How to Fund Medtech Startups in a Capital-Efficient Manner

Interview with Rich Ferrari, Managing Director of De Novo Ventures

Rich Ferrari is a realist. 

With over 40 years of venture capital experience under his belt, he understands that grand-slam, venture-funded projects, like Instagram and OMGPop, are pretty rare, especially in medtech. 

“We’ve got a long history and a collection of data, which points to the fact that 80% of transactions are $250 million and below,” Rich reports. 

In fact, as you dig deeper, the data is even more sobering: Rich estimates that 58% of successful medtech exits clock in at $100 million or less. 

When you factor in the rising costs and lengthy timelines associated with the premarket approval (PMA) process, establishing a successful medtech start-up can start to feel like a true uphill battle. 

That’s where Rich can help. After building and exiting several companies – including CardioThoracic Systems (CTS, acquired by Guidant) and Cardiovascular Imaging Systems (CVIS, acquired by Boston Scientific) — he’s now focusing his efforts on shepherding other business leaders through the process. 

“At this point in time, what I do is a lot of coaching and mentoring for entrepreneurs, because my goal now is to try and help people get to where they want to go.”

In this episode of Medsider, Rich shares what he looks for when assessing potential technologies, how he utilizes novel funding models to finance early-stage projects, and strategies he employs when navigating the FDA runway.

Key Lessons from Rich’s Experiences

  • Pursue projects that are disruptive in their field, and answer key clinical problems. Prioritize technologies in white space areas that are not riddled with competitors. Rich’s project Pulmonx, for example, radically transforms the clinical pathway for emphysema. 
  • Get creative with funding in order to maintain viability long enough to entice later-stage VCs. Rich innovated the medical device generator model as an alternative to finding angel investors, which secures capital up until first-in-human testing.
  • Be strategic when it comes to navigating the runway to FDA clearance. Collect high-quality data and prioritize the pre-IDE (investigational device exemption) process in order to avoid costly setbacks and miscommunications.
Guest
Rich Ferrari
Co-Founder of De Novo Ventures

Rich Ferrari is the Co-Founder and Managing Director of De Novo Ventures, a premier venture capital firm dedicated to fostering advancements in medical devices and biotechnology. Over the course of his 40-year career, Ferrari has founded six companies, including CardioThoracic Systems (CTS, acquired by Guidant) and Cardiovascular Imaging Systems (CVIS, acquired by Boston Scientific).

Go After Disruptive Technologies and White Spaces

Setting yourself up for success in medtech starts with choosing and pursuing the right projects. To that end, Rich has some straightforward advice: you want to look for truly disruptive technologies, especially in white spaces. In simple terms, white space refers to the services and solutions surrounding a technology. 

“We really love to see those technologies that would be in white space areas,” explains Rich. “Ardian would be one. There was nobody really in the hypertension space. It was a gigantic opportunity.”

Just as Ardian was groundbreaking in the treatment of hypertension, one of Rich’s current projects, Pulmonx, is doing similarly innovative work for emphysema. 

“That’s a white space that’s now looking to become extremely promising, where you can put an endobronchial valve into the lung and completely alter the treatment pathway for emphysema. That’s a white space, because there are no interventional pulmonologists and it’s a gigantic market worldwide.”

Entrepreneurs need to make sure that their technology answers a real clinical problem, and that it is more than just another iteration of an existing product. 

Rich touts Stanford Biodesign’s program as a model for generating and developing medtech innovations. 

“Before anybody starts anything, they have to do a fundamental clinical needs analysis,” explains Rich. “Look for areas in medical delivery and medical devices where there is an unmet clinical need.” 

Rich concedes that some of these vital interventions will be small, while others will be large-scale and transformative. But regardless of size, “you have to fundamentally start [by saying] … What is the unmet clinical need that exists where technology could be applied to actually improve upon it?

Once a start-up has worked through this process, it’s all about leveraging personal contacts to make all-important connections. “Talk to venture capitalists, talk to angel investors about what you’re doing, the steps that you’re going through, and what you’re looking for through financing.”

Seek Unconventional Funding

In an era of lower-than-average exit valuations and higher-than-average costs to fund early-stage companies, start-ups need to get creative with funding in order to remain viable. Rich notes that many venture firms aren’t necessarily in a hurry to invest, which is why he encourages entrepreneurs to consider alternative financing models.

