Launching a medical device startup is a complicated process and many factors can contribute to its success. One key factor is speed to market. Startups that have a positive exit come out of the gate fast and often gain momentum as they move through the formal commercialization process. The drag that opposes this momentum often comes from seemingly minor events or decisions that slow the development of the device.
Once introduced, this drag can tend to accumulate, critically slowing down time to market and costing money upon exit.
Startups emerging from institutions may have an advantage over independent startups due to access to facilities, fellow clinicians, and the institution’s guidance, among other advantages. Once the initial equity financing is secured, entrepreneurs should shift their strategies and approaches to focus on engineering and development and to reach the next key milestone.
Additionally, it’s crucial to choose a regulatory strategy early to guide the device efficiently through design, development, and V&V and to mitigate the risk of running out of cash before having a salable device.
Finally, this post emphasizes the economic impact of developmental delays and advises seeking outside expertise to help you navigate the process.
The Importance of Early Device Exploration in Medical Device Development
In the process of medical device development, taking the time to explore and refine the device early in the discovery phase is crucial. This allows startups to push their concept into a representative reality and is the first phase of de-risking the device, setting yourself for early funding to take it to the next step.
Institutional startups, which emerge from institutions such as teaching hospitals and grant-based research, may have an advantage over startups here that come from an inventor’s garage. Early, bench exploratory work has been done under subsidy, and there’s a bit of cache associated with leading institutions that can put a shine on the device when pitching to prospective investors. Access to facilities, fellow clinicians, and the institution’s guidance, and professional network are some advantages that can speed up the development process for institutional startups, although one should keep the licensing fees and royalty payments associated with institutional technologies in mind.
One factor that can be controlled is institutional culture. An academic setting can be excellent for research and discovery but may not be the ideal vehicle for commercial development. This can nevertheless be addressed by bringing in leadership team members from the industry.
The Stanford Startup Genome project identified that startups with a technical lead (e.g., clinician, research scientist) and a business lead, working together, were much more likely to secure funding and make it to market launch. (Marmer, Herrmann, Dogrultan, & Berman, 2011).
On the other hand, independent startups face various challenges, but are primarily resource constraints as you are on your own, without access to facilities an academic setting can offer.
Regardless of the environment, taking the time to explore and refine the device early in the discovery phase is time well spent. This can help reduce financial and operational risks and minimize adoption risk.
Beyond Bootstrapping: Navigating the Shift in Strategies After Securing Equity Financing
Once you secure your initial equity financing, you gain a partner in your investor and time becomes a crucial factor. Investors are like any other business except that their inventory is capital. The quicker they can turn their inventory, the more profitable they will be. As a result, it’s important to keep in mind that investors are in it to get out as soon as possible.
At this point, entrepreneurs should realize that they have crossed a threshold. The strategies and approaches that brought them to this funding stage may not be enough to carry them forward. While entrepreneurs must wear multiple hats, it’s essential to know which hat to wear and when to wear it.
For example, bootstrapping medical device development steps may have made sense before receiving funding, but taking shortcuts or trying to save money can have severe repercussions later. It’s now time to focus on engineering and development. The methods used to approach engineering tasks pre-funding may not be suitable for the same tasks post-funding.
Reaching the Next Milestone: Achieving Proper Startup Funding
To ensure the success of your startup, it’s crucial to secure the proper funding needed to reach your next key milestone. A key milestone is an event that triggers your next funding round.
Let’s consider the example of a Class II medical device following a 510(k) regulatory path. The funding sequence for this type of device may follow:
Friends and Family
Funding to cover initial legal expenses, patents, licenses, and early engineering. This initial validation justifies your Seed Round.
Seed Round
which should pay for your design, development, verification, and validation (V&V), regulatory compliance, quality, and pre-commercial manufacturing for testing. The objective is to get the company to 510(k) with this round of funding. Doing so delivers a salable device and this is your next milestone.
Series A
Ideally this funding round should get your device to market. Exit or additional funding rounds to scale will follow. For more complex or novel devices, substantial clinical studies may be necessary, requiring follow-on rounds of funding. A successful study would be another milestone.
