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13 min reading time
I found group member Gary Rosensteel‘s situation so compelling, I had to share it with you here … not only to see if you can help … but because I’m sure his situation will resonate with many of your experiences, which I hope you’ll share in the comments. His story will also be the subject of Tuesday’s group announcement to 150,000 members around the world.
The story is Gary’s. I only edited it. He writes,
The top activity of almost all startups is looking for funding, but you must have the right “ask.” Not only in terms of how, but, sometimes, how much.
In today’s investment climate there’s a Dead Zone between $2–5 million. Below $2M you may be able to cobble together angel funding; just above $5M and you’re in the range of early stage VCs.
So what to do when you need $4M?
Meet Insituvue. We’ve tried to raise funds to take two versions of our Sonic Flashlight vascular access aid device to the global market.
With self-funding, grants, and convertible notes, we pieced together nearly $1.5M since early 2010. This enabled us to develop the first version of the Sonic Flashlight through three prototype versions to just short of final design for FDA submission.
Now, about nine months from achieving FDA clearance and selling into the US market, plus another six months from CE Mark certification and selling into the EU, we’ve run out of money.
[caption id=”attachment_2766″ align=”alignright” width=”232″] The Sonic Flashlight from Insituvue[/caption]We had all the funding we needed lined up. Then, shortly before the deal was finalized, the investors said funding “would be delayed” and their investment would have to be pushed into the next year. At that point, Insituvue had to start over: Identify funding, due diligence, etc. … especially difficult because we’re in the “Dead Zone.”
Worst, if we don’t get funding … and fast! … we’ll lose key talent.
To say, “This has been frustrating,” is an understatement. After pouring ourselves and our funds into the project for years, we had to suspend development so close to the “finish line.” Can you imagine how painful it is to tell clinicians and distributors around the world that, “As much as you’d like the Sonic Flashlight, we can’t sell it to you.”
Are you familiar with Bloomberg TV’s show, Innovators? They featured the Sonic Flashlight in one of its episodes. We know every time it runs.
Why? Because every time the episode airs, we get emails and phone calls to purchase or distribute product around the world. (The YouTube video, below, has nearly 5,000 views-to-date.)
It’s even worse at conferences. At the Association for Vascular Access (AVA) and World Congress on Vascular Access (WoCoVA) our exhibit is mobbed. Clinicians and distributors want it (see what happened at AVA) and several large companies already want to co-market and/or acquire the technology because the Sonic Flashlight fits their existing product line and the competitive edge it would provide.
Here we sit with an unrealized dream, at least $2M to product launch with little time on the clock.
What to do? I’ve about exhausted ideas here.
Have you been in a similar situation? Did it have a happy ending?
Gary Rosensteel is the Executive Vice President and Co-Founder at Insituvue, the almost-makers of the Sonic Flashlight.
No contact mechanism on the Insituvue web site (hangs up….)….
so there is some learning to do here, too…..
The rules have changed – therefore go play in this NEW approach to funding… Harvest Enthusiasm!
the article does not describe specifics about costs, fundraising, and more… so it is NOT POSSIBLE to get more detailed…
Avoid “smart man’s disease”…. That’s where you ARE smart in ONE OR MORE AREAS… but that DOES NOT MAKE YOU SMART in others……
Crowd source funding is new… there are NEW RULES… don’t fall into the “money grabs” of traditional methods of fund raising – since it is not working for you so far….
I’ll check & see if I can get GE or Kimberly-Clark to speak, too. Stephen Paljieg’s very intelligent when it comes to crowdsourced product development.
That’s exactly how it works (with one adjustment). With the $20,000 pledge that individual has “already” purchased it. It’s not “we WILL sell you one.”
Crowdfunding, once understood, is really quite simple. The complexity lies in the motivation of your potential funders.
So if you can get 100 people to each give you $20,000 right now, you take their $2M, build the devices, & ship them out to your 100 new customers as soon as you can (Plus I’m assuming you’d be able to build more for future sales).
