Six Strategies for Medical Device Startups

Six Strategies for Cash-Strapped Medical Device Startups**

Thanks to innovations in medical technology, people today are living longer, healthier, more productive and independent lives. Advances such as stents, artificial hips, insulin pumps, deep brain stimulators, and implantable defibrillators have improved the overall quality of care and lowered healthcare costs. Venture capital firms and angel investors are still funding early-stage companies that solve a real market need, have a solid leadership team in place, and have a capital efficient business model. The article, below, provides an overview on strategies that emerging medical device companies need to deploy, including the right ways to utilize PR/marketing initiatives prior to commercialization, to generate growth and become self-sustaining or profitable in the shortest amount of time possible.

**SOURCE: MDDI [Medical Device + Diagnostic Industry], originally published: May 10, 2012, Author: Charlie Chi, PhD

The U.S. medical device industry is a true American success story. More than half of the healthcare products purchased around the world come from medical technology companies based in this country. Yet this crown jewel of industry is now in serious jeopardy. According to a December 2011 survey conducted by the National Venture Capital Association (NVCA), 58% of venture capitalists expect an investment decrease in the biopharmaceutical and medical device sectors in 2012. This downward trend has been continuing since 2007, according to PricewaterhouseCoopers / NVCA, with fewer first-time companies receiving funding.

Decreased investment in early-stage medical device companies could be attributed to several factors. First, according to NVCA, it is getting more difficult for venture capitalists to raise funds for investment. This is likely a result of current economic challenges. Second, regulatory and reimbursement uncertainties in the United States are causing venture capital firms to rethink investing in U.S. medical technologies. Instead, many are shifting their investment to later stage medical device companies, to overseas ventures, or to Web-based or digital media companies. Third, the cost and time to exit have increased while the size of the exit remains roughly the same, making investment returns significantly less attractive than in the past. In addition, current tax policy and potential cuts in reimbursement by payors also threaten to stifle the industry’s next wave of innovation.

As a result of these factors, the United States could lose its leading position in the global medical technology market. Worse yet, patients, healthcare providers and the overall healthcare system may suffer a range of unintended consequences, including lower quality of care and higher costs. Furthermore, securing early-stage financing would likely become even more challenging for emerging U.S. medical device companies.

Fortunately, venture capital firms and angel investors are still funding early-stage companies that solve a real market need, have a solid leadership team in place, and have a capital efficient business model. In this new model, emerging medical device companies need to use cash efficiently to generate growth and become self-sustaining or profitable in the shortest amount of time possible. What follows is a description of a capital-efficient business model and why it is in the best interest of early stage companies and their stakeholders to accomplish as much as they can with as little cash as possible:

1. The Right Team

With a capital-efficient business model, companies have limited resources and typically only have one shot to get it right before running out of cash. Getting the right team in place is one of the main pillars of a capital-efficient business model because doing so can save both time and money. Thus, start-ups should consider partnering with professionals who have the right knowledge and experience, such as successful medical device business co-founders or entrepreneurs, champions or mentors. In addition, finding someone who has commercial experience in a similar industry or has commercialized a comparable technology or device in the past can be extremely helpful. First of all, such individuals can greatly help in determining the minimum amount of capital needed to commercialize the product, determine the regulatory and business strategy, including a capital-efficient business model, and develop an execution and/or exit plan. Secondly, these individuals can also help recruit and hire other key team members, such as management, finance, regulatory, or technical personnel, when necessary. Finally, such persons can also make introductions to investors, such as angels or venture capitalists, when appropriate.

2. Time is of the Essence

Emerging medical device companies should focus on getting their product into the hands of customers earlier rather than later. It will be important to keep in mind that it is not necessary to build the perfect product or develop the perfect process at the very beginning. It is more critical to find a balance between speed to market and developing the right product for the first commercial launch. Once the product is commercialized, emerging companies have ample opportunities to refine the product or process from customer feedback.

