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10 min reading time
This may be a sobering post for entrepreneurs.
You may be working on the wrong project.
Go pick a bigger one.
That’s essentially what a panel of experts told me this month at the IN3 conference in San Francisco. We were discussing financing options for medtech startups.
Read the entire transcript at http://medgroup.biz/startup-financing
I asked, “What about the guy who has the $10 or $20 million idea, where does he go?”
Serial entrepreneur Danny Sachs answered, “Pick another project,” and continued, “I mean, you’re going to spend as much time and sweat on a $10 million idea as a $500 million idea.”
Fellow entrepreneur Scott Wolf added, “We all basically agree with that. There’s only one way to exit on an idea for investors or founders to make money on an idea: Sell to a big company.
Big companies aren’t interested in $10 million ideas unless they fill some specific niche you’re not going to go after and invent. It’s just too hard to turn that into investor returns.”
VC Trevor Moody wasn’t as declarative, saying, “I do agree market size is incredibly important. There are some exceptions but you’d better really know what you’re doing and not be fooling yourself.”
You see, I get a lot of private emails from members asking if I know funding sources for them. I told the panel, “I don’t want to just say, ‘Hey sorry, Man, you’re out of luck.'”
And Danny replied, “I think actually that is being helpful.”
The panel agreed.
“You don’t want someone to sink seven years of their life into a project that’s not going to go anywhere.
It’s not like there’s a lack of large market opportunities.” And Danny concluded, “Just steer them in another direction.”
There’s much more to the discussion at http://medgroup.biz/startup-financing – we touched on topics relevant to every medical device company seeking funding.
So? What do you think of the panel’s advice?
Should you abandon ideas smaller than $20 million?
OTHER FINANCING DISCUSSIONS WE’VE HAD
How to Get Money for MedDev Startups
Creative Funding in a Difficult Medical Device Environment
Looking to invest in medtech? (list yourself)
Start-ups looking for capital (list yourself)
How much money do you need to raise?
Why can’t I get my start-up funded?
What 3 things must a startup do to get funding?
Is a prototype enough?
Medical Device Funding’s Dead Zone
The MedDevice Company That Broke Crowd-Funding Records
How to help members who need A LOT of help?
MEET FINANCING EXPERTS
Rick Baron, currently serving as CFO for Globus Medical, one of four medtech companies to go public in 2012, is a featured speaker at the 2015 10x Medical Device Conference. See http://medgroup.biz/About-10x for details and a brochure.
Among the topics:
Admission prices go up at month’s end, order today.
Know folks who would have benefited from this discussion?
Invite them to join the group! http://linkd.in/MDGroup
Make it a great week.
P.S. That link to meet CFO Rick Baron in San Diego (May 4-6, 2015): http://medgroup.biz/About-10x
Nice article and thank you for the information. I agree that although a $10M or $20M idea sounds good, it would not excite the sophisticated investors. Raising money is hard enough, as I had to raise over $4M for my company. Fortunately, and partly due to a bifurcated opportunity, my technology has multiple applications in very large markets. Thank you for the article.
Paul M. Stein
In the heart valve space, there has been this persistent trend for everyone going crazy over TAVI. Clearly, 10 years ago, it made a lot of sense, but for the reasons and the analysis I presented above (4 days ago), perhaps it is time to set that trend aside, and find the next big thing in the heart valve space. Mitral TAVI makes a lot of sense, for the same reasons that Aortic TAVI made sense 10 years ago. But what is the trend in the aortic valve space today? I am placing my bets on the surgeon – empower the surgeon to be just as less invasive as the interventionist, but with better outcomes. That is what surgeons have always been great at – high quality outcomes!
I consulted for a time with a Spinal device company. The project was a “turd” from the beginning… out dated technology, high overhead and manufacturing, regulatory nightmares but…. VC groups were throwing money at this “thing” hand over fist! When I walked off it was $32M to the bad and at last word, VC groups are still tossing money their way! It made me lose a lot of faith in their ability to see a winning horse from a Nag!
I’m launching a Urinary technology, it’s not “sexy” like Neurology or Cardiac products so… it’s hard to even gain an audience. Few investment groups want to invest in the “ugly” side of medicine regardless of what the numbers indicate. I’ve been in this business long enough to remain hopeful, but also stay realistic that you can never stop looking for that one investor or group of investors that the product and business model will hit home, and have them breaking out their checkbook!
Paul M. Stein
This is a company that is 6th in line behind Edwards, CoreValve, Symetis, JenaValve and Sadra. Edwards was first at the trough and has made $100’s of millions in revenues from TAVI. Great for them! But take a look at the 2nd player – Medtronic. They spent $850 million buying CoreValve, then probably another $500-$750 million funding their first clinical trial, for high risk patients, and then most recently they paid $1 billion in settlement fees to Edwards for patent infringement. Edwards has all the key patents. How long will it take for Medtronic to recoup this kind of money? What are Edwards and Medtronic going to do to keep the other 4 companies out of the market, given that they have such a huge investment to protect? Are Symetis, JenaValve and Sadra going to make any significant profits in this brutal market place? Who is left to acquire Direct Flow so that the VCs can get some reasonable exit? And at what valuation? With Direct Flow already capitalized at around $100 million or more, how can the VC’s get their 5X return? Just makes no sense to me…. Sorry to rant like this, but it speaks to what appears to be the folly of the VC’s… unless, of course, they know something we don’t and that is why this kind of stuff just keeps on happening.
Paul M. Stein
If the product cannot realistically generate a minimum $100M revenue stream (and let’s not consider the painful discussion if the product displaces existing sales or if it requires major league evangelizing), the concept is DOA.
There are really two different questions. Is it a $20 million dollar idea or is the total market $20 million? If the total potential market is $20 million, you’ll need to dominate to make the 10X return that VC’s hope for (and fail to get a lot of the time). If your idea is projected to be an unexploited $20 million niche within a billion dollar market, you’ll get interest since the bigger fish won’t immediately snuff you out and there’s room to move. Most VC’s evaluate investments in this order First, market size, second – team, third – product. For me, as a product guy that was hard to hear and understand, but it makes sense now.
Another item I’ve heard from clients is that it’s easier to raise $10 million than $1 million. People with hundreds of millions don’t want to deal with hundreds of companies, so if you’re looking for smaller money, go to the smaller markets mentioned by others.
I personally like the idea of friends and family money as an introduction to investors (and to maintain control), but it can go wrong.
If you can’t convince a few friends to throw 5 grand behind you for say .5% or 1% interest, you probably aren’t ready for the Shark Tank. To avoid the potential disaster you just need to say this to them “There is a potential great return and I love the idea, but this is a risky startup. There is a 90% chance that all of your money will be spent and you will not get a penny back. Also, your investment does not give you voting or decision making rights. While we are happy hear your inputs, you will need to trust our team to make the right decisions.” To really get it through, have them to sign a paper “read and understood” before you get the check. Anyone who flinches, thank them and let them know it’s probably not a fit and your friendship is more important than the fundraising.
I know some pretty successful entrepreneurs who started now multi-million dollar companies by starting small, going to the local bank for a loan for a single product that was easy to make, and that filled a market niche. They sold a enough to make a go of it and then scaled. I think we get too wrapped up in success being defined as a high-tech product that requires massive R&D and clinical spend, and that has a particular kind of exit.
@ Elizabeth, I agree. Nobody talks much about the crowd as a source of funding, but it’s around now and will only grow. Sometimes all the inventor needs is enough $$ for functional prototypes and maybe help with the FDA filing. And then a few customers to say “yes.”
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