“A man who has committed a mistake and doesn’t correct it, is committing another mistake.” – Confucius

In light of the last blog entry, we now appreciate what VCs and corporations are looking for and how they aim to reduce their exposure to risk when making their investment decisions. As a start-up company, it is imperative to your success to illustrate how you have identified, addressed and planned to deal with these inherent risks. In the list below, we hope to help you understand some of the potential sources of this risk, in the hopes that this knowledge will empower you to think critically about them and, as a result, will increase the likelihood that you impress your potential funding partners enough to obtain your desired level of funding. (If you’re interested in knowing what the current funding environment looks like, visit www.pwcmoneytree.com, register, and start mining this invaluable resource. If you have other sources of great info that you’ve come across, please share it with us by leaving a Comment below.)

1. Executives don’t research appropriate funding sources, i.e. are pitching to VCs who either don’t fund medical device OR don’t fund the stage that the firm is currently in. Here’s a great site where you will find Angels, VCs and government grants with a significant focus in funding medical device as well as links to the respective firm so you can understand whether they fund your particular stage (click on the FUNDING link on the right hand side of the site): www.strategyinc.net.
2. Neglecting to ask the deal-breaking or -making questions. Any investor that plans to keep their job is going to do a tremendous amount of research (due-diligence) before investing in your company; so should you. Understanding and communicating how your device will implore physicians to change their existing behaviors, what they will react positively/negatively to is crucial to adoption and adoption rate. Be sure to engage with physicians early and often both at the ‘key opinion leader’ level and at the ‘in-the-trenches’ level to obtain feedback on your device.
3. Making unrealistic or uneducated financial projections. Experts suggest that you should apply sensitivity analysis (meaning, have a low, mid and high estimate) to your projections and focus on average sales price and adoption in your target market. Including what it will take to reach break-even is often helpful, as well.
4. Stating that limited competition exists for your product. Competition is not just limited to your direct competitors. A thorough analysis of your indirect competition is warranted and the better you understand them, the better you will understand your unique selling proposition. Illustrate this through a competitive matrix and be honest about the strengths and weaknesses of each alternative, including your own. You can be assured that any investor will be doing this, so show them that you’ve done your homework so they can feel confident in your intellect.
5. Underestimating time and expenses from now until launch. Granted, there is absolutely no way to predict the future but a clear understanding of what the costs will be (burn rate) and how you came up with those costs (are they based on professional service firms’ estimates, professional consultants’ proposals, etc.?) will put you ahead of the game. Also, mapping out the steps required and any contingency plans in the event something goes wrong prior to key milestones will not only help your investors visualize the path but will help keep you focused on being proactive rather than reactive.
6. Failing to communicate your exit strategy/strategies early on. Remember that this isn’t an academic exercise. Real money and time are being invested in this for essentially one reason only: RETURNS. If you forget to communicate what’s in it for your investor, you’ve lost the battle even before you’ve begun to fight. Be sure to have a crystal clear strategy developed and if you can, start the process of courting potential acquirers NOW and be sure to communicate those activities and perceived level of interest in your presentations.
7. Failure to include critical component of business plan. You can use this as a checklist: Name of technology, description of technology, market opportunity, competitive position, advantages of technology over standard of care/competitive offerings, reimbursement, verification of clinical efficacy, intellectual property, required product development, development/management team. Finally, how much money do you need and how will it be used (what will it be spent on specifically)?
8. Being naïve about how the device will be reimbursed and what the current reimbursement landscape looks like for similar products/solutions. Be sure to communicate your understanding that reimbursement is dependent on: product design, clinical indication(s), setting of care and provider type. Don’t make the mistake of looking in to reimbursement issues later on. Start with a strategy that highlights reimbursement so you can deal with those issues early, thus facilitating product launch and reducing hurdles that will ultimately affect your adoption rate.
9. Setting an unrealistic regulatory path. With the amount of overhaul that is happening in this area right now, it is crucial that you have up-to-date information on how to best proceed. Having a regulatory professional that is experienced in the area of your clinical application is mandatory.
10. Ignorance of changing health care reform initiatives. More and more, there is increasing pressure that new devices must be superior to existing ones, not merely non-inferior. Be sure that you take into consideration the move towards having data on comparative effectiveness. It is critical that the new technology improves outcomes, reduces cost OR-best case-both.
11. Setting prices based on competitive offerings, rather than thinking through the spectrum that exists between cost-based pricing and value-based pricing. Prices are going to be under tremendous downward pressure. Allow this to inform your average sales price and the financial models you develop with it.
12. Neglecting to remember that there are multiple stakeholders in the healthcare industry who very often have competing interests/priorities: patients, physicians, hospitals, pharmaceuticals, medical device manufacturers, and insurers. Be sure that you can communicate how your device will appeal to each of these and create win-win situations for all or most of the involved stakeholders.

Here are some other resources that may be of help to you. Brought to you by Medtech Resource Alliance, one our industry affiliates.  So to date, we now have four video presentations of our events on their site:

• “Due Diligence – Deal Preparation from All Angles,” September 29,2009
• “The Economy – How Investors & Management Teams of Life Science Companies are Reacting,” February 25, 2009
• “How Big is My Market? – Evaluating the attractiveness of Med-Tech Opportunities,” October 23, 2008
• “How Virtual are You? – Virtual Companies and Outsourcing in Med-Tech,” February 28, 2008

To view them, click the link: http://www.medtechresourcealliance.com/events.html