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Think of raising money in healthcare in the old checkers-chess analogy. Old-style fund-raising was checkers. Today, it’s chess.
Old style: Jump from government grants to angel investors to venture to an exit (either IPO or acquisition).
Today: A lot more moves and ways to win (and lose). Crowdfund, seek out angels, get grants or connect with a corporate investor. Then, later on, do more of the same, add venture or take another route.
Tiffany Wilson Karp has seen both paths: first as a medical device entrepreneur and now as the executive director of the Global Center for Medical Innovation in Georgia, which supports innovators, entrepreneurs and product development teams on commercializing devices.
Karp describes a landscape of opportunity. But she said it requires savvy entrepreneurs who can focus on what matters most while finding partners who can protect their interests. She shared her thoughts with us on investing in the life sciences and, in particular, medical devices. Excerpts of that discussion follow.
Q. How has fund-raising changed for medical devices and other life science innovators?
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
Venture capital is essentially out of the early-stage medtech investing business and angel investors are the main pitch audience the early stage entrepreneur needs to target.
Don’t neglect sources of non-dilutive capital such as SBIR [Small Business Innovative Research] grants, philanthropies and economic development grants that exist in some states.
In addition, I am seeing an increased interest from corporate venture capital (large medical device companies, for example) which face gaps in their innovation pipelines in the future and may be open to creative ways to engage with early-stage companies who are working on problems they want to address or product pipelines they want to fill.
The types of deals vary, but they will take a look early and start building a relationship with the company if there is a strong strategic fit with their product portfolio and long-term strategy.
Q. In these corporate deals, can they go early stage, too? What’s the value beyond the money?
Large multinational medical device companies can also play a valuable role early on, and we are seeing the large companies wanting to develop relationships and perhaps make investments early.
I think the great thing about working with a large-device company is, if you ultimately plan to be acquired, your due diligence package should be in good shape if you have guidance and input from industry.
Overall, there isn’t a “one-size-fits-all” approach. Entrepreneurs have to do what is right for their company.
Q. Is there a certain partnership that will serve you best as you get into fund-raising?
One piece of advice I got very early in my medical device startup career was to build relationships with the best lawyers — they are not only a great source of knowledge and insight, but also have strong connections to the investor community.
In order to raise capital, build and exit from a successful life sciences company, your “due diligence package” needs to be in order. Having strong legal advice on building a patent portfolio, making sure it stays protected, ensuring the structure of your company is right for both founders and investors and anticipating general quality and compliance matters is critical.
Yet early-stage companies do not always know how or when they should start. Lawyers can really help you navigate this.
Q. Some entrepreneurs worry about giving away too much information when pitching strategic investors or while going through the grant process. What do you suggest?
My biggest piece of advice is to develop strong relationships with IP and corporate lawyers early on and have a plan for managing confidential information – then listen to your gut. If you don’t trust the partner or believe that a deal isn’t a good long-term fit for your company, move on.
Also, always have a two-page executive summary that is non-confidential (lawyers can sign off on it if needed).
For any sharing of proprietary information, be sure to have a [nondisclosure agreement] NDA in place that your lawyer has blessed. Other strategies to protect intellectual property would include trade secrets around proprietary manufacturing processes and trademarks.
Q. How do founders best protect their stakes in their company and keep it as high as possible?
Think about staging different sources of capital at each stage of development.
I believe the best scenario would be to use non-dilutive funding, such as government and academic grants to complete as much of the “de-risking” process as possible and demonstrate the ability to achieve milestones in a disciplined and capital-efficient manner.
Be sure to read the fine print with grants and partnerships to make sure you can use the funds on the right activities and that your intellectual property stays clean.
Q. How do you see the JOBS Act, which allows startups to ask for equity investments publicly (through crowdfunding)?
The biggest concern I have heard about crowdfunding is the potential for a complicated cap table and [having to manage] a large group of shareholders at an early stage.
Medtech entrepreneurs, who are working with limited financial and human resources, should be laser focused on product development milestones that de-risk their products and move them as quickly as possible to commercialization. Managing a large group of small investors can potentially drain valuable time from development and commercialization activities.
This column is one in a series by Lake Whillans Litigation Finance. To learn more about Lake Whillans, and litigation finance generally, visit us at our website, lakewhillans.com. To ask a specific question, suggest a topic, or simply say hello, drop us a line at [email protected].