  1. Super angel investor. 

Rich recently worked with a company that was able to secure angel dollars early, and then obtain government grants to hit their funding target. He notes that for a small, early-stage start-up, coupling a $1 million grant with a commensurate amount of angel money can be enough to allow you to prove your method of action, complete good laboratory practice (GLP) work, and formally file your regulatory submission. 

  1. Super angel and venture capital. 

Increasingly, Rich is seeing start-ups combine early angel dollars with investments from venture capitalists who are open to joining projects in the beginning stages. 

“They’re generally raising a more modest amount of money, in the $1.5 [million] to $2.5 million range, so that you get through those early risk reduction phases, and then you go out and try to raise the bigger round,” explains Rich. 

While Rich admits that it has become more difficult to find VCs who are interested in early-stage investments, he emphasizes that these kinds of deals are still possible, especially for 510(k) and less-rigorous PMA technologies. 

  1. Medical device generator. 

Recently, Rich pioneered an alternative funding model for technologies that have already been developed to a certain extent. He calls it the “medical device generator,” and it is ideal for entrepreneurs who have created a disruptive technology, but are having trouble obtaining funding. 

Rich put together an agreement between a group in Switzerland and a U.S.-based investment group that took care of funding up to first-in-human, provided the technology passed the due diligence process.

“This is an alternative to having to go out trying to get angel dollars,” Rich explains. “This doesn’t even set a valuation. It just parses out ownership pieces to the entrepreneur and to my group and to the group in Switzerland. That’s actually quite economical, and it’s all funded to first-in-human and then you go out and raise dollars.”

Thoughtfully Navigate the Lengthy FDA Runway

If you feel like the runway to FDA clearance seems longer and more arduous than ever before, you’re not alone. Rich contends that there are a number of key reasons that it’s taking longer for start-ups to obtain 510(k) and PMA status.

  • 510(k) standards are becoming more rigorous with some looking more like PMAs.
  • The FDA is dealing with staffing shortages as reviewers are reaching retirement age and being replaced with newer, inexperienced assessors.
  • Venture-backed companies attempting to skirt requirements for the sake of cost savings or expediency. 

Still, Rich says, there are things that you can do to increase your chances of success with the FDA.

  1. Strive for high-quality data. 

It’s common for start-ups to run into problems with the FDA because they don’t submit data that is of a high enough quality, or rigorous enough to meet scientific standards. Rich has noticed that this is particularly common with venture-backed companies.

“They don’t like the answers, so they try to skirt around the answer and come up with other ways to try and get it through the FDA process,” he explains. “I think whenever you’re involved in that, you are putting yourself a little bit at risk. It’s kind of a dice roll.”

This is why it’s so important to follow the guidance of your advisors and consultants. Doing so increases your chances of moving through the clearance process expeditiously and effectively. 

“I have been involved with the FDA on a number of activities where, when the work was thoroughly done, it goes through relatively smoothly,” confirms Rich. 

  1. Invest in the pre-IDE process. 

Get a clear idea of what metrics you need to present at the beginning of the regulatory process by actively participating in your start-up’s pre-IDE meeting. This is an opportunity for you to learn more about the FDA’s requirements before you’ve invested a lot of time and money in data collection. 

“You go in there and try to find out kind of where things are. Generally speaking, you go in early, you start talking to the FDA, and you really figure out the plan. Then you can really deliver the goods. It will run much smoother.”

  1. Remember: time is money. 

Rich’s general words of wisdom are that time invested up front related to the submission is time well spent. It’s inevitable that your start-up will have a certain amount of back-and-forth with the FDA — it’s part of the process — but you can avoid a lot of headaches by doing adequate research, and by not cutting corners. 

The important thing to keep in mind while moving through the process is that every snag or setback in the process is costly, in both time and money. 

“You can easily chew up a year trying to outsmart them,” explains Rich. “Remember that, generally speaking, those companies — the size of them and their burn rate at around that point in time — are running somewhere between $350,000 and maybe $600,000 a month. So, if you have a year delay, you’ve got a $4 million to $7 million problem.”

This is why shortcuts are ultimately not worth the trouble. A better strategy is to communicate effectively with the FDA, and present the highest quality data you can.

