If the past few years have taught us anything, it’s that making predictions can be a risky business. However, we also know that despite the persistent uncertainty that clouds all industries—including medtech—solid companies with innovative technologies will continue to find success. But what else might we expect this year? We turned to two industry luminaries to see what made significant impressions on them in 2022 and how they believe the industry will fare in 2023.
Most of you know serial entrepreneurs and innovators Tom Krummel, MD, and Allan Will, but it’s always a pleasure to remind readers of the incredible industry impact they have had over their careers. Tom is not only a board chairman of Fogarty Innovation and senior advisor of Stanford Byers Center for Biodesign, but he is also a venture partner at Santé Ventures. In addition to those roles, he serves on multiple scientific advisory boards, has helped orchestrate four successful exits. He has also been honored with the Smithsonian Information Technology Innovators Awards for his work—all in addition to a distinguished career as a pediatric surgeon.
Allan is a director at Fogarty Innovation and is best known for his strong track record of founding, running, building and selling medical device companies, even during past economic downturns. His illustrious career includes serving as CEO of eight Bay-Area venture and private equity backed startups; visionary and founder of The Foundry; founder or co-founder of 14 companies, including Evalve, Ardian and Concentric Medical; founding general partner at Split Rock Partners; and being named as an inventor on over 30 patents. He is a University of Maryland Distinguished Alumnus, has served on the MIT Entrepreneurship Center Shareholders Board and University of Maryland President’s Committee on Innovation and Entrepreneurship and takes great pride in having been named Astia/Deloitte Excellence in Mentoring Award for mentoring women executives. He has served as mentor to countless Bay Area medtech CEOs over his 40+ year career. He currently serves as executive chairman of the board of EBR Systems and chairman of the boards of Fractyl Labs and Setpoint Medical. Equally important, both he and Tom have been invaluable mentors tos the future generation of medtech innovators.
Whether you’re an entrepreneur or an investor or anyone in-between, we know you’ll enjoy their insight and perspective.
Q. Let’s start with a brief look back to 2022—how did the medtech industry do overall and what would you highlight as some of the “winning” companies/technologies?
Allan. 2022 was a very strong year for device investment, down just a bit from 2021, which was a really big year. But last year was almost a tale of two years—the first half of the year had lots of activity, while in the second half people really started hunkering down due to inflation, the depressed public markets and a noticeable shift in the economy.
From my perspective, companies that got a lot of attention were non-invasive monitoring healthtech types of projects—those that would be considered less a “traditional” device and more digital/wearable technology. On the traditional device side, we saw a bit more activity in the later stages, likely due in part to the overall poor IPO market. We saw some companies that would’ve otherwise gone public instead do private financings, and I think we also saw investment in companies that might be prospects to go public in the future. Investment was either in good revenue stories or exciting big-impact projects.
The other piece of good news is that the supply of venture capital funds is very high. 2021 was a record year, and 2022 was very close. In those two years, $50 billion was raised for medtech, which means a lot of available dollars.
Tom. It was the best and worst of times. At Santé Ventures, we definitely felt we experienced headwinds in the second half of the year, which we expect will carry into 2023.
Q: So to that end, are you seeing a continuation of what late 2022 brought?
Tom: The macro trends are shaping the way we’re seeing the world, with inflation rising, along with interest rates. That means the easy, cheap money is gone. The big health systems are struggling, which makes it tough for medtech companies, as in the end, they’re the customers for new technology. That, coupled with recent layoffs in tech and an uncertain stock market, makes it a tough environment, especially for IPOs. For early-stage medtech companies this is definitely not a year for transactions; it’s a year to conserve cash, make the most of what you’ve got and try to weather the storm.
On the flip side, healthcare demands aren’t going away; it is still a $3.7 trillion annual need, with health problems that must be addressed.
The other piece is that as venture funds are out raising money, those without a successful track record are going to struggle. If you’re in a fund and don’t have results to point to, it’s going be harder to justify to customers like pension plans, family funds and endowments that their money is safe. Everybody has bosses, and venture funds answer to their limited partners, who are all skittish at the moment. Young entrepreneurs should do anything they can do to stretch out the runway because things will take longer—investors will want to see more due diligence, and that means your proposal is going to sit on someone’s desk for three months while they wait and see what happens with the macro markets. I think as long as you have cash in 2023, you can probably operate, whether you’re a startup, an early- to mid-stage company, or a venture fund. But things will be much more challenging if you need cash
Q: Allan, what are you seeing with venture funds?
Allan: Whenever there’s a downturn like we are experiencing in 2023, the top priority for venture funds becomes protecting their existing portfolio first, which reduces the amount of capital that’s available for new investments. So as typically happens in these down markets, we will probably see more downside risk protection built into term sheets and often you see more predatory term sheets for companies with weak syndicates.
As we move into 2023, I think we’ll probably see a better fundraising scenario for later-stage companies versus earlier stage; certainly for those with revenue stories, but also for later-stage businesses addressing big markets that hold the prospect of going public when the markets reopen. And the question of when the markets reopen is something that none of us can predict, but I certainly would hope we see some action late in the year. Following an era when you might have been able to fund a pretty good idea with perhaps a little bit of lower risk, I think those ideas are going to have a real tough time as funds become more selective. I believe only the premier companies are going to get funded if they’re earlier stage.
