An influential leader, a fundraising strategy, a business plan, persistence, and willing investors are all required to raise capital. Raising enough seed capital to get to the next valuation inflection point is usually the most challenging step in launching a medical device startup. Yet billions of entrepreneurs have done it and you can too! While some companies have an easy time raising capital, many raise it from the wrong investors and most end up pitching dozens or hundreds of times before they get the plan and pitch polished enough to attract an investor or investors at suitable terms.

It starts with having a leader who can influence a team and investors who buy into a vision. To investors, the CEO is the most important aspect of the investment opportunity because a strong CEO will build durable relationships with all stakeholders and figure their way out of challenging situations including pivoting the company as needed to sustain and build the company’s valuation. Investors will review the CEO’s track record of leadership, building relationships, and may run a background check. The CEO is the sales rep for the company to investors and manages the fundraising.

Why You Need Investors

Few medical device innovators are wealthy enough to get their startup launched with their own money. Everyone else needs investors because a medical device product development will have negative cash flow for a long period of time. Investors move money from those who have it (the investors) to those with the ideas (you). In addition, investors can take on the risk of your activity because they have distributed their support over many projects in the hopes that one or two will be successful.

It is not easy getting investors interested in your project because investors are seeking:

• A strong, experienced management team
• Disruptive solutions with strong IP protection
• Solutions to chronic disease conditions with a growing patient pool
• Solutions that are de-risked
• Clinical trial results significantly better than standard of care
• Solutions that can be effortlessly adopted by clinicians and systems
• A prototype that has been bench-tested, animal model tested, and first-in-human tested
• A market larger than $1b per year
• Light competition
• A clear regulatory and reimbursement path
• The potential for a product platform rather than a one-off solution
• A quick exit

Don’t expect large sums of money to come your way early in the process. But if your opportunity has been validated, with persistence you should be able to raise enough money at reasonable terms from supportive investors to fund your project.

Fundraising Strategy

How much cash do you need? Or, more accurately, how much will you need to get to the next valuation inflection point? A valuation inflection point is where the value of the company takes a significant leap, such as when you complete a clinical trial with favorable results compared to standard of care or when you achieve FDA clearance. A competent CFO will work with the team to build pro forma financial statements to estimate how much cash will be needed for the first and second rounds of funding. During normal economic times it typically takes six months to raise a seed round while during stressful economic times it may take nine months or longer.

The amount of cash needed helps determine the best fundraising strategy. First, research grant opportunities (federal, state, foundation) which do not dilute your equity should be considered. For US federal grants, determine which organization in your state is has been recognized as the official facilitator to help companies in the state access federal grants. Then turn to equity based funding sources that take equity in exchange for an investment.

Find a business attorney to advise you on fundraising strategy and to create and execute documents. Ask entrepreneur friends for referrals and what they like and dislike about their attorney. Understand the skillset and experience of each attorney. Some good questions to ask:

• How many startups have you worked with to raise capital?
• What’s the largest amount of money you’ve helped raise? Tell me about that process and how you influenced the raise.
• How will you save me time and money?
• Do you offer a package for entrepreneurs?
• Will you accept equity in exchange for some or all of your fees?
• What’s your hourly rate? Do you have an assistant with a lower rate who will handle the administrative tasks?
• What’s your style in negotiating a term sheet with a potential investor?
• Tell me about your network of investors who may be willing to invest in my startup, as the best attorneys have investor networks.

Funding Sources

Start by identifying the desired characteristics of potential investors. Medical device startups require capital where the investor isn’t looking to make a 5x return on investment quickly. Investors who have networks into providers in the specialty area have experience investing in medical device startups and understand the medical device sales cycle could be valuable. Some investors want to exert control over their investments. How much control are you willing to give up? Document the types of investors you want and the types of investors you don’t want before starting to raise capital and refer to these notes frequently during your fundraising journey.

Before pitching to anyone, research them. Google the individuals and their firms. Access Pitchbook through your local business or university library and do your due diligence on the potential investment firm: previous investments and amounts, board seats, whether they’ve invested in your competitors, etc. Do they sound like someone who would fit your desired investor profile? Do as much research on investors as they would do on you. Taking on an investor is frequently cited as being similar to taking a spouse. Will they stick with you through thick and thin? Will they bring more to the table than just money?

