Funding Challenges Explored: Series B round becoming the new A round as early stage funding thins
In 2012, during a panel at the Southeastern Medical Device Association (SEMDA; Norcross, Georgia) med-tech serial entrepreneur Jerry Gibson uttered the unforgettable phrase that today’s “A-round funding is yesterday’s B-round funding.”
It’s a phrase Medical Device Daily has constantly repeated over the years, and one in which very few in the med-tech would dispute. As it stands, early stage financings and funding rounds are few and far between.
In 2013, there were 18 Series A financings totaling nearly $151 million – comprising an extremely small portion of the $7.9 billion that was raised by med-tech firms that year. In 2012, those numbers look slightly the same with 26 Series A rounds raising about $21.2 million. This compares to the 7.1 billion raised by med-tech firms in 2012.
Funding is tougher to acquire and investors are jumping on in later rounds – leaving entrepreneurs and fledgling medical device companies in a quandary when it comes to securing initial investment dollars
Part of the reason stems from an uncertain healthcare landscape and strict regulations in the regulatory approval process. Venture capitalist are becoming a bit more cautious – and perhaps rightly so. Venture Capital firms are jumping on board to invest in companies at a much later date than they have in the past.
Aram Nerpouni, CEO of BioEnterprise (Cleveland), a business formation, recruitment, and acceleration initiative designed to grow healthcare companies and commercialize bioscience technologies, said that venture capitalist are looking for more detail at this point and are more meticulous in their funding rounds.
“I think it is fair to say that the milestones your traditional Series A investors are looking for are more mature than they were in the past,” Nerpouni told MDD. “They’re more risk adverse, before they put their money in they’re looking for a broader set of performing data, where as before you might have had very early clinical data and a certain amount of customer feedback . . . I think where they want to be cautious is that they’re not getting in so early . . . in their own portfolio they’ve already been sitting on investments that have been in the portfolio much longer than they have been anticipating. They want to have as clear a picture to the pathway to market as possible. So when they put money in they want to be as clear as possible and want to know what are the remaining milestones that this company or this technology needs to clear before the product will be in the market.”
He added, “I think a lot of times you’re getting no’s (to funding) not because people don’t think it can make a difference, but just they’re not sure how truly that product will get to market. There more factors than whether it’s a great device…”
One of the largest and most successful Series A funding rounds of last year came from Pixium Vision (Paris), a developer of retinal implant systems that aim to restore vision in the blind. In November the company took in a record $20 million in early stage funding.
Those investment dollars were used to advance the development of Pixium’s IRIS retinal implant systems for patients who have lost their sight through degenerative conditions of the eye, such as retinitis pigmentosa and macular degeneration, with the intention of improving their vision.
The round was led by Sofinnova Partners, which became the largest investor, with strong support from Bpifrance, through the InnoBio fund, and existing series A investors Omnes Capital and Abingworth LLP.
“I know that it’s excruciatingly difficult to raise a Series A in the U.S.,” said Antoine Papiernik, managing partner at Sofinnova Partners during a November interview with MDD. “It is an early stage company with, in fact, assets that are quite mature. That’s what is interesting for us.”
Dr. Bernard Gilly, Pixium’s chairman/CEO, as well as the firm’s co-founder told MDD that it could be less challenging for med-tech firm’s to secure funding – especially start-up funding in Europe, as opposed to the U.S. But he noted it was still a challenge to raise money in this economic environment.
“The IP market is very bullish for medical devices in Europe and not really for biotech companies,” Gilly said. “It’s actually the reverse in the U.S. I’m not going to pretend this is easy in Europe or in the rest of the world. If you have a good product in Europe it’s easy to get funded. The difference in the med-tech industry really comes from where an investor would consider would be more amenable to fund a company than their U.S. counterparts.”
Investment dollars are dictated by quick exits and predictable pathways. While it is open to speculation as to why investment dollars could potentially flow freer in some parts of the world – it is certain that investment firms are quicker to fund 510(ks) instead of PMA’s.
“You are seeing a lot of companies that are getting funding – going out for 510(k)s,” Nerpouni said. “It’s a much shorter and simpler regulatory pathway. I’m not sure what the long-term implications for that are for innovation and patient outcomes. But right now certainly one of the ways companies are trying to figure out how do I manage funding over a time line is to shorten the time line by avoiding PMA.”
Nerpouni said that companies need to plan more methodically when it comes down to developing a device, and need to understand that revenue streams aren’t as fluid anymore.
“You’re always looking at where the market demand is; where the patient need is; where there are cost reductions,” Nerpouni said. Knowing that it’s harder to get venture capital funds engaged, the companies just can’t go out and start a round and six months later have it close. They’re really thinking long and hard about what’s the sequence of funding they have to have in place to really carry it through a much longer pathway.”