“It is not easy for medical device companies to raise funds… lack of funding is holding back development in Europe.”
Alan Barrell, Entrepreneur in Residence, Judge Business School, University of Cambridge
The United Kingdom currently imports upwards of 88% all medical devices. Within the remaining 12% produced at home, 59% of home-grown medical devices companies are considered ‘well-established,’ aging them at ten years or more. For the 1% of companies under two years, the competition in the bid for funding is fierce.
The difficult task of securing funding is largely contingent on the stage of development for the company.
From the seed stage through the commercialisation phase, the type of funding companies should focus their attention on changes accordingly.
What are the different stages?
Let’s look at each stage of development and what funding options apply at each business growth phase.
1. The Seed Stage
During this phase of development, company operations are not commercially focused but internally focused and research oriented. The bulk of product development and testing occurs at this point. It’s helpful to think of this as a concept period, where an idea begins to materialize into a tangible product or device. During this time, most funding is sought from personal business networks or the increasingly popular method of crowdfunding. The idea at this stage should be only to bring a concept to life.
Although it’s tempting, seeking investment from banks or other non-research formal institutions should be avoided. Most companies at this very early stage in development would be hard-pressed to find a bank willing to disburse a loan. Those few that would be willing to take the financial risk, will ask for interest rates that could potentially strangle any future growth, crippling the company long-term.
2. The Start-Up Stage
At the start-up stage, efforts are directed towards fine-tuning products and marketing. By now, key management has been assembled, market studies have been conducted, clear business plans have been outlined, and first revenues are beginning to flow into the company. It is here when outside funding should be injected into the business. Sources of funding during this stage include grants, crowdfunding, business angels (typically wealthy individuals that invest their personal capital in a company), and private equity (once there is proof of concept). Crowdfunding in particular, has proven to be the way forward in terms of raising funds for many innovators, however, the significant impact has yet to truly be seen within the medical device industry.
Grants can be extremely beneficial to companies, but this comes with mixed reviews. Where this injection of cash can greatly benefit a company immediately, and make it more attractive for future investors, the strings attached can add an additional hurdle to overcome. At the start-up stage, company founders should be weary of private investors making their investment conditional on a seat on the board or similar requirements for small investments. Their small stake, yet powerful position to make noise, can be more detrimental than helpful moving forward.
3. The Second Stage
This stage marks a pivotal turning point, where a given company focuses their attention towards commercialization. Funding at this stage is typically sourced through venture capital and private equity, trade sale, trade investment, intermediate exits, and IPO IPOs (initial public offering: when a company offers shares to the public for the first time.) Private equity houses and venture capital firms are increasingly providing convertible loans, where instead of expecting traditional repayment, they are looking for the loan to be converted. This typically means that when matured, it can be converted into a specified number of shares within the company, or cash of equal value (pegged on the shares.)
Trade sales are typically seen as the traditional exit for British investors. Trade investment refers to companies investing in a portion of the equity, whilst allowing the investee company to remain independent. With intermediate exits, we see any business angels that previously invested transfer their shares to a private equity firm once they feel their shares have gained sufficient value. Finally, IPOs (initial public offering) prove difficult within the medical device arena, particularly with companies that have yet to turn a profit.
4. Commercialisation Stage
This stage marks the culmination of taking a concept from abstract idea to a tangible, profitable device. This is the stage when bank lending becomes appropriate. Once products have been brought to market, and a given company has produced a profit, more workable options become available.
At any given point throughout the business growth cycle, there are several factors that contribute towards eligibility and probability of securing funding. Company management and regulatory approval are amongst two of the largest factors. Look out for this. If you are unsuccessful in an application for funding don’t just blame the books. Ensure you review the behaviors and operating methods of each of the members of your management team too.
Other solvable factors such as understanding a grant application can drastically derail funding efforts. Don’t presume you fully understand how to do something. Do your research even if the funding or application process appears basic. Consult, show others and get feedback if possible.
Another obstacle for British medical device start-ups are NHS procurement rules. The NHS takes up a huge portion of the consumer market share in the UK and typically require 3 years of trade accounts before rendering a tender, pushing most start-ups out the picture and ultimately stunting growth. This issue contributes a lot to making the UK medical device start-up market less competitive than its counterparts for example in Germany or the USA.
Considering the current political climate, I must come back to one of the statistics mentioned in the opening of this blog. At present, upwards of 88% of all medical devices are imported into the U.K. As the uncertainty of what future trade deals with the UK will look like exactly, focus on internal innovation must be heightened.
What funding hurdles have you experienced at your company and what did you learn from it?
Camila Moreno, U.K. Cardiovascular Specialist Consultant at Projectus
Projectus are the world leader in medical technology talent management. If you are currently hiring or looking for a new opportunity yourself, give us a call to explore what options are available for you today on 02038000501 or email firstname.lastname@example.org.
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