I’d be happy to give a webinar. I think crowdfunding, as well as crowdsourcing, & open-innovation could be a very useful tool to this community. I know some big names who are already doing this (GE, Kimberly-Clark, AT&T,…).
Gary, I believe your device will cost tens of thousands, yes? For the sake of this exploratory, let’s say it’s $25,000.
If I understand the way it works (David correct me), you could say, “If you pledge $20,000, we’ll sell you one at a 20 percent discount as soon as it is made.”
Their $20,000 donations would only be accepted once you hit your threshold. At two million, you’d need just 100 pledges.
What say you, members on this string? Does this sound exciting/workable to you?
David, if there’s interest, I may invite you to give a webinar on this topic.
Since your story states you have “lots of people wanting to purchase or distribute,” I think you’d be a great candidate for crowdfunding. Crowdfunding is really made for the ‘Dead Zone’ & especially when people already want the item.
Sure there’s talk of offering equity (not yet legal), but that route wouldn’t be for you. Going the “Kickstarter” route is best because you’re basically pre-selling your product.
Think about this: How many people could you line up that would be interested in pre-ordering 1 device? And how many devices do you think you could pre-sell (if some distributors pre-purchase more than 1)?
If you can offer your product to these people at a reduced rate, would the multiplication of price x qty equal $2M?
Not only could crowdfunding work in your situation, but the even bigger benefit is market testing. With the ability for your “begging customers” to put their money where their mouth is, you’ll get a good perspective on what percentage & quantity of people actually pre-buy.
I have seen products raise $2M – $10M with this model. It’s not often, but it happens.
I’d love to share more about how this would work, if you’re interested.
Our team fully believes in the value and success potential of our Sonic Flashlight, and has repeatedly gone ‘above & beyond’ to help us move forward. However, they can’t work forever for free, and we need to catch up with payments to be able to restart the project. BTW – none of our partners is ‘bugging’ us for payment and some have agreed to convert fees to equity.
You say you are nine months from FDA and am guessing you do not mean “since”. If you are going for PMA, yes, big bucks and big time, but the product cannot be shoehorned into a 510(k)?? If you have developed correctly and have your ISO13485 / 14971 / 62304 house in order, an inexpensive consultant and 90 days will get you 510(k) permission to MARKET. And there’s the rub — you can’t even talk about the thing until you have your clearance.
And CE — you are going to be in “Third Edition” which is a step up in effort and a gigundo step up in cost of an NRTL, if your product is safe and has all the Design and Device Histories up to speed. Six months might make it, but you’re right — I’d put aside six figures for the audit and whatever it takes you to go through the aphabet soup of regs that they require — again, before you can market.
I gotta be honest, as big a pain as that is, I would take the punishment and do it yourself — once you understand how you have to do it from the start and have the right tools on board, the next product rev or product is going to be easy.
If this stuff was easy, we would all be doing something quick and sure, like designing Dreamliners.
Now, in my case, we believe we have good answers to those questions – need $4M; planning to exit within three years; worst case 3x, anticipated 10x. AND we can back up those answers! 🙂
Paul M. Stein
VC’s do “risk” capital the same way mortgage brokers “risked” when people with no income or assets got huge homes a few years ago. It was all about making the deal with these guys. I know this may seem bizarre, but they don’t care about the technology…they don’t understand the technology! If they can come up with a great deal to scam a company out of a huge chunk of its equity for a tiny amount of cash, then their bosses love them. Those medical device start-ups who never get money either are refusing to play this game, stand firm with their valuations, and walk away shaking their heads, or are just too tiny for the VC’s to even consider. Again, it’s not the technology…and when that technology eventually fails, the VC comeback is, “Hey, it was a great deal. Next?”
Timing is always everything, persistence a necessity, and a little luck doesn’t hurt. Hopefully this post by Joe kick starts one of those 3.
