Understanding, Playing and Winning the Funding Game in 2022

by | Oct 31, 2022 | Education, Funding

Leaders of early-stage companies spend a lot of time thinking about funding. That’s why it’s not surprising that the recent financing workshop, Fogarty Education’s first half-day workshop after a nearly two years, drew heavy interest from current and former FI companies, as well as friends and associates across the industry.

Speakers at the event represented a variety of funding sources, from seed-stage investors to VC’s and strategics. The list included some of the best-known names in medtech funding including  Matt Kovac, Wilson Sonsini Goodrich Rosati; Chris Eso, Medtronic; Juan-Pablo Mas, Action Potential Ventures; Avi Roop, Research Corporation Technologies; Max Bikoff, Longitude Capital; Lane Melchor, early-stage investor; Cynthia Yee, Vensana Capital; Mike Carusi, Lightstone Ventures; and Kevin Wasserstein, Stanford Catalyst. Fogarty’s Gayle Kuokka shared her perspective from years of experience in the field, while Mike Regan and Andrew Cleeland moderated the panels. 

Fogarty’s Marga Ortigas-Wedekind welcomed the group and the speakers for the lively and informative afternoon. Here are some of the highlights of the presentations.

How much funding your company needs

There’s a lot of focus on the company’s technology and fundraising, but not always on the strategy to determine to how much to raise. Presenter Gayle Kuokka explained that it should be based on three different elements: how much is needed to execute on the company’s defined milestones; how much investors are willing to give; and a company’s strategy. 

Figuring out how much money you need to raise entails developing a funding strategy: how many people to hire and when (most companies spend 60 to 70% of their budget on people) as well as which functions should be outsourced; and which milestones need to be achieved and how these can be adjusted as things change. The strategy must also include factors such as the company’s regulatory pathway, the need for pre-clinical and clinical trials, supplies and services, and how much it will cost to commercialize— all of which can end up taking longer and costing more than expected, necessitating a buffer.

Next is considering how much money can be raised in each round, starting with the end in mind, which is based on an estimate of the company’s valuation and exit strategy. “There are a lot of variables in play during the budgeting process, but the bottom line is that how much you can get is what at times drives your strategy so there may be times you need to redefine your milestones so you can get to the next steps and raise more,” said Gayle. “Ultimately your investors have to believe that your business is going to provide a favorable return.”

What to know about the funding environment now and looking forward

The medtech industry has seen some successful fundraising years, but current economic conditions have made things much more challenging. While there are still deals being made, raising money is tougher. Moderator Mike Regan led this conversation with panelists Max Bikoff, Lane Melchor and Cynthia Yee.

The question for investors now is how to determine whether to invest or stay on the sidelines. Not all VC firms invested as much as they thought they would in big years like 2020, as medtech corporate valuations were at an all-time high. Accordingly, these firms are discussing the best ways to deploy their “dry powder” to capitalize on market opportunities for startups of interest while mitigating investment risk. Others, like private equity firms, base their investment volume on how the market is doing, so are likely to be less aggressive during a downturn. That balance is why there’s still money and interest in medtech, though it’s a matter of finding the right fit at the right time.

The IPO market represented one of the primary exit paths for high growth medtech startups between 2018 and 2021, and they did quite well during the bull market, seeing high valuations. Today, however, the path is much rockier. Many companies that went public have lower valuations today than at their IPO, but are likely valued accurately. Yet others, like Shockwave Medical and Axonics Modulation Technologies have remained strong and continue to hold high valuations. Others may not have been ready to go public and now have to prove themselves in order to increase their valuations. 

Early-stage companies that offer “dual path” opportunities can be of greater interest to VC firms in the current market. These can be attractive to investors because they show they can either build their business and eventually go public or can be a fit for a large set of strategic acquirers. These are companies that have all the pieces in place: They are addressing a big market, have excellent clinical data, address a large unmet need and have a reimbursement strategy and targeted launch strategy.

Understanding the players in the fundraising game

While early-stage startups are typically focused on developing their technology, they also have to understand how investors work and what they’re looking for, explained moderator Andrew Cleeland and panelists Mike Carusi, Chris Eso and Kevin Wasserstein. By knowing the end game, they can think strategically about whether and how their business fits into a funder’s strategy and portfolio as they consider potential stakeholders. 

And just like VC firms are the startup’s stakeholders, the VC firms in turn have their own set of stakeholders to whom they need to answer, like pension funds, university foundations, individuals and more. Their chief concern is financial returns — they typically require a 30 to 35% internal rate of return or 25% net return to stay in business. It’s important for entrepreneurs to realize what VCs think about when underwriting a deal because, while relationships, trust and transparency are very important, returns are paramount in the venture world.

However, there are other types of investors, like Stanford Medicine Catalyst, which are exclusively focused on supporting early-stage entrepreneurs who are looking to get out of a lab and turn their concept into a company. They invest in non-incorporated groups to keep them within ecosystems like Stanford where they can leverage existing resources. The aim is for the company to become mature enough to then seek investments from other funders and successfully exit.  Catalyst measures return on investment primarily on the impact the company makes on the healthcare system, and secondarily on a successful exit.

Similarly, when strategics like Medtronic are looking at acquisitions, they consider both a company’s revenue and impact on patient care. As public companies, driving returns for their own shareholders is a major consideration. Therefore, their interest is based on the acquisition being accretive to revenue, addressing unmet internal technology needs, and the potential to expand into markets that advance their businesses. Regardless of market conditions, they continue to look at deals to supplement internal growth and organic investments. 

Given that investing in a company ultimately becomes a partnership, all the investors prioritize evaluating the start-up’s team, considering the team’s experience, character and their ability to successfully run a company. In addition, they want a company that can “fail fast,” to quickly determine whether the concept can succeed or not. 

While the topics were different, the thread throughout the day was the same. Money may be harder to come by, but is there for those who can show they deserve it. So, when young companies have an opportunity to get in front of an investor, they have to make the most of it: Be well prepared for their pitches, view investors as partners, be transparent, highlight a strong management team and above all, prove how the technology will successfully solve a large unmet need.  

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