Download a copy of the interview transcript right here.
Share:
Twitter
Facebook
LinkedIn
Email

Rich Ferrari is a realist. 

With over 40 years of venture capital experience under his belt, he understands that grand-slam, venture-funded projects, like Instagram and OMGPop, are pretty rare, especially in medtech. 

“We’ve got a long history and a collection of data, which points to the fact that 80% of transactions are $250 million and below,” Rich reports. 

In fact, as you dig deeper, the data is even more sobering: Rich estimates that 58% of successful medtech exits clock in at $100 million or less. 

When you factor in the rising costs and lengthy timelines associated with the premarket approval (PMA) process, establishing a successful medtech start-up can start to feel like a true uphill battle. 

That’s where Rich can help. After building and exiting several companies – including CardioThoracic Systems (CTS, acquired by Guidant) and Cardiovascular Imaging Systems (CVIS, acquired by Boston Scientific) — he’s now focusing his efforts on shepherding other business leaders through the process. 

“At this point in time, what I do is a lot of coaching and mentoring for entrepreneurs, because my goal now is to try and help people get to where they want to go.”

In this episode of Medsider, Rich shares what he looks for when assessing potential technologies, how he utilizes novel funding models to finance early-stage projects, and strategies he employs when navigating the FDA runway.

Key Lessons from Rich’s Experiences

  • Pursue projects that are disruptive in their field, and answer key clinical problems. Prioritize technologies in white space areas that are not riddled with competitors. Rich’s project Pulmonx, for example, radically transforms the clinical pathway for emphysema. 
  • Get creative with funding in order to maintain viability long enough to entice later-stage VCs. Rich innovated the medical device generator model as an alternative to finding angel investors, which secures capital up until first-in-human testing.
  • Be strategic when it comes to navigating the runway to FDA clearance. Collect high-quality data and prioritize the pre-IDE (investigational device exemption) process in order to avoid costly setbacks and miscommunications.
Guest
Rich Ferrari
Co-Founder of De Novo Ventures

Rich Ferrari is the Co-Founder and Managing Director of De Novo Ventures, a premier venture capital firm dedicated to fostering advancements in medical devices and biotechnology. Over the course of his 40-year career, Ferrari has founded six companies, including CardioThoracic Systems (CTS, acquired by Guidant) and Cardiovascular Imaging Systems (CVIS, acquired by Boston Scientific).

Go After Disruptive Technologies and White Spaces

Setting yourself up for success in medtech starts with choosing and pursuing the right projects. To that end, Rich has some straightforward advice: you want to look for truly disruptive technologies, especially in white spaces. In simple terms, white space refers to the services and solutions surrounding a technology. 

“We really love to see those technologies that would be in white space areas,” explains Rich. “Ardian would be one. There was nobody really in the hypertension space. It was a gigantic opportunity.”

Just as Ardian was groundbreaking in the treatment of hypertension, one of Rich’s current projects, Pulmonx, is doing similarly innovative work for emphysema. 

“That’s a white space that’s now looking to become extremely promising, where you can put an endobronchial valve into the lung and completely alter the treatment pathway for emphysema. That’s a white space, because there are no interventional pulmonologists and it’s a gigantic market worldwide.”

Entrepreneurs need to make sure that their technology answers a real clinical problem, and that it is more than just another iteration of an existing product. 

Rich touts Stanford Biodesign’s program as a model for generating and developing medtech innovations. 

“Before anybody starts anything, they have to do a fundamental clinical needs analysis,” explains Rich. “Look for areas in medical delivery and medical devices where there is an unmet clinical need.” 

Rich concedes that some of these vital interventions will be small, while others will be large-scale and transformative. But regardless of size, “you have to fundamentally start [by saying] … What is the unmet clinical need that exists where technology could be applied to actually improve upon it?

Once a start-up has worked through this process, it’s all about leveraging personal contacts to make all-important connections. “Talk to venture capitalists, talk to angel investors about what you’re doing, the steps that you’re going through, and what you’re looking for through financing.”

Seek Unconventional Funding

In an era of lower-than-average exit valuations and higher-than-average costs to fund early-stage companies, start-ups need to get creative with funding in order to remain viable. Rich notes that many venture firms aren’t necessarily in a hurry to invest, which is why he encourages entrepreneurs to consider alternative financing models.