Choosing Your Regulatory Strategy Early in Medical Device Development
Now that funding has been obtained, the next priority is to efficiently guide the device through design, development, and V&V. The milestone gate is submitting the device’s 510(k) filing with the FDA. Obtaining clearance means the device is salable and it’s ready to move forward.
A crucial piece of advice is to choose your regulatory strategy early and conduct your FDA Pre-Sub meeting as soon as possible. This guidance will be priceless in helping you move efficiently forward through development and increase the likelihood of a successful submission on the first pass.
Running out of cash before having a salable device is a significant risk and is referred to as “No Man’s Land,” where fledgling companies die a slow death. If you’re fortunate enough to raise bridge financing, it will be very expensive, and there’s a fair chance you’ll lose control of your company.
To mitigate this risk, it’s essential to educate yourself thoroughly about the requirements necessary to get your device from concept to commercial-ready. If you’re unfamiliar with what’s required, seek expertise from outside vendors. Help is available and it’s often well worth the investment.
Calculating the True Cost of Developmental Delays
We’ve already discussed various factors that could potentially delay your development process. However, it’s important to note that these delays could have a significant economic impact on your business. To better understand this impact, let’s look at a historical project’s economic model.
Based on this model, the device was projected to be ready for market launch 18 months after securing “proper funding.” The targeted exit was set at 60 months after securing funding. This serves as our baseline for measuring the potential economic impact of any delays.
At month 60, the projected EBITDA was $63.4 million. Assuming a conservative multiple, the projected company valuation at exit would be $63.4 million x 8, or approximately $498.4 million. As you can see, even minor delays in the development process could result in a significant loss in potential revenue and valuation at exit.
Therefore, it’s crucial to manage the development process efficiently and proactively address any issues that arise to ensure timely market launch and maximize economic returns.
Consider the impact of a three-month delay to launch. Although the delay pushes out sales and cash flow by three months, it is important to note that the cash flow from the first three months is not lost. Instead, it is the cash flow from months fifty-eight, fifty-nine, and sixty that will be forgone.
As a result of this delay, the EBITDA at exit, with a target of sixty months, will be lower at $62.3 million. Using the same multiple, the company’s valuation at exit will be around $498.4 million ($62.3 million x 8). This three-month delay will cost the company $8.8 million at exit.
A six-month delay pushes out cash flow even further, lowering EBITDA at exit to $60.2 million. So, $60.2 million x 8 ≈ $481.6 million, a drop of nearly $26 million in company valuation at exit from the original projections.
A nine-month delay lowers EBITDA to $47.8 million at exit. So, $47.8 million x 8 ≈ $382.4 million, a drop of more than $125 million in company valuation at exit, versus the original projections without delays.
Missing your launch date by twelve months will lower EBITDA to $42.2 million at exit. So, $42.2 million x 8 ≈ $337.6 million, a drop of more than $170 million for the original projections.
Once you’ve started the development process, attempting to save money by cutting corners or taking on tasks that are outside of your expertise can have a detrimental impact on your company and your investors.
Delays can quickly become a slippery slope; we’ve seen entrepreneurs pause development for what was supposed to be a short period of time and then suddenly find themselves six or nine months behind their original targets.
This risk is heightened in today’s climate with the added uncertainty of supply chain disruptions.
Navigating the Trade-Offs in Medical Device Development
Speed to market is critical for success in the competitive landscape of medical device development. While safety is a top priority, delays can have a significant impact on economic outcomes.
Attempting to trade time to market for cash preservation or cutting corners can result in costly delays that hinder progress.
If you’re new to product development, it’s important to seek outside expertise to navigate the complex path successfully.
Don’t hesitate to reach out to professionals like Rev.1 Engineering with the skills and experience necessary to help you achieve your goals.
Remember, time is money, and a delay in launch can have significant economic consequences.
Marmer, M., Herrmann, B. L., Dogrultan, E., & Berman, R. (2011). Startup Genome Report: A new framework for understanding why startups succeed. Retrieved from https://startupgenome.com/reports/startup-genome-why-startups-succeed