May 06, 2020

Is It Time For A New Startup Business Model?

Is It Time For A New Startup Business Model?

Those of us working in the medical device industry are experiencing unprecedented times. Often insulated from periodic downturns in the normal business cycle, the COVID-19 pandemic has landed squarely in our lap. With elective surgeries and procedures having been put on hold for the past month or so, many hospital systems are seeing revenues drop by half. In addition, even with reimbursement, hospitals are losing between $6,000 to $8,000 with every COVID-19 patient. These factors have left the delivery system reeling. It is reported that healthcare spending dropped 18% in Q1, the first time healthcare spending has dropped since the government began tracking it in 1959.

While the delivery system will recover with time, the stresses it’s currently experiencing are accelerating changes that were already inching forward prior to the pandemic. For example, rather than heading for the office, I’ll be experiencing my first telemedicine call with my doctor this week.

As a sign of the times, I was interviewed last week by Medical Design & Outsourcing about how current conditions are impacting medical device startups. Startups, I shared, may be approaching an inflection point. This being my third global shock event while working with startups (9/11, The Great Recession, COVID-19), I’ve lived through these downturns before. In 2002, only 7% of startups were able to secure dollar one in equity investor capital, down from the 20% to 23% that successfully do so during economic expansion years. During and shortly after The Great Recession, startup yield rates (the percentage of startups that get funded) dropped to around 12%. And keep in mind, neither of those global events impacted healthcare economics to the degree we’re experiencing now.

Even during good times, the medical device startup model is woefully inefficient. Of the 20% of investor-backed startups that historically get funded, only 25% of them will achieve some level of success. Twenty-five percent of twenty percent is five percent. That’s right, even in the best of times, only 5% of historical, investor-driven startups ever hit full stride as a viable business. And yet, a business model with a 95% failure rate, that pulled in more than $23 billion in Angel Investor funding in 2018, has gone pretty much unchanged over the past 30 to 40 years.

After more than a dozen years designing, developing and commercializing complex, medical devices, REV•1 Engineering® believes it has created a better approach. The virtual startup model has proven to be remarkably efficient, nimble and successful for our clients that have followed this path over the past several years.

Topera is a great example. The founders chose to only maintain a lean management team, outsourcing all developmental elements of the company through REV•1’s integrated Program Management. In a little over four years from startup, Topera was acquired by Abbott for $250 million in cash, plus additional milestone payments. Topera was able to raise $30 million from equity investors, of which they expended around $4.75 million with REV•1, and the balance on clinical studies and commercial launch (to validate their market opportunity). The present value of the return on investment for Topera’s founders and investors was an astounding 686% with an Internal Rate of Return of 329%.

Another of our clients has also followed this model. Working exclusively with REV•1, and only maintaining a core management team, Ablative Solutions (ASI) has been able to raise more than $120 million for the development and extensive clinical studies of their Peregrine™ renal nerve ablation system (for the treatment of chronic hypertension).

The REV•1 virtual startup model is fast, efficient and economical. As a real world comparison, the last four investor-driven startups that I was a part of burned around $500,000 in General and Administrative costs per year just to keep the lights on. Of those four startups, all of which secured funding, one was successful (surprise, there’s that 25% mark) and is currently in the marketplace (Molekule). With all of these startups, a significant portion of that half a million dollars in G&A expenses could have been used for engineering and development if we had been operating in a more virtual environment.

Perhaps the most significant validation point of our approach to virtual startups is the fact that the founders from both Topera and ASI have come back to REV•1 to help launch additional startup device companies using the same approach. If you’d like to learn more about our approach, please contact me at terry@rev1engineering.com. I’d be more than happy to explore if we’re a good fit for your endeavors!

All The Best,

Terry Murray

© 2020, REV•1 Engineering.

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