Third in a 5-part series

In the second part of our series on helping early-stage med device companies that are seeking funding, we talked about common investee perspectives and expectations on the process. Here, we’ll take a look at what happens once a funding agreement is in place and the parties have closed the investment.

After a long, hard road, the signing and closing constitute a major high point for both investors and investees. After great celebration, the honeymoon period almost always ends quickly as reality – and sometimes animosity – sets in. Med device startups need to keep three main points front of mind:

• Bumps in the road are inevitable.
• Problems will arise.
• Delays will most likely happen.

 

Reasons for these realities will depend on the company, products and people involved, but in general, can be tied to one or more of these three factors:

• Due diligence issues. Due diligence activities often do not look deeply enough into the technology and underlying assumptions to uncover potential uncertainties.
• Expertise on the investor side. Most investors assign someone to the project who is financially and market-savvy, and experienced in working with startups – but who is not a deep expert in the technology involved. This may be appropriate, but all too often is not recognized.
• Expertise and approach on the investee side. Most senior product developers and scientists have tremendous self-confidence (and, often, large egos they may not be aware of). While confidence can be an asset, the truth is that these brilliant scientists and engineers do not, and cannot, possess all the advanced finance, accounting, marketing and management skills that are needed to run and grow a successful company. Believing they know the unknowns, and how to overcome them, they can be disinclined to listen to other input in many cases.

 

The result can be a situation where both parties are polite to each other but lack real communication.

Not Invented Here (NIH)

Amid this scenario, the startup believes it knows what it’s doing, and continues along its path. The investor, looking to hit key financial and market milestones, may bring in, or suggest, outside experts to help if progress is not as expected. While the startup may recognize it needs to overcome some difficulties, it commonly resists this help. The prevailing thought, spoken or unspoken, is, “These outsiders have not lived this project like we have. They don’t know what we know. Their ideas were not invented here.”

Typically, a downward spiral starts to spin. Reluctant to admit that something may not be going well, the startup may avoid reporting potential problems. “There’s no need to bother the investors and face difficult discussions when we can work it out” becomes an unspoken, unofficial mantra. This can proceed until the problems are truly serious and hard to overcome, and start delaying the project.

Investors, for their part, may look to put more money into the project – in many different ways – in hopes to fix the problems. And while money may be able to address some of them, it often doesn’t address the root cause of the problems. The adage, “nine women can’t make a baby in one month,” applies more often than not, highlighting that some processes cannot be rushed, regardless of increased resources.

The outside experts

Faced with issues and potential delays, a concerned and frustrated investor may move from suggesting to insisting on bringing in one or more outside experts. This can impact or even shatter company confidence, even when the outside experts are suggesting positive, worthwhile approaches. At worst, outside experts can pose a serious and real threat to the business. It is not unheard of for an outside expert to present an alternative approach so appealing that the investor fires the original team and gives the project to the new expert group.

Even for situations with serious problems, this generally is not the solution. A new team will not understand the nuances of the technology or the project development challenges the way the original team does. They may be no more likely to achieve success, and further delays are predictable.

Coming up: Preserving the marriage with outside counsel

Clearly, working together with open communication is the right approach to investor-investee partnerships. But as with many things in life, easier said than done. Many relationships can benefit from outside expertise, and med device startups are no exceptions. The key is to learn when and how to utilize experts. In our next post, we’ll look at the issue, and how to grow the investor-investee marriage into a healthy, functional family.

Larry Blankenship, Director