  1. Super angel investor. 

Rich recently worked with a company that was able to secure angel dollars early, and then obtain government grants to hit their funding target. He notes that for a small, early-stage start-up, coupling a $1 million grant with a commensurate amount of angel money can be enough to allow you to prove your method of action, complete good laboratory practice (GLP) work, and formally file your regulatory submission. 

  1. Super angel and venture capital. 

Increasingly, Rich is seeing start-ups combine early angel dollars with investments from venture capitalists who are open to joining projects in the beginning stages. 

“They’re generally raising a more modest amount of money, in the $1.5 [million] to $2.5 million range, so that you get through those early risk reduction phases, and then you go out and try to raise the bigger round,” explains Rich. 

While Rich admits that it has become more difficult to find VCs who are interested in early-stage investments, he emphasizes that these kinds of deals are still possible, especially for 510(k) and less-rigorous PMA technologies. 

  1. Medical device generator. 

Recently, Rich pioneered an alternative funding model for technologies that have already been developed to a certain extent. He calls it the “medical device generator,” and it is ideal for entrepreneurs who have created a disruptive technology, but are having trouble obtaining funding. 

Rich put together an agreement between a group in Switzerland and a U.S.-based investment group that took care of funding up to first-in-human, provided the technology passed the due diligence process.

“This is an alternative to having to go out trying to get angel dollars,” Rich explains. “This doesn’t even set a valuation. It just parses out ownership pieces to the entrepreneur and to my group and to the group in Switzerland. That’s actually quite economical, and it’s all funded to first-in-human and then you go out and raise dollars.”

Thoughtfully Navigate the Lengthy FDA Runway

If you feel like the runway to FDA clearance seems longer and more arduous than ever before, you’re not alone. Rich contends that there are a number of key reasons that it’s taking longer for start-ups to obtain 510(k) and PMA status.

  • 510(k) standards are becoming more rigorous with some looking more like PMAs.
  • The FDA is dealing with staffing shortages as reviewers are reaching retirement age and being replaced with newer, inexperienced assessors.
  • Venture-backed companies attempting to skirt requirements for the sake of cost savings or expediency. 

Still, Rich says, there are things that you can do to increase your chances of success with the FDA.

  1. Strive for high-quality data. 

It’s common for start-ups to run into problems with the FDA because they don’t submit data that is of a high enough quality, or rigorous enough to meet scientific standards. Rich has noticed that this is particularly common with venture-backed companies.

“They don’t like the answers, so they try to skirt around the answer and come up with other ways to try and get it through the FDA process,” he explains. “I think whenever you’re involved in that, you are putting yourself a little bit at risk. It’s kind of a dice roll.”

This is why it’s so important to follow the guidance of your advisors and consultants. Doing so increases your chances of moving through the clearance process expeditiously and effectively. 

“I have been involved with the FDA on a number of activities where, when the work was thoroughly done, it goes through relatively smoothly,” confirms Rich. 

  1. Invest in the pre-IDE process. 

Get a clear idea of what metrics you need to present at the beginning of the regulatory process by actively participating in your start-up’s pre-IDE meeting. This is an opportunity for you to learn more about the FDA’s requirements before you’ve invested a lot of time and money in data collection. 

“You go in there and try to find out kind of where things are. Generally speaking, you go in early, you start talking to the FDA, and you really figure out the plan. Then you can really deliver the goods. It will run much smoother.”

  1. Remember: time is money. 

Rich’s general words of wisdom are that time invested up front related to the submission is time well spent. It’s inevitable that your start-up will have a certain amount of back-and-forth with the FDA — it’s part of the process — but you can avoid a lot of headaches by doing adequate research, and by not cutting corners. 

The important thing to keep in mind while moving through the process is that every snag or setback in the process is costly, in both time and money. 

“You can easily chew up a year trying to outsmart them,” explains Rich. “Remember that, generally speaking, those companies — the size of them and their burn rate at around that point in time — are running somewhere between $350,000 and maybe $600,000 a month. So, if you have a year delay, you’ve got a $4 million to $7 million problem.”

This is why shortcuts are ultimately not worth the trouble. A better strategy is to communicate effectively with the FDA, and present the highest quality data you can.

Download a copy of the interview transcript right here.
Share:
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