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Investing in medtech can be highly rewarding, both financially and personally, but every investor needs to have a strategic approach to understanding a startup’s commercial prospects before taking the plunge, says entrepreneur investor Professor Michael Atar.
After suffering a temporary blip during the Covid pandemic, the global medtech sector is once again growing rapidly, with the global medical devices industry expected to reach a valuation of $612.7bn (£440.5bn) by 2025.
It’s no surprise, then, that the sector is increasingly attractive to private investors, not only because of the potential for high returns but also because of the clear and genuine good that can come from the field, benefitting the health and wellbeing of all.
That said, like with any investment opportunity, there is risk. Research indicates that at least three quarters of medtech startups fail to make it to market, so you need to tread carefully before choosing who to back.
But how can you go about diagnosing an unhealthy investment from one that promises healthy profits down the line?
Investors don’t have crystal balls, sadly, but there are some key steps which will help you make a reasoned decision.
Know The Sector
Medtech is booming and there are hundreds of novel ideas out there just waiting for your backing. Some medical topics are particularly hot at present, such as cancer, Alzheimer’s and Parkinson’s research – and it’s easy to get lured by the buzz.
But just because something is hot doesn’t mean that it’s automatically guaranteed to be a success, as the sobering statistics about startup failures underlines.
It’s great to be excited about a potential investment but it’s not enough that it sounds like a great idea to you. Like a clinician, you need to dispassionately assess the idea to ensure it is scientifically sound, functional ( in that it serves an actual need), and that it can be put into action.
That requires you to have a grasp of the science behind the idea and whether it will actually make a difference to people’s lives when rolled out. A study by CBI Insights, for instance, found that over 40 per cent of startups fail because of a lack of ‘product-market fit’ (PMF).
Doing so, you will find that there are many gaps in the market that for some reason are not hyped but which have huge potential to transform medical outcomes.
For example, millions die each year from sepsis (blood poisoning) but this has little buzz around it.
For over a decade I was the lead investor in Silicon Valley startup Cytovale, which has developed and launched a revolutionary device, Interline, which can detect sepsis in under 10 minutes.
I wasn’t passionate about sepsis when I first came across Cytovale, but I was intrigued by medical physics and its use in medical technology.
Importantly, they did things right. Sepsis kills one person every three seconds so they were focussing on a topic that has the scope to help everyone.
Be Careful With Complexity
Some medtech startups put forward very complex technological solutions. A basic rule of thumb is that the more complex the idea, the longer it will take to realise.
After doing your analysis, you may come to find that the startup doesn’t anticipate reaching the finishing line for 20 years or more.
You need to ask yourself if you are honestly willing to back an investment that won’t mature for over a decade, and which during all that time remains exposed to the same risks every startup faces – not least the money running out or the burn rate becoming unsustainable.
Assess The Team
Fundamentally, a startup isn’t an idea, it’s the people behind that idea.
You should, therefore, make it a priority to assess the team behind the project. Who has developed it, where has it been developed and how, and how has the team been assembled. What knowledge do they bring and what are their track records?
To do this, you should observe how the team works together. You need to be able to feel at the microlevel that they truly understand what they are doing, both in a scientific and business sense.
The danger is that the startup may be crammed with bright young and ambitious PhD students who are looking to break out of the university setting yet have no clue about the commercial realities of running a business.
If you discover the CEO is one of the students or their professors, then alarm bells should ring as they won’t have a track record of translating ideas from the academic to commercial world.
Seasoned entrepreneur investor Professor Michael Atar, an award-winning medtech scientist, has the ‘Midas touch’ when it comes to medtech investment, being a lead investor in Silicon Valley multi-million-dollar success story Cytovale among others. As he reveals, however, this is underpinned by sound strategic thinking.
Communication Is Critical
Never put your money somewhere without having spoken to the team first, ideally through multiple meetings.
It’s only by doing this that you can really gauge how the people behind the startup see themselves. If you’ve chosen the right startup then it should be clear that your commercial interests are aligned from the first conversation.
If, during those meetings, their messages are nuanced, so that there are positives and negatives, then that’s a good sign. If, however, you just hear a stream of superlatives, with the startup comparing itself to the biggest unicorns in recent memory, then be suspicious.
It’s not necessarily about their self-assessment being 100 per cent realistic but at the same time they can’t be swallowing their own hype. They need to be following the money.
Also pay attention to whether the communication flows. When you are reaching out to the CEO, CFO or other board members, are they getting back to you promptly? Likewise, are they reaching out to you with you first prompting them?
If everything checks out then the good news is that you can probably lean back rather than being hands on with your investment, should you prefer to keep a distance. By contrast, if that alignment isn’t there then even giving every minute you can spare to nurturing the startup won’t ultimately help.
Do Your Due Diligence
The same study by CBI Insights found that, after misjudging market demand, the second biggest reason startups fail is that they run out of cash.
This happens in nearly a third of cases so you need to be prepared to look into a startup’s finances with a realistic eye to determine where things are heading.
I invested in one company that, unfortunately, went bust, and it was because of the burn rate. They rented space in the most fabulous labs and went on a hiring frenzy that their finances couldn’t support. It was a classic case of moving too fast.
Related to this is the company’s own drive for securing finance. If they aren’t actively pursuing every investment opportunity – government funding, incubators, and more private investors – then it’s questionable whether they will last the course.
There is an opposite problem for investors. If a startup is drawing in money left, right, and centre with continuous funding rounds then it will obviously have a knock-on effect on your equity.
For every investor there is a sweet spot between the money the startup is putting out and bringing in, so make sure their finances and your expectations align.
For more information about Professor Michael Atar, visit www.michael-atar.com