While a warm introduction to an investor is always preferred, sometimes a cold call is necessary. A cold email usually consists of a brief introduction including the problem you’re solving, how much you’re raising, what stage of fundraising you’re in, why you think they’d be interested and a request to pitch. Attach your executive summary for quick reading, and not your whole pitch deck which may change many times before you’d actually deliver the pitch. Generally, NDAs are not used when making your initial pitch to an investor, because you are not disclosing the details of your solution to the investor. That comes at a later date.

The most important initial funding source is you. Investing in your own project is the best evidence that you believe in what you are doing and are willing to assume some of the risk; a strong signal to early investors. This does not mean mortgage your house because you need to be sensible about the risk. It does mean, that if at all possible, you should fund the first, low-resolution prototype out of your own pocket.

Sometimes the next stage is  people you know: your family and friends. Again the sums will be small, but could be sufficient to fund a second prototype or to cover the expenses related to filing a patent. The advantage of the FFF (friends, family, and fools) funding network is that these investors are not interested in owning a part of your venture but rather are motivated by wanting you to succeed and you eventually paying back their no-interest loan. The disadvantage is if you ask too much and are unable to repay, you run the risk of permanently damaging important relationships.

The first group of private investors to pursue are angel investors. Angels could be experienced investors or individuals or groups that invest in high-risk projects that could have a high rate of return. Angels invest their own money and the investments tend to be small, but could be sufficient to fund a second prototype or to cover the expenses related to filing a patent. Share your business plan and make the risks very clear, including potentially losing their entire investment. Execute an investment with them just like you would with any other investor. To reach this group, you will need a good pitch and a viable business opportunity plan. Angels are generally smart, seasoned investors and will do their due diligence investigation to determine if your product and your plan has merit.

As your business grows and you need larger sums of capital, venture capital may be the next type of investor for your startup. VCs are fund managers who invest other people’s money, and are professionals who will take a hard look at your proposition. VC funding generally requires that you give up partial control of your company. For example, VC investment can come with the stipulation that the VC fund name a seasoned CEO to run the emerging company or that a VC rep sits on your company board. VC funding tends to come after your prototype has been validated in bench and animal models. Sometimes, strategics (large medical technology companies) will invest in a startup if they may have a future interest in acquiring your company but usually strategics will wait until your technology is substantially de-risked. Some startups are successful without taking VC money and giving up too much control, so keep your options open.

In the USA, startup and pre-startup companies can receive funding through the federal government SBIR program. SBIR facilitating organizations may host regular educational webinars, have relationships with the federal agencies and may have financial support from the State to help entrepreneurs write compelling grant proposals. For medical devices, NIH, NSF and DOD do most of the SBIR funding for med tech startups. The advantage of this funding is that it is non-dilutive and comes with no strings attached. Further, Phase 1 SBIR funding is over $250K and Phase 2 is over $1M. The disadvantages are that applying for the funds requires writing a science-based proposal that will be reviewed by academics, you must wait for six to nine months after you apply before finding out whether the proposal is awarded, and having to meet government regulations for entities receiving government money. Other countries (e.g. Israel, Korea, Singapore) have analogous government funding sources to support med tech startups.

External foundations such as the American Heart Association, Michael J Fox Foundation for Parkinson’s, and the Alzheimer’s Association all have funding available for clinical trials. The American Heart Association also participates in venture funds including BrightTorch Ventures and Cardeation Capital.

Some states and cities offer education to entrepreneurs, grants and low interest loans. If you are in Minnesota, the Launch Minnesota office (mn.gov/launchmn) administers these programs. Hennepin County, which includes Minneapolis, has resources through the Elevate Hennepin program (www.elevatehennepin.org/). Contact the economic development office of the city where you plan to establish your business to identify other potential helpful funding sources.

If You Are Part of a University

Most research universities have internal sources of funding to support translational research that may lead to a product. While the amounts may be small, it is often enough to get an idea ready for licensing. If you are at a university with an engineering school, take advantage of capstone design projects in your mechanical, electrical, and biomedical engineering departments that generally are looking for interesting projects for students to work on. Finally, there are always the traditional sources of government research funding. For example, the NIH R21 funding program can be used for early-stage product development. The NSF Partnerships for Innovation (PFI) program is specifically for university research projects that are moving into the product development stage. Contact your tech transfer office who can refer you to university startup resources.

