The Fogarty Institute held its first monthly lecture series on a topic that is critical for all of our startups, fellows and graduates: funding. Whether early- or late- stage, all startups need to raise money to move their company to the next phase, and, as is well-known in the medtech industry, funding in our sector has suffered from a steady decline for more than two decades.
Jon Norris, managing director of sales origination for Silicon Valley Bank, kicked off the program by providing an overview of the state of the healthcare and medtech industry and trends in these sectors.
He was followed by a panel discussion with Renee Ryan, vice president of investments at J&J Development Corporation; Mike Carusi, general partner and team leader of Lightstone Ventures; and Marc Galletti, managing director and founder of Longitude Capital. The team provided a view into early-stage investment and tips on pitching.
Philip Oettinger, partner in the life sciences practice at Wilson Sonsini Goodrich & Rosati, wrapped up the seminar with best practices for term sheets and investor negotiations and pitfalls.
Below are a few highlights from the seminar.
State of the medtech industry
In its annual report on healthcare investments and exits, Silicon Valley Bank provides insight into fundraising, investment, M&A and IPO activity for private, venture-backed biopharma, medical device and diagnostic/tools companies. During his discussion, Jon Norris shared a high-level view of market conditions the bank has observed.
Key healthcare trends:
- U.S. healthcare fundraising: Overall fundraising has been strong, but most of the dollars are being allocated towards biopharma and away from medical devices. This presents challenges for the industry, but also opportunities as investors have access to great companies with good valuations because there is less competition. In 2016, $11.7 billion was invested in healthcare companies, and U.S. venture fundraising remained active at $7.2 billion. Seeing similar VC dollars raised two years in a row shows that the healthcare pipeline is fully funded and there is a lot of capital to support companies for the next couple of years.
- Series A investments: Series A escalated in 2016 for medical devices, nearly doubling from 2015. These deals were not necessarily VC-backed but came from other sources, such as angel investors and family offices. The top deals and investments were made in neuro, respiratory, cardio and orthopedic.
- Investor pool: The active device investor list grew much more diverse than we saw 10 years ago, filling the void in venture capital funding. Companies that traditionally have only completed late-stage deals are beginning to express interested in early-stage companies. Examples include LSP, Deerfield, KKR and Co., Boston Scientific, J&J, Medtronic, and more active angel investors such as Green Park & Golf Ventures. The growing field of non-invasive monitoring, cardiovascular and neuro spaces were among the most active investments, while aesthetic and derm decreased. Overall deal sizes for the medtech sector stayed steady between $15 and $18 million, and Northern California led the U.S. in volume of deals.
- M&A and IPOs: M&A declined in 2016 following a strong 2015. Orthopedic and ophthalmology had a few deals, surprisingly, as these are not areas where there has been significant investment in the last two years. Device acquisitions continue to focus on later-stage companies. M&A time to exit increased in 2016 with cardiovascular, ophthalmology and neuro achieving exits at earlier stages. The IPO landscape was rather bleak, but there were several in the fourth quarter.
- 2017 Outlook: Silicon Valley Bank is foreseeing investments will stay close to 2016, perhaps slightly lower for devices. Norris stressed that this doesn’t mean there are fewer investors, and the numbers remain fairly healthy for this industry. Series A should also stay similar; IPOs will at least double; and M&A activity will remain stable with a potential increase.
One of an entrepreneur’s main challenges is knowing how to identify and connect with the right investor. Some best practices the panel shared included:
- Realize that each VC group has professionals with different specialties. Get to know the person, their history of funding and how they help companies through challenging situations. Also, if there are two VCs focused in the same sector, see if you can find out who just conducted several deals and who hasn’t, to identify the one who may be more open to making an investment.
- Look beyond the obvious value of money. Consider how they can help with introductions and networking opportunities.
- Review their websites to see what kind of investments they have made and in which fields.
- Do reference checks: Find out what the VCs are like in the good and bad times.
- Find a connection or common link to the VC you are looking to reach – many of the investors work with entrepreneurs they know, trust and have already had positive outcomes with. Don’t cold call; use LinkedIn and/or network to find an introduction.
Making a strong pitch
Entrepreneurs only have a brief window to make a strong impression on VCs for a small pool of funding so a pitch can make or break a company.
Here are a few best practices the panel shared for Series A funding:
- Between one to three people at the most should be at the first pitch.
- Have someone who can clearly articulate the unmet need the technology is trying to address, and can answer questions about the size of the market, the clinical plan and why the technology is going to evolve into a product that is materially better than the current standard of care in the market.
- Factors that best the pitches have in common:
- Quickly introduce the team and their specialties.
- Reveals the value proposition within the first three slides.
- Crisp, answers the questions and is well thought out – and does all this within an hour.
- Shows the team’s passion.
- Thoughtful and demonstrates a linear progression of thinking.
- People who are self-aware and are transparent about what they can and cannot do.
- Helps VCs understand the business: Remember, you are pitching a business and not a product. It’s very useful when the entrepreneur knows the likely acquirer and which division within a company would likely make the acquisition.
- Bad pitches:
- Waste the team’s time by not listening to and responding with what they are interested in hearing.
- Don’t take VC’s feedback into consideration if there is some initial interest.
- Don’t demonstrate strong interpersonal skills. Part of the importance of the pitch is to understand who you would be working with, so VCs test your interactions and receptiveness to feedback as a way to get to know you and see if they feel you can work together.
Medtech industry outlook
We asked our panel to summarize the receptiveness that early-stage entrepreneurs with very innovative ideas might expect in the industry:
- Mike Carusi: “We have a window of opportunity in medtech right now. The best time to start a company is when the base is contracting. What has been consistent over the past 15 years is the number of acquisitions. Since there are fewer companies being created, I think there is a strong opportunity. We are predicting that some of the biotech money will start flowing into medical devices. With that said, not all companies will succeed or should be started – you need to make sure you are thoughtful and going after a real clinical need and that it is something that is ultimately appealing to the strategic investors, as you can’t count on an IPO.”
- Renee Ryan: “I am very optimistic. We saw an opportunity in the marketplace five years ago when there wasn’t a lot of investment in medical devices. There is a lot of money out there for early-stage funding through different sources, for example through competitions like QuickFire Challenges or others put on by Google. Don’t be afraid to look at grant monies early on as there are a lot of companies like us at J&J who are interested in the later stages of funding. “I am also very excited about the consumer-medtech space. We are seeing great progress in this sector. The customer is changing and the market is changing, but don’t be afraid of some of those business models.”
- Marc Galletti: “I have confidence in our industry and where it is going. I think we are at a dawn of the next generation in medtech with some traditional technology but also with emerging connected devices. In the new world, healthcare efficiency will be the mantra and the economic value will be very important. You need to think of the four ps: patient, physician, providers and payers and ensure you are providing value to all of these stakeholders in the long-term. A negative in any one of them will challenge a company.”