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Medical Device Company Must Show Solid Promise to Potential Investors

by
Bill Contente

Raising money is never easy, and in today’s environment it’s harder than usual. Early-stage medical device companies can improve their chances of success by anticipating investor expectations and addressing, in advance, areas of concern.

To attract investment dollars, startups must show they will generate huge returns. A company’s valuation is an assessment of its ability to make money, and to make money, medical device companies need a capable management team, a strong product, marketing savvy, a ready pool of customers, a viable FDA strategy and enough cash to make it work. Deficits in any of those areas greatly diminish the chances of success.

Management team. Investors always say that they invest in people. They mean it. Absent a complete experienced team, investors want to know management is smart, practical, motivated and works well together.

If three founders go to a pitch meeting, all of them should speak. The group impression should be one of mutual respect, complementary strengths, competence and confidence. If there’s a gap in the team, acknowledge it and discuss how the company will function until it is plugged.

Marketing. Thorough understanding of the company’s market is critical. Investors will stampede to the exits if founders don’t understand who needs the product, who will pay for it, who the key complementary and/or competitive companies are, what the distribution channels look like and how long it will take to penetrate the market.

If founders can’t afford third-party marketing studies, they should ask the opinions of experts or thought leaders as to how the market will receive the product.

The market for medical devices is complex. Successful companies will convince doctors, hospitals, insurance companies and even end users that a product improves medical care in a cost-effective way.

Each of these constituencies responds to different arguments. For example, a surgeon’s primary concern may be improved outcomes, and an insurance carrier may respond to an analysis of the savings a product can generate over time.

To attract investment dollars, founders must have a viable plan for penetrating the market and must convince their investors that this plan is achievable.

FDA compliance. No medical device can be brought to U.S. market unless requirements policed by the Food and Drug Administration (FDA) are satisfied. The FDA regulates the manufacture and labeling of medical devices. If the device is as safe and effective as, or substantially equivalent to, another legally marketed device, FDA approval can be obtained through a comparatively easy 510(k) pre-market notification process. Other devices may require pre-market approval by the FDA, which requires a more lengthy and complex process. Clinical trials may be required.

FDA clearance is a major concern for investors. Obtaining FDA clearance can take years and must be factored into the company’s cost projections.

There are consultants who specialize in FDA compliance work for medical devices. Before approaching investors, founders and their FDA consultants should carefully map out a strategy for achieving compliance. A complete strategy will identify required approvals, the information needed in any FDA submission and the anticipated timeline.

Executive summary. The summary may be an investor’s first contact with a company. A good one will entice an investor to look at the business plan; a bad one will go into the trash, along with prospects for investment dollars.

– Make it short, a maximum of two pages — and don’t cheat by using 4-point type. Brevity forces clear communication and will increase the odds an investor will read to the end.

– Describe the company, marketing and sales strategy, revenue model, competition, management team and financial projections.

– Write clearly, avoiding complexity and jargon.

Business plan. The business plan should be no more than 25 pages, less if possible, plus three or four pages of financial statements. It should cover the topics described in the executive summary. Fit it into a slim binder to make it easy for your investor to toss into a briefcase.

Fund-raising goals. How much money will the company need? The answer may determine the type of investor to approach. Need $60,000? The best bet is probably a friends and family round. Will it take $400,000 to get the company to the next level? Approach angel groups — they fund investments from $100,000 to $1 million depending on the group. If the business plan requires several million dollars, contact institutional investors, usually venture capitalists or companies that will profit strategically from the new product.

First contact. When contacting investors, it’s better to have an introduction than to cold call. Founders should talk with their lawyers, accountants and other contacts asking for introductions to funding sources. Investors will pay little attention to an unsolicited business plan but may carefully read a plan sent by a trusted referral source.

Trust. Finally, investors give money to people they trust. Founders must be dependable and honest to attract investment dollars. Successful entrepreneurs know that building the trust and confidence of their investors is key to a successful relationship.