Investing in medical device development requires understanding stages of de-risking.
Medical device development is a costly and complex process, especially when considering the requirements of a tightly regulated industry and potential liability issues. To even consider investor funding, the device must meet certain criteria, such as a reasonable device idea with a sizable market, a logical regulatory route to market, and a device that has true value with high price and gross margins.
The investment process is broken up into various milestones, each of which presents an opportunity to reduce risk for the investor. This includes filing a patent application, creating a pitch deck, proof of concept, design and development, clinical data, regulatory clearance, sales, breakeven point, and sales multiples.
When it comes to seeking investment, it is important to get to know potential investors, as people invest in people. Generally, a startup device company must get to the proof-of-concept stage to successfully raise significant capital. If a developer can then get to regulatory clearance, the device’s worth and company’s valuation increase significantly, and investor risk decreases significantly.
When it comes to being acquired, investors buy device companies based on multiples of sales, not EBITDA, as building a market for a device is very expensive. Sales and marketing costs average 22% for large device companies, but can easily amount to 50%–60% of revenue for a startup.
Knowing when to seek investment is a difficult question, and depends on the technology, industry, use, market, economy, and personal preference. It is not realistic to expect an investment after a single meeting. Most investment firms will want to see real, tangible progress over a period of six to 12 months — or more — before writing a check.
Designing and developing a medical device is a complex and costly process, and it is important to understand the investment process and milestones to ensure success. Knowing when to seek investment is tricky, but if a developer can get to regulatory clearance, the device’s worth and company’s valuation increase significantly, and investor risk decreases significantly. It is also important to get to know potential investors, as people invest in people, and to understand that when it comes to being acquired, investors buy device companies based on multiples of sales, not EBITDA.
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