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Advice for entrepreneurs in the medical device industry on raising cash and growing startups

The Foundry CEO and managing partner Hanson Gifford (right) interviewed by David Cassak, co-editor in chief of the MedTech Strategist. (GeekWire Photo / Charlotte Schubert)

Entrepreneurs in the medical device industry face a shifting regulatory landscape, skeptical investors and a healthcare system resistant to change. But there are ways to get through the gauntlet.

Investors, regulatory experts and CEOs shared their experience and advice last week at the 2022 Medical Device Summit at the University of Washington Bothell campus.

Hanson Gifford, CEO and managing partner at investment firm The Foundry and partner at Lightstone Ventures, said he looks for companies that have a potential big market opportunity and a compelling solution. A niche or incremental product may not cut it, said Gifford in an on-stage interview.

“It has to be a dramatic improvement, because the whole healthcare industry has gotten more and more rigid and fixated on a specific pathway of wringing the costs out of whatever is the best treatment,” said Gifford, who has helped launch more than a dozen medical device startups. “You have to give them real incentive to change.”

Read on for more advice and insights from speakers and panelists at the meeting, sponsored by the trade group Life Science Washington and the Washington State Medical Device Innovation Partnership Zone.

Build connections with bigger companies

Traditional investors can overlook medical device startups in favor of tech companies or digital health companies, said Gifford.

“But the one investor that can’t walk away from the medical device field is medical device companies,” said Gifford. “And they have more and more money to work directly with early-stage companies, including very early-stage startups.”

Startups are striking deals with larger companies that keep the door open for a future acquisition by anyone, added Gifford. It’s important to keep talking with potential partners as a product develops, he said.

“Tell them about your product and tell them what you’re going to do in the next six months, and come back six months later,” advises Gifford. “Build that relationship, because the companies are not just buying a widget, they’re buying into a relationship with the entrepreneurs.”

Healthcare collaborators and well-known researchers also can have leverage with potential strategic investors or distribution partners, added Gifford.

Collect the data

Lawyer Janice Hogan. (Hogan Lovells Photo)

The path to selling a startup to a larger company is becoming more arduous, said lawyer Janice Hogan, a regulatory expert and managing partner at Hogan Lovells.

“It used to be the case that if the innovative company got most of the job done through the FDA process, or very close, that was good enough,” said Hogan during a panel discussion on trends in regulation. Now, startups generally need to also collect the data to show that they can get insurance companies and other payers to reimburse for their products.

Setting the stage for reimbursement used to be something the acquirer would take on, said Hogan. “Today that just doesn’t seem to fly anymore. It really diminishes the value of an exit,” she said.

Connect with regulators

Wavely Diagnostics CEO Arna Ionescu Stoll. (Wavely Photo)

The FDA is building up its capabilities to evaluate AI products and will soon issue more guidance documents on software, said Hogan. It may also tighten up its reporting requirements for granting a 510(k) clearance, the regulatory path many devices take to market.

“We’re living in a really exciting time because the agency is very actively changing the way that it’s approaching products that have a digital layer. I can also call it chaotic and challenging,” said Arna Ionescu Stoll, CEO of Seattle startup smartphone-based medical diagnostics startup Wavely Diagnostics, during a panel discussion on AI in medicine. “I think it’s important for companies to be nimble right now.”

Companies need to engage early with the FDA and come to them with a plan, said meeting participants.

“There’s quite a bit of education that needs to be done so that the agency can do its job effectively,” said Gabriel Jones, who was also part of the AI panel and is the CEO of Proprio, a Seattle startup developing an AI computer vision platform to support surgeons.

Build software infrastructure thoughtfully

Proprio CEO Gabriel Jones. (Proprio Photo)

“Today, every device company should be making a transition to being a digital health company if they’re not already,” said Jones.

Jones said startups should allocate engineers early on to work on back-end data, such as the connections with big cloud providers, “even though it’s painful to take one or three engineers and put them off of the clinical solution.”  

The economic downturn means that some former employees of large tech companies may snag jobs at medical device startups. And while many startups can’t offer the same high salaries, they do offer the motivating opportunity to make a difference in healthcare.

Jones advises startups to hire and use their engineering talent thoughtfully. “A few really great machine learning engineers from the right background can make a huge impact,” he said.

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