For those companies that do raise money, there’ll be larger rounds as typically happens in these markets. In the back half of 2022, we saw some of these larger-than-average rounds because companies saw the nuclear winter that we were headed into and decided they’d raise two or more years of cash rather than 18 months.
Because the markets were overvalued in 2021 and early 2022, some correction is going to happen in a lot of these fundraising rounds, and existing investors and entrepreneurs are going to need to accept the reality that having a down round is better than having no round.
Q: What are some other opportunities in lieu of IPOs?
Tom. There was a year-end bright spot with the J&J acquisition of Abiomed for over $16 billion, which shows that when the big players see a major opportunity, they are willing to invest. The other interesting factor is that there are a number of larger players with new CEOs, like Medtronic, so they will want to “earn their stripes” and prove their ability.
Allan. There’s no question that there’s capital out there, but because the stock performance of some large companies hasn’t been terrific, their boards may be more selective about what they allow the CEOs to pursue. There’s really no IPO market currently, so some later-stage companies that might have otherwise gone public and started a revenue ramp may be prime for acquisition instead. The large companies may look at this as an opportunity since smaller companies don’t have an IPO option.
Going back to the J&J acquisition, I see that as a good sign—it’s been a long time since the company has been active in the cardiovascular space, so that was a big move.
Tom. It got everyone’s attention and was certainly a ray of sunshine kicking off 2023. I agree with Allan’s comments regarding leadership at the larger companies. Executives get measured by stock performance and earnings, and Wall Street is hungry for earnings, which puts a lot of pressure on the leaders of these companies who have to decide whether to ride out the next 18 months or be more aggressive with their investments.
Q: What are some parts of the field where you see interest?
Allan. In talking to Mark Galletti, managing director of Longitude Capital, he made the insightful comment that whereas in the past we often saw the founding of multiple companies chasing a hot field or hot technology area, we’ll probably see less of that in 2023 –the “fast follower” strategy may not be as well received by venture capitalists. From his perspective, he’s also seeing more activity in dental and in the consumer spaces.
Tom. Dental is a good space because of the sheer number of procedures. It’s office-based and as the likes of Walgreens and CVS increasingly become points of care, you could potentially skip the dentist’s office and get your teeth cleaned while you wait for your prescription. As these types of players become avenues for healthcare delivery, new opportunities open up. Amazon’s acquisition of One Medical is yet another indication that the delivery of healthcare is changing and will continue to change.
Allan. Another area that still has potential is wearables. They got overheated in the last two years, and I think those types of businesses are going to need to realize their high valuations are likely to change. Yet they will still be hot markets in the sense that these non-invasive wearable monitoring systems have the potential to help our health and will likely still see significant investment this year. Women’s healthcare also appears to have a long-overdue tailwind.
Tom. I agree, and with players like Apple in the market, if they set their sights on cardiac rhythms and put a team together, they could have the biggest database of cardiac rhythms and instantaneous communication. That’s not even touching yet on the AI, natural language processing and learning systems that are being integrated in technologies.
Allan. In this environment, investors are going to be looking for quality companies with seasoned leadership addressing an important need with a logical technology, no matter which industry.
Tom. Leadership is indeed critical in this market. It’s hard to find the right person who can navigate a startup through the next 18 months to make enough progress and hit the milestones necessary to impress investors in a down market. Besides the work we do at organizations like Fogarty Innovation, there aren’t many ways for leaders to get this type of training. If we could accelerate a small number who have the right experience and give them the skills they need to become good operating CEOs who manage their board and investors, it would be very valuable as that’s definitely one of the boxes we check when looking at investing in companies.
Q: What advice do you have for entrepreneurs in this market?
Allan. If you do a round, raise more than you need, even if it means more dilution. Figure out what you really need to do—not what you want to do—but the key milestones you need to hit in order to be in a solid position for the next financing. I think too often people take advice like that too lightly and don’t really hone in on identifying those critical factors and doing them well. You always need to be thinking about the quality of your syndicate, the amount of money you have left, along with understanding the reserves your investors have, particularly if they are at the tail end of a fund.
I also think it’s really important to get to know your investors and understand what their positions are. Where an investor is in their fund often influences how they’ll behave in a financing, and it’s good to know whether they are likely to be interested in putting more money into your company.
It also can affect their risk tolerance. You may find one of your investors already had a huge win in the existing fund that you’re in so they may be willing to play the game longer with your company because they’ve already made a great return on that fund. On the other hand, maybe they need to make a bigger return on your company in order to make their fund so they’ll be more sensitive on valuation and whether they’re putting good money after bad. In that way, knowing where you are with your investors might be even more important in 2023.
Tom. I agree. Capital seeks its highest return, whether you have bottom feeders or secondary markets or the big guys that say, “Hey, we’ll take you out.” It’s not exactly what you hope for, but your board may agree it’s a good way to go as in the end, companies like Santé aren’t in the business of investing in companies and hanging onto them with a steady 8 to 10% return a year. We’re in the business of turning things, returning money and hitting grand slam home runs. It’s really important to understand venture funds: their life cycles, how they get paid and who their bosses are.
Without question, in the current environment you may find that terms are a little more onerous in 2023, and the valuations are going to be lower. But if you can get a term sheet that you can live with, you should probably take it.