Looking for capital to grow your OEM business?
Scenario 1: Your medical device is mostly developed but not yet cleared and you need $1M-$2M of additional funding to get you though FDA clearance and launch. What are your best sources for the capital?
Scenario 2: FDA clearance is behind you and you’ve launched your product. You are even cashflow positive and have interest from family, friends and angels to continue investing in the business. Given the costs associated with building inventory, hiring a sales force and publishing studies demonstrating the value of your technology, you estimate that you could deploy up to $10M over the next year or two. Should you continue to solicit capital from current investors, go to VCs or look somewhere else?
Almost every medical device company founder must make funding decisions at these two points in their development lifecycle. As companies get started, they often rely on funding from family, friends and angel investors. As the need for capital continues to increase, companies then consider investment from family offices, Venture Capitalists (VCs), Institutional Investors and Strategic Partners. But when is the right time to tap into each of these funding sources?
One fact deserving consideration is that different types of investors generally invest at different times of a company’s development. This often has to do with the investor’s appetite for risk and the amount of capital at their disposal. Investor risk is highest at the start of a business and declines as the company’s first product completes development, gains regulatory clearance, demonstrates adoption in the market and starts to grow.
Friends, family and angels generally invest earliest and in the smallest amounts. VCs and family offices come in next, often investing before a product’s regulatory clearance and in increments that range between $5M-$10M. In exchange for the high amount of risk they are taking on, VCs expect significant equity and demand high returns. Institutional Investors and Strategic Partners generally are the last to invest and only do so once a product or business has been further de-risked by gaining regulatory clearance and demonstrating customer acceptance. These investors typically invest in amounts starting from $10M. Because they are investing with less risk, their valuation and return expectations are more reasonable than what VCs expect.
So, what’s the right source of funding in Scenario 1?
In most cases Kinsella Group would recommend that the medical device company continues to access funding from family, friends and angels, if funding in the needed amount is available. Given VCs demands on equity and performance, as well as the considerable amount of time executives must spend to secure funding from a VC, most companies position themselves better financially if they can get to regulatory clearance without VC funding. In addition, a company’s valuation will improve following clearance and initial launch, providing stronger leverage in conversations with investors from that point forward.
How about Scenario 2?
Kinsella Group has seen cases in which companies that have benefited from strong family, friend, angel investor support early on continue to rely on that same funding source for far longer than they should. When larger amounts of capital can help accelerate a proven product much more quickly in the market, it is almost always in the company’s best interest to make use of it. This provides better efficiencies from an investor management perspective, e.g. getting all of the funding from one source rather than trying to round it up from 5-15 difference individuals. And it also provides the early-stage company to strike when the iron is hot, quickly gaining market share and attention from potential strategic buyers. Using funding from family and friends post-launch results in much slower growth and provides competitors with time to catch up.
For companies in Scenario 2, Kinsella Group would recommend approaching Institutional Growth Capital Investors for funds to scale. An infusion of $10M-$15M over the next 2-3 years would allow the company to build inventory, establish a larger sales force and conduct additional research for publication. It would help the company to scale quickly and, because of this accelerated growth, provide valuations to existing shareholders at exit that are far higher than the equity they’d be giving up. Since OEM companies often exit based on a multiple of revenues value creation comes with increased revenues.
In addition to the buy-side and sell-side medical device transactions work we do, Kinsella Group also helps our clients make smart decisions around growth capital. Once our clients determine the appropriate amount, timing and use of growth capital, Kinsella Group provides our clients with further support in securing that growth capital from Institutional Investors. For more information on how growth capital might help your business, please feel free to contact us at 312-229-1357 or Robert.Kinsella@KinsellaGroup.com