While every medical device business founder daydreams of pre-revenue exits and unicorn valuations, it is imperative to plan for the long and unpredictable haul.
Richard F. Mattern, Bass, Berry & Sims PLCDespite the starting point being nearly universal (founder sees a clinical need, a promising market opportunity and a path to regulatory approval or clearance), a business’ opportunities, challenges and capital can vary significantly.
Your corporate focus and related legal needs can shift through your medical device company’s life cycle as it grows.
Surviving the burn (early stage)
While operating initially on a shoe-string budget is possible, the initial funding, whether in the form of a “friends and family” raise or out of the founder’s pocket, will be quickly exhausted. Furthermore, medical device startups regularly find themselves in an extended and ever increasing cash burn position, which often exceeds $500,000 per month. Thus, the company will likely have to raise a significant amount of capital from professional investors. Despite the tendency of the terms and structure of those investments to evolve over time and by investor type, the capital raising tips below are generally applicable.
- Be prepared. Professional investors will need a concise presentation and a specific plan for the capital supported by reasonable projections and assumptions. Don’t overstate the opportunities or understate the challenges. They will know. Finally, since raising capital can be a time-intensive process, start the process as far in advance as possible, and have the deal team and data room ready to go. You can’t afford any time lags.
- Assemble the “right” team. The management team is crucial to an investor and the long-term success of the business. Investors want a management team that has industry experience and the skill sets to grow the company. Similarly, the company should engage experienced counsel who understands the industry and current market terms. The initial raise is very important as those terms (especially the unfavorable ones) will find their way into future raises.
- Get more than money. Taking on a professional investor is the beginning of a long-term relationship. Don’t be blinded by prestige or the largest checkbook. Instead, find the partner who shares your vision for the company and the industry, has a complementary skill set, is willing to dig in when times get tough and has relationships that will open doors in the future.
- Raise more money than you need. If you have access to capital on reasonable terms, take more money than you need. While no one suffers dilution well, consider that running short on capital, even temporarily, could irreparably harm the business. Also, a down-round financing, which comes with additional transaction costs, demoralizes the employees and existing investors. And when the capital need becomes apparent, the funding window may have closed due to micro or macro factors outside of the company’s control.