Todd Staples, MBA
Only somewhat kidding. Risk tolerance is at an all time low throughout the global investment community; from individual, small Angels to later-stage VC firms.
Investors, like the rest of us, are not monolithic. They have their own criteria for what is and what isn’t important. After going through the wringer so many times I’ve learned to filter the offered ‘advice’ into basic types. Then you have to plot those types against the types of investors you need. If (when) you get advice that goes against the grain of most others, I suggest you should normally ignore it.
Why, because you want your presentation package to appeal to the broadest community. If you tailor it to the 10%, then you’ve severely limited the number of potential investors, Again from experience, I know that even if you do change to suit the smaller group, you aren’t going to get funded. The reason, if those people were honestly excited about your opportunity, they wouldn’t be looking for things to nitpick!
For the most part, unfortunately, it’s all about how excited you can get investors with your opening gambit. Get them far enough ‘gone’ and they will gloss over the details of your business plan and financial projections. Otherwise they will dig in to find reasons to say, “No!”
This is why we have all seen ‘crap’ products get ridiculous investment funding, while ‘sure winners’ die on the vine – it’s all about the sizzle, baby! To quote a line from a song in the musical Chicago, “Give’m the old Razzle-Dazzle!
Of course, living in a time when potential investors around the world have their ‘wallets’ locked up in a fortress, ain’t helping anyone! 🙂
I am inclined to believe that it is the funding white noise that leads to a roller coaster ride of highs and lows that typically does the entrepreneur and his/her great idea in at this stage of the dead zone…..constantly chasing and throwing resources at great, seemingly brilliant, suggestions….convincing your team that this one will be worth it…..staying positive and persistent and diligent….extracting those necessary very limited dollars from someone very close to you and your project repeatedly, time and again, to chase that next “interested” investor or funding opportunity.
All of this takes resources, burns cash, and takes a ton of hard work and time – calling in lots of favors usually and putting lots on the line (staying very lean)……this is how my experience has been anyway…..to me, this is the game / nature of the med device start-up / funding environment.
When you have so much at stake in a new technology and you pour yourself into the venture, every meeting, every email, every phone call can literally become the “one” that gets your technology commercialized (from whatever stage you exist in or need to get to) and makes you and your team / existing seed folks instantly “a success”.
Through this process (at least early on), you chase down anything a “successful / experienced” investor tells you….until you discover that they all tell you something different…..the only common factor is that they are telling you to do something because what you did isn’t going to garner any funding from them…..they are picking anything from your plan to simply say “No”. Even though you match their own stated criteria of invstment opportunity word-for-word perfectly.
Personally, I have always looked upon this noisy process fairly positively because every “No” meant I had something new to work with and a more thoughtful pitch or Plan going forward. My sales background has been useful in this way, but it is hard to convince your spouse/family or your seed investors sometimes that this continues to be a worthy process:) .
Again, the challenge is staying viable and capable of getting in front of the right investor(s), so having a strategy and targeting (i.e. focusing your Bus Plan or Plans on) only certain investors (keeping in mind the all-of-the-above model) instead of talking to anyone who will listen or take your Exec Summary (which EVERYONE will do because no one wants to miss the next BIG one) seems to be the logical approach, but will still come with lots of “noise”….but, who am I….I am still trying to get the stars to align and get my funding! 🙂
Several people have suggested that Gary present a plan that requires more money to get out of the “Dead Zone”, but I would like to make the same argument in a different way. One investor I pitched to asked me a great question that I have never forgotten. This is the question you need to answer: “Ok you need $1.5M for the US Market and you are asking for $4M to get you to cash-positive. If I gave you $10M, what would you do with it?”
If you give an investor only one choice (i.e. – $4M), you will have fewer interested investors. If you give an investor a plan for what you would do with $1.5M, $4M, $8M, etc.), now your investors will be more inclined to commit because you are giving them the opportunity to invest a larger amount but they can manage their risk by giving you a tranche at each milestone. You are also showing that your plans can be more flexible and you can grow the business with what you have instead of what you want.
