Venture capital funds have long served as life lines to get early-stage medical technology ideas into the hands of buyers, and eventually, doctors. But insiders say that funding system is facing greater challenges than ever, and med-tech executives need to get creative when thinking about future funding.

A report out this month from med-tech trade group AdvaMed and Deloitte Consulting LLP says the total value of venture capital funding for early-stage funding declined for three years in a row, to $5.8 billion in 2016 from $6.8 billion in 2014. And structural changes in the wider healthcare financial ecosystem system may make it difficult to reverse the change.

The report, “Out of the valley of death,” says early-stage med-tech executives should start to think more creatively about where their future funding will come from, especially their first-round “Series A” financing, which has become especially challenging.

For digital-health companies in particular, non-traditional sources of funding may include healthcare providers and consumer-tech companies. “Case in point: among the top 15 corporate investors in med-tech over the last 10 years are Kaiser Permanente, Ascension Health, Amazon, and Google,” the report says.

Large established medical device companies may hold the key for some smaller players. Unlike in the past, when the larger players only got involved when it was time for an acquisition, larger med-tech companies today may be more willing to engage earlier with smaller investments, through “strategic” arrangements like licensing, co-marketing and co-development agreements. Such arrangements are already common among biotech companies.

Larger med-tech companies may also do “build to buy” deals, in which they pair their own investments with early VC in exchange for the right to a stake in the smaller company or a right to acquire it outright if milestones are met. “Such models would allow for early partnerships and a closer goal alignment,” the report says.

"This report lays out in stark terms the challenges facing not only medtech startups but the entire ecosystem that supports innovation in our industry,” said Ashley W. Wittorf, executive director, AdvaMed Accel, and global head, investor relations, in a press release. “It also provides clear and concrete potential solutions to these challenges.”

The full 31-page report is available as a PDF here

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