It was a full house at the Fogarty Institute’s latest educational seminar titled “Fundraising – Art or Science?” highlighting the need and interest in this important topic. After all, it drives the future of all startups, but is particularly pertinent to early-stage companies immersed in finding appropriate funding.*
Attendees were also drawn to the breadth of experience of the speakers, which included Jon Norris, managing director of healthcare for Silicon Valley Bank; Susan Stimson, executive-in-residence, KCK Group; Chris Shen, MD, managing partner at Qiming Venture Partners USA and executive director of Singapore Stanford Biodesign; Chris Eso, vice president of strategy, growth and business development at Medtronic; Amy Belt Raimundo, managing director at Kaiser Permanente Ventures; Bryan Kim, partner at Invus Opportunities; and James Eadie, MD, partner at Sante Ventures; as well as several members of the Fogarty Institute’s senior staff.
The agenda covered a wide-ranging variety of relevant topics, with panel presentations on:
- Insights on medtech financing and M&A activity
- Sources of early-stage capital, including grants, angels, family funds and Chinese capital
- Investor dos and don’ts based on real stories and lessons from decision makers
- How to manage organizational process after the initial meeting with the VC
- How to balance a business’ long-term vision with the short-term objectives, starting with the end in mind.
Here are a few highlights from the workshop:
Status of medtech financing
The overall U.S. healthcare venture fundraising in 2019 was quite healthy, according to Jon, who shared data from Silicon Valley Bank’s well-regarded annual 2020 report on Healthcare Investments and Exits report. The sector also set a venture fundraising record for the third consecutive year, with strong M&A and IPO performance in all four healthcare sectors, including medical devices and healthtech.
He noted that investment in the medtech industry has increased year over year, with funding almost doubling in the U.S. and Europe from $538M to nearly a billion in 2019. However, most of the dollars are being pushed out onto later-stage deals, which typically fund commercialization, making it more challenging for early-stage startups seeking an infusion for their pivotal activities such as clinical trials. Series A device valuations were led by cardiovascular, orthopedic, neurology and ophthalmology, along with a big jump in interest in imaging, with Northern California maintaining its lead in deals.
Reflecting a strong M&A environment, Boston Scientific has been dominating the venture device acquisition for the past three years, followed by Johnson & Johnson, Stryker, Smith & Nephew, Merit Medical and LivaNova, which each had two or more deals since 2017.
“Overall, we are seeing a lot of capital available for investments into devices, coupled with a more diversified investor pool, which is great for the industry,” said Jon.*
Funding for early-stage startups is becoming more diversified
As more capital is devoted to later-stage rounds, early-stage companies are getting more creative to source funding, including an increase in grant funding, angel investments, family fund involvement and international investment, particularly from China.
The National Institutes of Health (NIH), for example, has been a good source of funding for early-stage companies. “As an entrepreneur, you are going to need to get scrappy to find capital, whether it’s writing a lot of grant requests or seeking angel investors,” said James.
The rest of the panel echoed the sentiment that entrepreneurs need to be creative in identifying financial sources, while cautioning them to think through the critical importance of making sure the proposed source will be a good partner, particularly over the longer term. “Take grants for example,” Susan said. “Some grants also come with strings attached, which could potentially create conflict for the intent of the product you were initially developing, send your business in a different direction or distract you from larger funds you could be raising via other sources, which ultimately slows the process.”
Partners such as angel investors could have a similar effect, so it’s important to use the prism of both short-term and longer-term goals and focus on appropriate valuation expectations that can help boost your business.
Another hot topic is international investment, particularly from China, which has become a strong player in the industry. Chris Shen gave an in-depth overview of the medtech landscape in China, including the country’s interest in innovation and the types of companies in which they are most interested in investing or buying, such as devices that are in a new product category. “If you can be first to market in China, you are likely to be successful. The country is very interested in innovative technologies that, under the right circumstances, are going to be valued higher than in the U.S.,” said Chris. “But, like every other opportunity, you have to make sure it is the right fit and strategy for your company.”
Dos and don’ts of managing relationships
While funding is always top of mind, another topic critical to success for early-stage startups and entrepreneurs is how to manage relationships and start that “courting” process, in other words, best practices in the art of raising money, from identifying and initiating relationships to pitching and securing a deal.
Based on hearing countless pitches, the speakers gave real-life examples about how to navigate through the inevitable unexpected aspects of running a company while preserving your credibility. “While it’s important to ‘sell,’ never oversell because the investor will know. Once your credibility diminishes, you will never get it back,” Bryan said.
The panel also emphasized the value of a warm introduction in connecting with the right investor; then once that introduction is made, doing sufficient homework to learn everything you can about your audience, keeping in mind that the goal for the first meeting is not to get an investment, but to get a second opportunity. “Building relationships is a marathon, not a sprint, and there needs to be trust and transparency to build that relationship,” said Chris Eso. “When working with a larger company, look for the individual who can be a champion for you within the organization, who can get your device in front of the decision makers.”
In addition, the presenters dove into the intricacies of managing the financing process and balancing the different personalities involved, including how to manage board members. The general consensus was that the entrepreneur has to take the responsibility for making decisions – rather than passing them on to the board – while building a transparent relationship with the board so the CEO can draw on their experience to help him or her navigate through the many issues they likely have seen before. The board should be considered as a partner and the board room as a place where everyone is working together to make the company as valuable as possible.
“The best strategy for board management is to put them to work,” said Amy. “When you encourage them to pursue an avenue where they can offer something that is valuable for the company, they are able to engage and be part of the solution.”
Starting with the end in mind
The final panel ended with a discussion on the importance of focusing on “starting with the end in mind,” a principal that is at the core of Stephen Covey’s “7 Habits of Highly Effective People” book. It emphasizes the importance of beginning each day, task or project with a clear vision of your desired direction and destination, and then continue by flexing your proactive muscles to make things happen.
This is a principle that the Fogarty Institute has been working closely on with its entrepreneurs. “It is a critical concept that helps you really understand what your business is and drives your day-to-day activities and decisions. For example, are you intending to get acquired or aiming to go public; and based on that, how much financing will you need?” concluded Andrew Cleeland, who moderated the panel. “From there, you work backwards to determine your strategy, company structure, and the types of investments and partners you seek.”
*The fundraising workshop was held prior to the COVID-19 crisis.