If you have a business school, contact the entrepreneurship department as it probably has faculty and students looking for projects. Students can help with business planning, market research, building a market model and similar deliverables.

The Process

Building on the content in the Pitching your Idea chapter, common documents to prepare for raising capital include a pitch deck, executive summary and pro forma financials. The executive summary is a 1-2 page document with highlights from the pitch deck. Work with a graphic designer on a logo and brand for your company. Best practice for a pitch deck is 10 slides that cover these topics:

1. Cover slide with company name, logo, tagline CEO name and contact information in company branding
2. The problem you are trying to solve
3. Your solution including the value proposition and specifically how you’re solving the problem with IP in progress
4. The market size and cumulative average growth rate
5. Your current and emerging competition
6. The startup team with titles
7. Financial snapshot
8. Milestones you plan to achieve with the money raised such as design freeze, meet with FDA, clinical trial dates and next fundraise
9. The ask: How much you’re raising, the form of the investment instrument, desired date to close and how the money will be used
10. Closing slide: company name, logo, CEO name and contact information, and of course the company branding

Additional pitching tips:

• Bring paper copies of the pitch deck, executive summary, and pro formas. Hand out the pitch deck, and the pro formas if they want them.
• Practice, practice, practice so you have the phrases and key points down
• Prepare backup slides to address any questions they may ask
• Pitch confidently: find a solid and grounded stance, smile, laugh a bit, use a firm voice, gesture naturally and look investors in the eye regularly
• Answer questions respectfully. Thank them for asking as they are interested. Never be defensive.
• Stick to the time allotted for the meeting unless their questions make the meeting run over

Some startups create an online data room to house important documents which could include all relevant company documents, investment documents, research papers, key contracts, bios of the management team and other information. Then simply grant access to your data room. There are several online data room services available to keep your information safe and secure.

Eventually the day will come when you find your first serious investor. Celebrate! It’s important to remember that investment terms are always negotiable. Venture capital managers, sophisticated angel investors and angel networks will usually use a term sheet, a summary of the deal terms they propose, to negotiate the key investment terms. Less sophisticated angel investors, or friends and family members, may forgo negotiating a term sheet and just skip to executing the investment documents. Have your attorney review all term sheets and deviations from your investment documents. Then execute the various investment documents with the agreed upon terms.

Investment documents for startups have become standardized. There are templates of the most common investment documents on the website of the National Venture Capital Association (nvca.org). Or you can use documents provided by your business attorney. Read through the entire document and make sure you understand every sentence. Google unfamiliar words and phrases. There have been naive CEOs who execute documents without really understanding the ramifications of certain clauses then regret it.

The two most common forms of investment for startups are SAFEs (Simple Agreement for Equity) and Convertible notes. There are pros and cons for each type. In general the market is moving away from SAFEs and towards convertible notes. Your attorney can advise you on the best type of instrument to meet your goals.

For an in-depth discussion of obtaining VC funding, read the 2019 book by Scott Kupor, Secrets of Sand Hill Road: Venture Capital and How to Get It.

Licensing

Most inventors are not interested in taking their idea into a fully formed public or private stand-alone and instead are thinking about the appropriate research exit strategy, which often means selling or licensing their idea. If you are at a university a common exit is when the university technology transfer office facilitates licensing your idea to an existing company. Ask your tech transfer office about their licensing policies and how revenue from the licensing is split between stakeholders.

Of course the dream is to sell a napkin sketch for millions of dollars, but in reality that rarely happens. The selling price of your idea directly depends on how much work you have done to prove its value through protecting, prototyping and validation. Protecting means you should have at least a provisional patent filed; a full patent application filed is even better; an issued patent is best. Prototyping means that you have built one or more physical versions of your concept. Validation means you have bench tested or animal model tested your prototype to determine if it works to its intended purpose. In addition, you should have done some work to determine the market feasibility of the concept (who needs it and why) and have a realistic idea of what the future product might cost. The more evidence you have that your product concept has value, the better your position will be when negotiating a license or sale of the idea. The bottom line is that the further you are along the innovation process, the more valuable your concept will be.