Time for startups to build MedTech IP for future funding

Now is the time for startups to build MedTech IP for a future funding or exit, experts said at DeviceTalks Boston.

There’s no sugar-coating the state of venture capital investment for young medical device companies that are looking for funding while building their MedTech IP.
“It’s brutal out there,” said venture capitalist Jeremy Sohn, managing general partner at P74 Ventures. “… Is it completely bleak? Absolutely not. There’s a lot of money out there, billions and billions if not trillions of dollars sitting on the sidelines. There absolutely is money to be taken. You’ve just got to be creative” to close a financing.

Sohn was speaking in early May at a DeviceTalks Boston panel with Greenberg Traurig patent attorneys David Dykeman and Roman Fayerberg, as well as Luis Barros, an MIT lecturer and managing partner of Leading Business Ventures.

“It’s actually a great time to be starting a company,” Dykeman said. “In the public markets, there aren’t exits, but you’re not exiting a public market for two or three years. Now’s the time to build your company, build your relationships and get your house in order so when that window opens, you’re ready to jump through it.”

MedTech IP is a critical consideration in that process. Patents can help device companies secure new investments, control costs to buy more time, or sell their technology to a strategic buyer.

‘It is tough out there’
“It is tough out there, but the good management teams with protected technology going after a big unmet need are still closing rounds,” Dykeman said. “It might not be at the valuation they want [or] the exact terms they want. It might take twice as long as they thought it would. But there is money being put to work. It’s much more a buyer’s market for the VCs and investors.”
He advised MedTech founders to have many plans for funding, and warned “no matter how much a VC likes you, there’s a lot of smoke right now in the VC community.”

VC funds are holding off on financing for early-stage companies to keep the cash flowing to their existing investments, but may not be transparent about it, he said. Instead, “they’ll do the dance with you, they’ll take you all the way through” the diligence process and then drag their feet in the final stages.

“IP due diligence is usually one of the last things because they have to hire lawyers to do that,” Dykeman said. “A lot of the other market analysis they can do in-house, but getting them to actually fund and write that check, we’ve seen a number of clients that have gone all the way down the road and then at the last minute, ‘Oh, the partnership didn’t approve the investment.’ And you really look at it, and they haven’t done many early-stage investments. They’re keeping their powder to invest in their existing portfolio companies because there are no IPOs, there are no exits. Even if you think you’ve got the best VC or the best investor in the world, the money’s not in the bank until the check clears.”

Hunker down — but don’t stop building, and don’t stay quiet
“Hunker down, reduce your costs, make sure you’ve got two years of runway, if not more, and forget about thinking about valuation,” Sohn said. “There’s not a CEO or leadership team out there right now in an honest moment that won’t tell you that’s absolutely the playbook for at least the next 18 months.”

Reviewing your IP portfolio can yield savings or even bring in revenue if you can find assets, applications or even issued patents to abandon, license or sell, Fayerberg said.
“That’s an easy way to save money because obviously there are fees that you pay to get the patents,” he said. “But then once patents issue, they have maintenance fees and things like that, and as your portfolio grows it becomes a big part of the spend. You have to see which patents are still relevant. Some might not cover the product, might still be good defensive patents, but you might also have a part of the portfolio that’s no longer relevant.”

Reviewing your MedTech IP could also lead to new streams of recurring revenue, Barros said.

“If you have a good patent portfolio and you can show that it can generate revenue and dividends — it doesn’t have to be part of your core business, [just] something you might have — that’s not a bad way to monetize” through licensing or selling to a third party.

Communication remains paramount, especially in tough times for funding. Engaging early and often is the best way to win over investors.

“You have to show that you have traction and you have revenue,” Barros said.

And milestones matter. Investors want to hear about continued progress toward product development milestones, customer milestones or revenue milestones.

“We have a lot of companies that approach us, and they’re painting a story, which is great, but what we want to see is that you’re making progress against that story,” Sohn said.

Protect your MedTech IP
Investors or potential buyers are also measuring the strength of your MedTech IP and how well it protects your product from current or future competitors.
“Protect your IP,” Sohn said. “Make sure that it’s real. You want to give people reasons to lean in, and you don’t want to give reasons to not lean in and to walk away. Sometimes it means giving up a little bit more of your company to another partner. Sometimes it means spending a little bit more in already tight times, but it’s money well spent.”

