What do unicorns, fairies and medical device platform plays all have in common? They would be delightful to see, but sadly don’t exist. “Wait a minute,” you say, “My incredible new medical technology has so many potential applications that it may ultimately be used on every patient to ever enter a hospital.” The reality is that most emerging medical device companies succeed not because they have an expansive platform technology, but because they have a lead product that works and doesn’t kill anybody. Most med tech investors don’t fund platforms, they fund products. Of course, the business plans of development stage device companies have to expound on the platform potential to look like they have multiple shots on goal, but having one really good shot is what drives valuations.
To be clear, we believe there are really cool technologies out there with lots of exciting medical applications all over the body, but upon deeper examination all those applications often have few development or market synergies (apologies for the overused s word). In all likelihood, it will take almost as much money, time and senior attention to get your second product approved as your first one, because most of that expense is clearing the regulatory hurdles in the specific application. So all the development effort for your nifty erectile dysfunction device is going to help you precious little in clinically advancing, much less commercializing, the incontinence version. And good luck asking your investor to double their investment into your company to get two products simultaneously through development, much less to market.
“Okay,” you say. “I will find rich strategic partners to provide non-dilutive funding for these other applications, and then there is only upside! We get money, validation, and access to all their expertise! I will be a hero!” Don’t kid yourself; finding, sealing, and feeding that little partnership beast will take up precious R&D and management bandwidth that would otherwise go to progressing your lead product. And really the most you can hope for out of these side deals is more credibility as a platform, which might up your valuation by maybe 25%, but this has to be weighed against the distraction factor and added cost (as the partners never pick up the whole tab). Another consideration is that many potential big device company partners are well diversified (and growing ever more unwieldy through acquisition), so that carving distinct, partnerable fields without risking the ultimate acquisition value of the company is a challenge.
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There is definitely a bright side for emerging medical device companies in deflating the platform myth, though. If you aren’t going to be viewed or valued as a true platform technology, then you don’t have to waste time and energy chasing down little detour deals to leverage your platform. The real job of a medical device startup is to use scarce capital resources to prove the product hypothesis somewhere, as quickly and efficiently as possible. Arm-waving at other exciting opportunities is allowed and expected; if plan A doesn’t pan out, nice to have a plan B around which to reinvent the company. Our admitted bias at S2N is that we like focus, as you can read about in several of our previous blog posts and particularly this one about the hidden cost to medical device companies of non-dilutive funding. If what floats your boat is lots of development stage dealmaking, you might be disappointed in emerging med tech land. If it feels good to create something you can see and touch, then you are in the right place.