The goal of any emerging medical device company should be to out-innovate larger competitors, as well as get one’s product to market before other start-up companies can do so. To succeed, emerging companies should identify the key product requirements and essential features that would result in a shorter development time and, in some cases, faster regulatory clearance. Too many times, start-up companies become bogged down by focusing too much on process and too little on product development. Manufacturing and process efficiencies, such as cost reduction, can be outsourced or refined after the product is commercialized. In many cases, being the first to market allows medical device start-ups to sell their products at higher prices, set product requirements, establish regulatory and quality standards ahead of the competition, and obtain valuable customer feedback to further improve and refine their products. Achieving this does not mean one needs to skimp on quality or patient safety, as some might suspect. Emerging device companies must follow proper regulatory and quality protocols, obtain the necessary permits or licenses, and perform the necessary testing to ensure that the product is made with the highest quality and reliability possible. In essence, the product must meet and comply with appropriate standards to ensure patient safety. 3. Choosing a Sound Regulatory Strategy When following a capital-efficient business model, companies may choose to seek regulatory approval and launch their products overseas before doing so in the United States. From a timeline perspective, there is generally a one- to three-year delay in launching new medical devices into general clinical practice in the United States compared to in the European Union, for example. This is partly because the regulatory process in Europe is less bureaucratic, more efficient, and more predictable than in the United States. Another reason is that FDA requires evidence of both safety and efficacy of a device, whereas a European CE Mark only requires proof of safety and that the device performs in a manner consistent with the manufacturer’s intended use. Also, it is becoming ever more difficult and arduous to conduct clinical trials in the United States as a result of FDA’s clinical data requirements (reference device regulation guidance documents available at www.fda.gov). Thus, the timeline for obtaining a CE Mark is typically much shorter than the timeline for gaining FDA approval. In some scenarios, emerging medical device companies can start the approval process in the United States and overseas in tandem. This is the ideal strategy in terms of reducing regulatory risk due to costly delays in the launch of a device, but requires more financial resources. It is important to note here that most venture capitalists today require medical device companies to develop parallel regulatory strategies before funding. Thus, start-up companies need to determine the various regulatory options and develop capital and time efficient business strategies that include both the United States and other countries. To determine the right regulatory strategy, companies should seek advice from regulatory experts as early as possible. 4. Growing Carefully Through Strategic Marketing Another important consideration for emerging medical device companies is to grow very carefully. This does not mean slowly, but wisely in a smaller market first…it will be more important for them to focus on local or regional markets initially to validate their products. The local or regional markets can be thought of as the launching pads for national and international sales. Selling locally or regionally first can help companies hone their sales pitches to healthcare providers, validate their products clinically, and prove to customers, distribution partners or potential acquirers that their products can be game changers in terms of efficiency, cost savings or better clinical outcomes. Launching products nationally too quickly without proper market and product validation can be disastrous for emerging companies if not done properly. There are several marketing tactics to sell and promote new medical devices locally and regionally with limited funding. Examples include positive media coverage (also known as “free media”) obtained through public relations outreach, word-of-mouth “advertising,” and customer testimonials campaigns. We will discuss how each of these approaches can be used to promote and sell your products with limited cash and resources. Media coverage can greatly help spread the word about new products or companies. When a new medical device is used successfully on a patient in a local or regional hospital, local or regional media are often very interested in doing a human-interest story. In some cases, local or regional media coverage is picked up by national news outlets, especially if the patient or technology makes for an exciting or important story. Media coverage can boost brand awareness and sales tremendously. Unlike advertisements, articles and stories in the press are viewed by the public as third-party endorsements. Selling locally or regionally can also generate word-of-mouth “advertising” without a large marketing budget. Inspiring patients, healthcare professionals and customers to talk about a new product creates a “buzz” in the community. No form of marketing is more powerful than patients telling their friends, families and co-workers about their great new medical device and their much-improved health. As a side note, allowing certain influential customers (physicians or hospitals) exclusivity in a local or regional market for a period of time can create competition, which will drive demand in the long term. Finally, getting the right customers talking can help validate and promote a new medical product or technology in a local or regional market. In every community, there are the early adopters, who usually are highly influential, and the followers, who wait to hear what others have to say, then follow. If emerging companies can market and sell their products to these early adopters and get them talking, they can usually influence the followers. One of the best and most cost-effective ways to maximize customer testimonials is to ask influential customers to give their testimonials in various local or regional markets in the form of media interviews, presentations to physicians and/or patients, live surgeries or product demonstrations, or physician referrals. Testimonials on the start-up’s Web site, in Blog posts or on social media platforms can also be effective. 5. Outsourcing Non-Critical Business Functions With a capital-efficient business model, it is necessary to leverage external resources where appropriate. Emerging medical device companies should focus on their core technology, such as research, design and innovation, and outsource non-critical business functions, such as payroll, accounting, HR, and IT. Trying to own all of the business functions in-house and build one’s own team and infrastructure from scratch could be time-consuming and costly. There are plenty of consulting and service companies that specialize in non-core business functions that can do the job more efficiently and less costly than start-up companies. Generally speaking, companies can also leverage offshore or on the ground consultants and design service companies to outsource their product development. Start-ups that choose this path must be careful to ensure that the product development is done under certain budget constraints and on a strict timeframe. In some instances, hiring or retaining an offshore project manager can avoid costly delays or mistakes, especially in countries where language, culture and communication could be potential obstacles. Emerging companies seeking this path should consult with outsourcing professionals that can help them avoid costly time delays. 6. Compensation for Sales Team For start-ups operating with limited cash and resources, hiring and supporting a permanent sales team is extremely expensive; paying commissions is much more cost-effective. The ideal situation for a start-up is to have all of its sales team paid purely on commission with no base salary and benefits, such as paid vacations and health insurance. In some industries where pure commissions are not the norm, offering a minimum base salary may be necessary to attract stronger sales representatives. In addition, equity in terms of stock options might offer additional incentives for sales representatives to join a start-up’s sales team. For emerging medical device companies that need to build a productive sales team in a short timeframe, independent sales consultants paid purely on commission is the ideal way to go. Conclusion Considering today’s uncertain regulatory climate and challenging economic environment, emerging medical device companies have to accomplish more with less. In this article, I have discussed why a capital-efficient business model makes sense for early-stage companies seeking venture capital funding. It may also apply to some later stage companies that would like to operate more cost efficiently. Following the traditional business model for raising several rounds of financing before a start-up company becomes profitable or is acquired is no longer attractive to venture investors. This is due to lower valuation compared to other industries (such as Web-based or social networking companies). On the brighter side, the opportunities for medical device technologies have never been greater for the United States and abroad. As mergers and acquisitions continue to pcik up, venture capitalists are shifting their focus and looking for new opportunities to invest in early-stage companies with innovative medical technologies. Emerging medical device companies that can think outside the box by accomplishing more with less cash will ultimately succeed. ABOUT THE AUTHOR: Charlie Chi, PhD is an electrical and computer science engineer with more than 15 years of management, operations, product development, manufacturing, and consulting experience in the medical device and high technology industries. Currently, Dr. Chi is a consultant to medical device companies throughout California and in other states. Dr. Chi is former president, CEO, and co-founder of OtisMed (now part of Stryker Orthopaedics), a medical device company co-founded by Dr. Chi to address unmet clinical problems in orthopedics. Dr. Chi can be contacted at (415) 234-7968 or charlie@drcharliechi.com.