Building a U.S. patent portfolio is expensive, and the costs increase significantly when filing patent applications in other countries. Be strategic about patents: Understand where your potential buyers and investors are and how MedTech IP protection differs from country to country.

“IP is important. It’s part of your story, it’s explaining your technology,” Fayerberg said. “Everybody wants innovative proprietary technology. And the way you build the IP, you have to make sure it’s protected properly. … Understanding what you have, what you need to do to protect it, and where to protect it is very important. It’s going to become part of your story, de-risking your company and making it more attractive to investors or partners.”

Look everywhere for funding
Only a small percentage of deals are funded through venture capital, Barros said, and MedTech founders should consider other sources of funding, especially today. Search out family offices, angel investing groups, non-dilutive alternatives, government grants, low-cost venture debt and other financing sources, even if that means looking beyond the borders of your state or country.

“What I’m seeing is a lot of creativity in terms of entrepreneurs thinking about where are their markets, where they’re going to grow, and then strategically anchoring — it can be in multiple geographies, multiple continents — but always going for those geographies that they think will enhance their chances of success,” Barros said.

“In Massachusetts, for example, you’ll find that if you got an SBIR grant, you can probably match it with a state grant, and you can probably take that and apply it to the next-stage grant,” he continued. “And you can probably then look at a place like Singapore, which has Enterprise Singapore, and you can match funds. … And don’t forget all the stimulus programs that are coming from the government [including the Inflation Reduction Act]. All those programs actually do add up, and they’re very meaningful amounts of capital. So as an entrepreneur, think about where you want to build your company.”

In particular, Barros recommended the states of Massachusetts, California, Minnesota, North Carolina, Texas, New York and the cities of Philadelphia and Chicago.

“The main thing is they want to create jobs,” he said. “They want to create new companies, they want them to innovate. And the most important thing: We have a lot of unmet medical needs.”

Sohn mentioned China as an opening market with relatively decent reimbursement, huge patient population and medical trends similar to the U.S.

“It’s one of these markets that’s so large and so consistent now with the U.S. around specific therapeutic areas, particularly those age-related diseases, you can’t ignore China,” he said. “To the extent that you’re looking for alternative ways of being able to either grow or leverage financing alternatives — partnering, venturing, joint venturing, raising capital, creating other mechanisms to be able to raise capital — to enter into the Chinese market may be an option. That tends to force you to be more thoughtful around your IP.”

Dykeman said a client recently licensed patents to a partner in China to develop products for the China market.

“They were going to get into China eventually, but it was probably five to 10 years down the road,” he said. “But they were able to monetize that now to fund their U.S. R&D development.”

What about M&A?
With IPOs rarer, mergers and acquisitions (M&A) — selling to a larger company — will be the most common way for founders to exit, but timing is important. Sell early or partner with a potential buyer, and they’ll fund development of your technology.

“But if you don’t get that early window, it could be a long haul,” Dykeman said. “Then you have to prove commercialization, you have to get your FDA approval, you have to show your sales ramp, and then they’ll pay a premium for you.”

However, major OEMs want to see foreign patents when negotiating with acquisition targets.

“If you want to get acquired by a J&J or a Medtronic and you don’t have a patent in China or Japan, they’re going to beat you up on valuation,” Dykeman said. “We’ve seen that in diligence: ‘We love your technology, but China’s the biggest market in the world, and you have no IP there.’ So then they beat you up on valuation, and the CEOs wish they had spent that extra $10,000 or $20,000 to get a patent in China.”

Larger MedTech manufacturers can also help through development partnerships. A device developer usually considers multiple potential indications, but focuses on the most promising first. One MedTechcompany found a way to develop two products for different indications simultaneously, Dykeman said.

“They found a commercial partner, one of the bigger medical device companies, that’s going to fund that development to the tune of what they were looking to raise in a VC round,” he said. “They ended up kind of spinning that out, forming a separate subsidiary, but they’ve now got enough money to keep that engine moving and have two products in development at the same time.”

Creative financing solutions like these will help MedTech developers move forward and prepare for better times ahead.

“Tomorrow’s outlook is always better than today,” Fayerberg said. “Think strategically. This market will pass, and things will get better.” Medical Design & Outsourcing