it.
4. We will capture X% (e.g. >40%) of the addressable market in <5 years
The biggest hurdle to adoption for a new medical technology is getting someone to pay for it, unless it simply replaces an existing device at a similar or lower cost. Even then, competitor contracts and bundling leverage may delay adoption. Whether it’s a battle for payer reimbursement or hand-to-hand combat with clinicians and budget-conscious administrators, market penetration takes time. Most new medical devices, whether 510(k) or PMA regulatory path, are launched without the killer data needed to win the reimbursement battle, and that is assuming they’ve gotten the technology right on the first pass (see #1).
5. The addressable market [or worse, revenue] opportunity is $1B+
Let us count on the fingers of one hand, other hand not required, the number of medical device product categories, much less products, to have achieved annual revenue greater than $1B. Drug eluting stents, pacemakers, surgical robotic systems, orthopedic implants, hearing aids, someone help me here… Sad as it is, medical devices have a rough time even breaking through the $100M revenue sound barrier- not that it isn’t possible, but it’s damned hard. If you have anything but a therapeutic technology, it’s even harder. Yet there is something magical about that $1B+ addressable market number, and it appears in almost every pitch deck to investors.
To some degree, this tale-telling between entrepreneurs and investors is negotiation 101; those seeking funding must be hyperbolic, knowing potential funders will haircut whatever they say. Unfortunately, our industry is missing the irrational exuberance of tech and biotech that makes fairy tales come true (Uber is worth $50B as I write this). Despite our sector's current reality, med tech investors still want and need to feel that magical high return potential, and so we liberally sprinkle the pixie dust. The truth: there are plenty of good ROI opportunities for med tech investors if we stop telling each other stories and work together to get creative in how we finance and develop new technologies.