At the March 2014 Medical Device Roundtable session, Revital Hirsch of SCP Vitalife led a discussion about key milestones in the lifecycle of a medical device company from inception to exit and stages in between.
The topic is timely because it affects the way venture capital firms evaluate potential investments. If you are talking to potential investors (and who isn’t?), you need to understand their viewpoint – which is primarily "how do I exit this investment and can I do so in a timeframe that makes sense to my stakeholders?" Major shifts are being seen when identifying the stage at which companies exit and modifications are being absorbed into the regulatory approvals, which are now more difficult to obtain than they were in the past.
What Your Start-Up Can Expect:
- Medtech start-ups should expect to experience delays in their development, clinical and regulatory processes. You should build cushions into your company’s timelines in order to absorb these delays without finding yourselves in a cash crunch.
- 510(k)s are not being obtained as quickly or as easily as they have been in the past. In the last three years, pre-market clearance timelines have increased by 12 months. On average, it now takes approximately 5.1 years (from its inception) for a start-up company to obtain its first 510(k). This delay creates a multi-billion dollar burden on the medical device venture capital industry.
- There has been an increased delay in FDA clearance. Medical devices under development have become more complex, resulting in prolonged development timelines that push out the clinical and regulatory processes, in turn resulting in delays in obtaining the first FDA clearance.
- It is likely that you will not exit with $10-20 million in venture capital raised. Keep in mind that one in eight medtech start-up companies will raise greater than $50 million in venture capital prior to exiting. Adjust your business plan to be realistic, taking the new industry metrics into consideration.
How to Prepare when Approaching a Venture Capital Firm:
- Have a realistic level of expectation of your company’s valuation.
- Invest the time to build a benchmark of comparables and measure those companies’ timelines, venture fundraising and time-to-exit.
- Be specific in the definition of your industry and addressable markets when approaching venture capital firms.
- Build your own data set. Look to products in your industry that are as closely related to your own as possible in order to demonstrate accurate numbers.