Finding Funding in 2009—What's a Medtech Startup to Do?

The current economic climate has forced many companies to think seriously about available funding alternatives and, in some cases, to get a little creative. The good news for many emerging medtech companies is that more alternatives may be available in medical technology than in other industries. Though it may not be easy to locate, there is investment money to be found. At the same time, though, companies that find new investors or lenders must realize the considerations for spending and conserving capital are somewhat different in 2009 than in more prosperous times.

Who Has the Money?

Angel Investors. There are still plenty of individuals who didn't invest with Bernard Madoff and have funds to invest. But such high-net-worth individuals can be difficult to identify. Finding these dollars tends to be a "who-do-you-know" game—but they are out there. In fact, many of these individuals are looking for longer-term returns and are tired of sinking money into the lackluster public equity markets. Some communities have networks of angel investors, and others can be identified by contacting local venture capitalists and small business resources.

Venture Capital Firms. Venture capitalists are still closing new deals and making additional investments in their existing portfolio companies. Valuations may be less favorable to companies, and down rounds are not out of the question.

Strategic Investors. Many large medtech and pharmaceutical companies have active practices of investing in and acquiring emerging companies as a means of growth. Many of these strategic investors have quite a bit of capital to invest and are looking at the current market and depressed valuations to do some bargain shopping. The decision to sell securities to a strategic investor shouldn't be taken lightly, particularly if the investment involves a package deal that includes other commercial or strategic provisions (i.e., distribution, licensing or other arrangements). Strategic investors often seek to structure financing in tranches, with subsequent rounds of investment contingent upon the achievement of operational milestones, such as completing a clinical trial or obtaining FDA approval.

Banks. Banks and other commercial lenders are among the toughest sources of capital to access in this market. When bank funding is available, it may involve relatively high interest rates, stricter covenants and increased collateral requirements.

When You Get the Money

Companies that find sources of funding in this difficult economic climate need to be especially careful about how they spend—and conserve—newfound capital. Below are a few tips.

Take the Money. Under other circumstances, companies might be afraid to take on more dilution than seems necessary in the short-term, at the current valuation, especially when that valuation seems depressed. Most companies would rather fund operations through their next key developmental milestone and then seek to raise additional capital at a higher valuation. However, given the current uncertainty in the market, now may not be a time to focus too much on concerns about dilution. Many companies are properly focused on raising as much capital as possible—to fund operations through 2009 and well into 2010, they hope, if those funds are made available now.

Don't Spend It All in One Place. More than ever, diversification is important. Most companies are looking to invest in multiple strategies, as opposed to putting all their eggs in one basket. Diversification is particularly important in this evolving economy, and with a new presidential administration that may establish new sets of regulatory regimes. As a result, it may be difficult to predict which business strategies will be successful, or even possible, over the next few years.

Don't Forget the Cushions. It's pretty easy to get comfortable spending money when you have it, but now is the time for all companies to conserve cash—without jeopardizing long-term growth, they hope. Every company should spend time "tightening the belt" and looking for expense reductions. Having the ability to stretch funds can enable you to defer seeking capital in periods when it is not available on favorable terms—or at all.

Maintain Relationships. Investors are naturally concerned about their investments. It is particularly important to keep a good relationship with your investors, whether they are banks, venture capitalists, angel investors or strategic investors, during these uncertain times. Situations can change quickly, and it is important to feel you can contact your lender if you need to request a covenant waiver or modification, or your investors if you need a bridge loan. Lenders and investors don't appreciate surprises, so keeping them informed of your financial condition is critical if you may need their assistance in the coming year.

Invest the Money Wisely. A difficult decision these days is how to invest the money you've raised while you are waiting to deploy it. Many companies are moving toward increasingly conservative investment strategies focused on government obligations and debt securities rated by rating agencies.

Evaluate Counterparties. Conduct a thorough evaluation of the financial viability of your key suppliers and financial partners to determine how they are weathering the current economic challenges. If you are concerned that some of them may not be around in coming months, start looking for other potential partners or evaluate the possibility of conducting necessary development and production in-house.