Paul M. Stein
Paul M. Stein
Paul M. Stein
So, what is left? Besides NIH or NSF SBIR grants, which are extremely competitive at less than a one in five chance right now, private investors who have money to burn, who are frustrated with their former usual places to put their money, such as telecommunications or real estate, and are looking for new excitement. Finding such people is a very long, frustrating path, requiring lots of education to make a perfect, compelling story, but it seems to be the only path right now.
To provide some more background on our situation, the Sonic Flashlight technology is licensed from the University of Pittsburgh. We don’t ‘own’ the IP’; however, we have an exclusive, world-wide license on its application.
This is an important fact, because the IP also covers usage in MRI and CT areas, plus there is a large R&D project ($2M+) going on right now (funded by NIH) to use the Sonic Flashlight technology in ophthalmic applications. So, not only do we have a very real, huge market potential with the first products we are bringing to market, but there is an even bigger market for future applications. Also, we have our own developments to add to this – algorithmic software to automatically highlight the nerves within a real-time image!
Investors note – your small investment in our current needs buys you considerable back-end potential!
I just reran the numbers and it still projects out that we need $4M to hit cash-flow positive. We need at least $1.5M now to get the first version of our Sonic Flashlight technology on the US market, which we can achieve within about nine months – we are THAT close!
I am happy to share all of our information with interested parties – you can reach me at [email protected], M: 412.491.7747, Skype ID: gary.rosensteel
Regarding the ‘bundling’ proposal. I understand what is driving that, but believe it would actually be a negative from an investor’s viewpoint – lack of focus.
My situation is simple, I have clients who ask me to identify specific areas of technology (in different stages of development) that they can buy, license and or develop to meet their specific needs. However, more recently one of my contacts is struggling to find enough sufficiently ‘winning’ developments to use up the available funding from private investors. So there is cash out there…simply because the cash rich need to invest in ‘things’ these days…banks are a disaster!
The secret of course is identifying the right ‘things’ but healthcare can still be a high return area if the risks are known and managed and for example, not totally dependent on a new as yet unproven drug (which might still fail). The combined device and therapy/drug deal is of course the greatest reward but in the future, doing more with exisiting drugs and providing better healthcare with exisiting portfolios (but next generation devices) will be a key area of focus…we need to do more with a lower total ownership/treatment cost and then share the savings/benefits with the solution providers…so as far as I am concerned, the device market is looking very healthy and very positive in the future…it is where the solutions to lower healthcare costs lie. Good luck in your endevours!
My pre-hospital med diagnostic device IP is in the same tough funding / valuation / development “dead zone”. We have poured ourselves and our money into the early-stage efforts over the past 3-4 years (securing IP, engineering a concept, roadmapping our FDA / global regulatory pathway, securing best-in-class vendors and scientific advisors, and aggregating all of the relevant players / licensees / distributors who are eager and ready to invest in the technology once it is market cleared) and find ourselves needing the meet & potatoes funding for the next major development milestone – essentially, through our excellent research, planning, and preparation, we put a downpayment on, and uncovered, a massive funding requirement to see our project to market clearance and the end of the rainbow.
Our strategy has been an all-of-the-above strategy to seek out funding from a variety of logical sources – private (ideally family trust-type investors), public / institutional (we align quite well with federal medical countermeasures programs in US – find your ideal federal program and get at them), trade-out with vendors (for lack of a better term – allowing any of our best-in-class contract vendor/partners to work for equity to lower the cash burden and realize progress which is worth its weight in gold to other funding sources), and most importantly, we placed ourselves squarely in front of very relevant large pharma companies that would directly benefit from our technology and whom absolutely need it to drastically increase their drug sales (targeting potential co-dev / licensing deals.)
