The Long Read: Q&A with David Gill, MedTech Investment Expert
14 Oct 2020
To coincide with the second Longitude Prize Sprint workshop focused on investment, we spoke to investment expert David Gill, Managing Director, St. Johns Innovation Centre, Cambridge, UK to capture his advice to innovators working to raise funds for medtech product development and to scale companies. David has decades of experience in the finance world.
1. What do prospective investors need to know from medtech developers to persuade them to invest? What are the most common mistakes you see from those pitching/applying for funding?
The same fundamental issues confront medtech developers as challenge all tech entrepreneurs looking to raise funding:
Investors are pitched to by some of the most promising new ventures all the time. When you start any conversation – formal or informal – be prepared to grab their attention. For instance, kick off with the one key fact or startling problem that you solve. Do x% of all thoracic surgery patients encounter serious complications in the recovery room? Or y% of the most commonly prescribed inhalers deliver an ineffective dosage? Above all, don’t start with vague assertions about being unique or becoming the next unicorn.
Make sure you have identified the right subset of investors to talk to. Does what you do fit with their sector track record? After all, ‘medtech’ covers a very broad range of applications. Be clear about what problem your product solves and make sure that is a problem these investors are actively interested in.
Get across what is fundamentally different about your company – and why your team are the people to deliver such an important change. This may well be grounded in your research expertise, but make sure the application of the technology (not the technology itself) is front and centre. As always, it’s benefits not features that matter. And while you will no doubt have to justify key factors such as your ownership of formal intellectual property once you reach the due diligence stage, including footnotes referencing your academic papers in the initial pitch deck will likely be a big turn-off for investors.
The more you can show some market take-up, the more credible you will be. Of course, in the initial stages it’s highly unlikely that you have numerous paying customers. So look instead for validation through trials with established medtech manufacturers or endorsements from leading medical practitioners. This will also help validate your go-to-market strategy.
Finally, always tell investors what you want from them, for instance: ‘We are looking for £750,000 to complete field trials in two university hospitals over the next 12 months’. The investment journey is a long and iterative one so what you ask for may not be what you eventually get. But without an ‘ask’ investors find it hard to begin the conversation.
2. What sort of information and evidence should they have in place before looking for funding? What is the best way for medtech innovators to approach potential investors when fundraising?
A difficult choice for all entrepreneurs is deciding when to break cover: on the one hand, you need to have numerous informal conversations with various stakeholders – including investors – while you refine key issues; on the other, the old adage that ‘you only have one chance to make a first impression’ is painfully true. I often hear even experienced investors talk disparagingly of proposals that later go on to be successful because they only saw the initial pitch when it was still half-formed.
So use professional training days, participate in numerous investor events as part of the audience and use your mentors to facilitate informal conversations with investors until you are ready to go live with a properly formed proposal. By that point, you should be able to articulate compellingly what the product-market fit is, how you will scale (if you can’t scale, growth capital isn’t for you) and how your team will adapt as the business grows.
Investors realise not all key members of the team will be onside on day 1. But they will expect you to recognise key gaps – head of marketing, head of regulation – and have a plan for filling gaps subject to funding and milestones. And regulation will always be a key differentiator in medtech, so if you can, do use it to your advantage – if your product is approved now, does it inhibit competition?
”Regulation will always be a key differentiator in medtech, so if you can, do use it to your advantage – if your product is approved now, does it inhibit competition?”
3. What are the biggest hurdles facing medtech developers in securing the right funding at the right time?
In several ways, medtech is more attractive to investors than – say – drug development. The time to market is shorter (3-5 years?), usually the funding rounds smaller and medtech is less of a one-zero game: if you don’t pass a key phase of clinical trials in drug development, the likelihood is your entire investment will be written off; but a device can be re-engineered learning from critical lessons absorbed so far.
But some hurdles do come back on a regular basis. First, while regulation can act to your advantage once your device is approved, the chances are that if you are being genuinely innovative, you will have to work with the regulators in detail over many months to help them understand what you do, why it matters and why it is safe. We worked with one company originally in Cambridge that relocated to Texas to be able to dialogue with US regulators over many months on site. They did eventually gain approval, which opened numerous doors in the US and beyond, but for much of the time product development (and the lives of the founders) ground to a halt.
