By Chris Newmarker | June 22, 2018
Ask any early-stage medtech or digital health entrepreneur, and they’ll tell you how tough it is. There’s tremendous competition for venture investing, coupled with a pullback by previously traditional investors in this space.
Bill Evans
While venture investment in medtech and digital health has recovered since the financial crisis of a decade ago — setting a record in 2017 — this doesn’t reflect what it’s like for entrepreneurs raising money at that critical transition from seed money to Series A.
The bar for new investments is considerably raised, and funding seekers have to cast their nets more widely for new sources.
To get to the bottom of what’s going on, I reached out to entrepreneurs at this stage, as well as bankers, startup accelerator programs and industry observers. The result is a three-part series:
- Part 1, the present article, looks at what is driving the underlying trends.
- Part 2, coming soon, looks at these trends from the entrepreneur’s perspective.
- Part 3, also coming soon, gives advice from the trenches, to guide entrepreneurs looking to tune up their business plans to be in the best position when Series A comes around.
So let’s look at the underlying trends
This chart, showing trends in total venture investing and number of deals in devices, is taken from a 2018 Silicon Valley Bank (SVB) report.
“We’ve seen a wholesale change in investors over the last 10–15 years,” said Jonathan Norris, the managing director at Silicon Valley Bank and one of the authors of a recent report about healthcare investments.
“Traditional venture investors are not playing at the early stages. They are waiting for these companies to get further along before jumping in, or favor starting their own companies with proven management teams,” Norris said. “On the corporate side, firms like Boston Scientific are more active both on investing and acquisitions whereas Medtronic seems less so. The early stage companies are forced to find funding outside of the traditional places. Angel groups like Keiretsu Forum, Golden Seeds, and Green Park & Golf fill the gaps, not just with $100,000s as you might have seen 10 years ago, but now a few millions. The goal line has been moved from angels funding development stage, to funding into the clinical stages.”
As the size of angel investment has grown, so has the sophistication. “We continue to see smart angel investors such as CEOs previously successful in this sector, doctors who know it well or VCs investing as individuals as their funds no longer invest this early. These people know the sector and are making some big bets in earlier rounds,” Norris said.
Over the last decade the melding of digital technologies of all kinds (sensors, AI, mobile, etc.) and the focus on the patient as customer has altered the traditional medtech device world. This has brought in new investors and caused established ones to look at healthcare anew.
“Digital health (DH) is still a work in progress from an investor perspective,” Norris said. “While the FDA is supporting new types of innovation, what those exits will look like and how much capital it’s going to take raises a lot of questions. We’re seeing more activity on the enterprise side of DH, rather than the marriage of devices to data, which seems a harder sell.”
Digital health trend aspects
This chart is from digital-health-specific observer Rick Beberman, who has been tracking every investment in digial health since 2009. His database tracks about 2,200 transactions covering 800+ unique companies.
[Chart courtesy of Rick Beberman, May 2018, compiling information from public sources]
The largest group of Series A investors in digital health are tech investors, accounting for about 50% of the pool over five years, according to digital-health-specific observer Rick Beberman, who has been tracking every investment in digial health since 2009.
Series A investors include broad-based VCs who invest opportunistically or have expertise in things like cloud or cellular and use this expertise to jump off into health care. “They’ll take more risks especially at the earlier stages,” Beberman said.
“The health IT and life science investors do not like Series A,” Beberman added. “The second largest group are the corporate investors, including the providers, payers, pharma and device; the so-called strategics, and of these pharma and device are not playing much yet in the DH space relatively speaking. This group includes companies like Qualcomm who up until recently were fairly active in DH, and others like Google and General Electric. Tech, and corporate-combined investment is hovering consistently around 70% of total Series A in DH over the last five years.”
The view from accelerators
Having less investors with healthcare experience in the earlier rounds means they often don’t have the experience and connections required to be successful there, according to Paul Grand, CEO of MedTech Innovator, a global-reaching accelerator that filters from more than 700 companies down to 20 who enter the program.
“In the past when VCs were in earlier rounds they had pattern recognition of the steps needed to guide entrepreneurs to success,” Grand said. “Eventually these companies will get to later institutional rounds where the bar has gone up, seeking preclinical and human data before they’ll invest.”
What kind of data are investors looking for? Grand puts it this way: “They’ll want to see the evidence you’re lowering costs and improving outcomes. Does the ultimate purchaser, such as a hospital system have the budget to pay? They’ll want customer evidence you have gotten past a value analysis committee somewhere and have traction. The evidence burden for institutional rounds is high.”
According to Grand, attractive areas for investors include, the neuromodulation/electroceuticals space, precision medicine, getting the right drug to the right patient at the right time including localized and combo drug delivery devices, and diagnostics.
“Anything to keep people out of hospital is huge,” Grand said. “Whether it’s about preventing admission or readmission, the pressure is to reduce cost and avoid retreatments, or move treatment to less costly places such as the clinic or home. The thinking has shifted at device companies and hospitals to episodes of care and how can devices, home monitors and the underlying flow of data reduce the costs of these. Another hot area, artificial intelligence (AI), is still unproven at scale and has become trendy with many entrepreneurs taking something older and framing it as such. This is unlikely to last.”
Grand also sees a lot of home care startups with poorly differentiated offerings, making funding difficult. He’s seen companies packaging off-the-shelf monitors and wearables combined with a platform for providers and EMRs that are also undifferentiated. For monitoring he recommends focusing on unique solutions that offer patient benefits like new ways to wear including comfort, and medical grade measurements previously hard to achieve at home. There are also solutions looking problems, warned Grand, “such as non-invasive blood pressure monitors, when no one has yet definitively explained the need to monitor this continuously, and doctors don’t know what to do with this data yet.”
Come back in a week to check out Part 2 of this article, which will look at investment trends from the perspective of the entrepreneurs raising early-stage funds.
Bill Evans is an individual consultant to the medtech and digital health industries, and an expert in helping companies leverage user centered design to create market winning products that improve outcomes, and help lower overall costs. Until recently, and for 25 years, he was the founder and former innovation SVP at the medical design consultancy, Bridge Design (San Francisco), now a Ximedica company. He can be contacted at [email protected]
The opinions expressed in this blog post are the author’s only and do not necessarily reflect those of MedicalDesignandOutsourcing.com or its employees.