In addition to this, I have looked into a possible combination (device & therapy) investment strategy which might make it more interesting to the VC of the world simply because it is a much larger project as Todd and Joe commented on. There is some preliminary interest in this model as well, but it appears all of the diligence will be on our shoulders to determine its validity with VC (i.e. an entirely new business plan with some alternate research, etc…..timely & costly.)
All of these current strategies do not include traditional angel groups or VC for the good reasons Gary outlined in his experience (they were my experiences as well), which is a common problem for those whom I believe are building their med device business in the right way…..the thoughtful way…..the way in which they will have downstream success.
All of these strategies continue to create interest and allow us to maintain several “irons in the fire”, and a couple of these strategies have been very close and vetted quite thoroughly so we know they could and eventually will work, but time is money and money is always needed and needed always.
Perhaps Phil would be willing to explore our opportunity and see if he can help us as well?
Dr. David C. Chilvers
Todd Staples, MBA
I think this kind of adaptive thinking is what drives companies like MakerStaker and my own, TASSMA (to name just two) to bring creative service solutions to market as well. As much as physical devices, service companies need to adapt and adjust their business models to address the changing realities of this economy.
The VC could spread the risk among a few promising concepts and the “ask” will go above the Dead Zone.
Too “out there” or something worth exploring?
Todd Staples, MBA
I completely agree with David’s comment describing how investments by VCs require the same amount of work regardless of investment size, so if you can expand your applications of the technology, and thus your sales forecast as well, you may be able to make a compelling argument for how 8Mil will get your company to the profitable stage faster and thus the investors their return faster.
From what I have seen and heard about the technology there is nothing “small time” about it – I’d consider making it bigger on the VC radar by asking for more based on delivering more. Of course I have no idea what your sales forecasts look like now, and I am sure they are huge, and the return is big, but since the requirements are low it sounds like you are being overlooked out of hand. Just my thoughts.
Yuri Sokolov, MSc, PhD, MBA
As it’s well known, time to market/revenue is crucial, and the best route is the shortest one to revenue. A 510(k) can be submitted well before the completion of a pre-production prototype, needed for regulatory testing before product release. The process may take a number of iterations, depending on the FDA’s questions. There are ways to make this shorter, but given that each response takes 90 days, the process may still take a long time. Long enough to complete regulatory testing and release the product to market. Hence, the 510(k) can run in parallel with the development – saving valuable time, so that the clearance and product are complete at more or less the same time. In my experience, we actually had clearances before we could ship.
Once the clearance is obtained, you can start taking orders. If the product is as hot as you describe, you can sell it on a pre-payment basis – either 100% or at least partial, say 25-30%. Moreover, you may quote longer delivery terms – 90 days or even longer. Customer deposits would significantly fund building the early batches. To start selling earlier, you may also consider markets with no regulatory requirements. As you start selling, you may also obtain an operating line of credit which will help ramping up production and sales. I found orders, customer deposits, and revenues the most convincing arguments for investors. Of course, caution is needed to avoid selling “raw” products, as they may back-fire with customer complaints and bog the company down with fixes and handling complaints. The product needs to be really ready.
Licensing may be an option, but then you wouldn’t be manufacturing the device. If you do want to manufacture, another option may be a distribution agreement, but you wouldn’t be marketing and selling it. In both cases though, in return for the rights, you may negotiate funding to complete the development, as well as defending any potential IP disputes. So, it could be a win-win.
As to the $4M, it may be a good idea to analyze the project once again and try splitting it into smaller stages, with the first one aiming orders and customer deposits/revenues.
I’m excited about the potential for crowdfunding. In fact, Gary, I wouldn’t be surprised if you could raise a million or more on KickStarter. How much time do you estimate you have, exactly?
Can you imagine if we found eight Medical Devices Group members, each in for $500,000? (Unfortunately, I’m not one of them.)
I am open to using the Medical Devices Group any way we reasonably can to get your product introduced. What a meaningful way to use this forum!!
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