The other issue that probably needs to be addressed with medtech development early on is working out the sometimes-baffling distinction between who is your customer and who is your client. The people who ultimately pay for the product (the NHS, the insurance company) are your customer, but the patients are your clients, who are guided by their clinicians (another layer of complexity). The medical case for adopting a new device may be compelling for patients and GPs, but breaking into established procurement and payment procedures is another challenge altogether, especially if the existing technology is sustained by an entire supply chain that would need to be re-engineered if your product is to be adopted.
”Experienced investors know that things don’t always go to plan so what matters is that you show what action you’re taking to deal with events that could otherwise derail the business: are you cool and realistic under fire?”
4. What is the value in seeking multiple sources of investment (e.g. government, philanthropic, bank loans and venture capital)? Diagnostic development is complicated and takes time. At what milestones in the diagnostic development process should medtech start-ups be looking at securing investments?
In all probability, you will be working with many sources of funding at each round, and these will often overlap: the neat textbook definitions of what is ‘seed’ or ‘start-up’ or ‘growth’ or ‘Series A’ are in reality at best indicative of where your business is at for any given stage of development.
Always look to make maximum use of non-dilutive funding in the early stages to get you as far along the path towards paying customers or early clinical adoption as possible before you approach investors. ‘Non-dilutive’ will include grants from government agencies and philanthropic endowments.
But there is one big caveat here: never pursue a grant simply because it looks like ‘free money’. Grants may be ‘non dilutive’ in a balance sheet sense (you as founders don’t give up equity) but they can be highly dilutive in a strategic or commercial sense: applying for them takes time, they only exist for often narrowly-defined aims, reporting can onerous, match-funding must be found and penalties can apply if you are deemed not to have complied. So only ever apply for a grant if its fundamental purpose and yours are properly aligned.
5. What should medtech innovators do to keep investors on-side once onboard? What will investors expect from innovators in a long-term professional relationship?
Most investors provide standard templates for reporting both financial and non-financial information on a regular basis, often quarterly. In addition to observing the letter of your investment agreement by reporting as prescribed, the best way to build a professional relationship is to abide by the spirit also: report back important changes as soon as possible, never bury bad news in the appendices and always ensure that investors don’t suffer from surprises.
Furthermore, experienced investors know that things don’t always go to plan so what matters is that you show what action you’re taking to deal with events that could otherwise derail the business: are you cool and realistic under fire?
Finally, it’s likely that specialist investors have extensive sector experience. Don’t be afraid to call on them, to use their knowledge or gain introductions, to make sure they stay engaged with your evolution in the good times as well as the bad ones when the plan didn’t survive contact with unforeseen events.
For the next stage on – perhaps shifting from proof-of-concept to proof-of-market – a ‘good’ grant can help reassure investors both that an expert body has validated what you do AND will leverage the at-risk funding that angels and others provide. Another important consideration to make leverage go even further is to seek professional advice on what tax breaks are available in your jurisdiction. For instance, many developed countries allow generous reimbursement of funds spent on R&D against the company tax bill – to the extent that you may be eligible for cash back from the tax authorities if you do not yet pay tax. We have seen several companies manage through a tough quarter in this way recently.
On a related issue, find out what tax breaks investors – especially angels – are eligible for. As with grants, you should never let tax considerations distort your fundamental mission. But if a few tweaks to clarify that your company operates in a qualifying sector will allow angels to gain personal tax breaks, make sure you have made the necessary changes and told investors about this.
Coming back to milestones and investment rounds, some obvious considerations arise. First, your bargaining power when looking for investment is inversely correlated to how close you are to running out of cash. So start prepping for the next round before the need is desperate, and accept that the life of a tech entrepreneur is one long sequence of funding round negotiations. Secondly, remember that investors will rightly assume that you will need another round later – so show that you have a plan once the next milestone has been reached, and (crucially) show that you’ve thought about the impact on today’s investors. Early round investors do not like being diluted to homeopathic levels of ownership by later backers.
If you can time a round to coincide with a life event for the company (regulatory approval, key contract with a major hospital group, senior hire from an established medtech player), of course that will work in your favour. But such events are often beyond your control, so focus instead on ensuring the stage you are at is appropriate for the investors you are approaching. Don’t go to Series A investors who need a minimum viable product to be in place if you are still at the proof of concept stage or are still tackling fundamental clinical risk. Digest carefully what each syndicate or venture fund says it needs to see. If you wouldn’t take a knife to a gun fight, why would you take a minimum viable product to scale-up fund?
And until you can show regular income from sales, it is highly unlikely that bank debt will be suitable for you, though you will always need baking services, and the longer the trading track record you have with the bank the more likely you are to be considered favourably for a loan when the time comes.