54:26
What Do VC's Look For Before Investing in a Medtech Company
Project Medtech
Overview
This video features venture capitalists (VCs) Tom Shiab of Arboretum Ventures and Bill Trainor of Mutual Capital Partners discussing what they look for when investing in medtech companies. They cover the initial screening process, the importance of qualified introductions, and the content of pitch decks. The discussion also delves into the due diligence process, the significance of team, market, technology, and intellectual property, and how VCs evaluate companies at different stages, particularly Series A investments. They emphasize transparency, preparation, and building long-term relationships, highlighting that while a strong pitch is crucial, the underlying substance and the team's ability to execute are paramount.
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Chapters
- Arboretum Ventures is a healthcare-focused VC firm investing in med device, diagnostics, health IT, services, and life science tools, excluding single-molecule pharma bets.
- Mutual Capital Partners focuses on med devices, digital health, and opportunistic B2B software, with a smaller fund size and a more hands-on approach.
- Both firms, despite being geographically based in the Midwest, invest globally.
- Arboretum manages approximately $750 million across five funds, while Mutual Capital Partners manages around $110 million across three funds.
Understanding the specific investment focus and fund size of VCs helps entrepreneurs tailor their pitches and target the right investors.
Arboretum's focus on 'pharma adjacencies' means they invest in companies enabling pharma, not in the drugs themselves.
- Venture Capital firms receive thousands of submissions annually, necessitating a screening process.
- Qualified introductions from existing investors or trusted connections are highly valued and significantly increase the chance of a review.
- Key elements for an initial pitch or executive summary include: what the company does, why they believe they can succeed, and who the team is.
- Materials must be succinct, clear, and user-friendly, with either a short teaser deck or a full pitch deck being acceptable if well-executed.
A strong initial impression through effective communication and a clear value proposition is critical to getting past the first hurdle and securing further consideration.
Bill Trainor mentions that California is considered a difficult geography for investment due to labor and cost issues, which can be a screening factor.
- Venture capital is a relationship-driven business, with many investments stemming from prior interactions.
- Consistent and timely follow-up, especially when a company commits to providing updates or information, builds trust.
- When VCs pass on an investment, they often provide specific milestones or triggers for future consideration (e.g., FDA clearance, next fundraising round).
- Entrepreneurs should communicate key milestones and maintain accurate, consistent, and concise information in their updates.
Nurturing relationships and maintaining open communication, even after an initial rejection, can lead to future investment opportunities.
Tom Shiab notes that 50-60% of Arboretum's investments were with teams they had met previously, but not at the right time for an initial investment.
- Start preparing due diligence materials well in advance of fundraising; a data room should be organized early.
- Use standard, generic documentation for early-stage agreements to avoid getting bogged down in minor details.
- Time is critical; delays in due diligence can lead to deals falling apart due to external factors or loss of investor interest.
- Transparency is key; acknowledge any missing information or ongoing issues and provide a timeline for resolution.
Thorough preparation for due diligence demonstrates professionalism and significantly smooths the closing process, preventing deal-killing issues.
Bill Trainor advises entrepreneurs not to wait until fundraising to understand what a due diligence request list looks like; they should prepare it in advance.
- Entrepreneurs should also conduct due diligence on potential investors, understanding their investment thesis, fund cycle, and past performance.
- The team is consistently cited as the most important investment factor, often referred to as betting on the 'jockey' before the 'horse' (technology) or 'track' (market).
- While the team is paramount, VCs also evaluate market size, technology, and intellectual property (IP).
- Transparency about challenges and a willingness to say 'I don't know, but I'll find out' are valued over perceived perfection or faking it.
A mutual understanding and fit between the entrepreneur and the VC are essential for a successful long-term partnership, especially during challenging times.
Tom Shiab mentions that VCs look for how a team handles situations when things go badly, not just when things are going well.
- The order of importance for investment factors can shift based on the stage of the company.
- For Series A, VCs look for a clear FDA pathway, a prototype to research-trial-ready device, and a plan for reimbursement.
- Market size is critical; VCs need to see a compelling need that can generate a significant return.
- Intellectual property (IP) is highly important in medtech, alongside the team's ability to execute and the technology's efficacy.
Understanding the specific criteria VCs prioritize at different stages helps companies focus their development and fundraising efforts effectively.
For Series A, VCs expect a plan on 'how to get a plan' for reimbursement, recognizing it's a complex and often delayed process.
- The stage of a VC fund's lifecycle (e.g., year five vs. year one) can influence investment decisions, particularly regarding company stage (e.g., pre-revenue vs. post-revenue).
- Investor alignment within a syndicate is crucial; differing expectations among investors (e.g., early-stage angels vs. later-stage VCs) can cause problems.
- VCs aim to invest in companies that align with their core thesis, avoiding over-saturation in a specific sector within a fund.
- Entrepreneurs should inquire about the fund's stage and how it might impact investment decisions.
Understanding the internal mechanics and constraints of VC funds helps entrepreneurs navigate the fundraising process more strategically.
In year five of a fund, VCs are less likely to invest in pre-revenue companies due to the typical 10-12 year fund horizon.
- Major character defects or blatant dishonesty (e.g., misrepresenting FDA submission status) are significant deal-breakers.
- VCS are generally more patient with first-time founders or teams with specific skill gaps, provided they are honest, driven, and willing to learn.
- A lack of follow-through on stated commitments can be detrimental, but it's less of a killer than outright deception.
- The team's ability to work hard, be transparent about challenges, and learn from mistakes is highly valued.
Knowing which issues are critical deal-breakers versus manageable deficits allows entrepreneurs to focus on building trust and demonstrating resilience.
Tom Shiab states that if a founder admits, 'I don't know, but I'll find out,' it's a positive sign, indicating honesty and a willingness to learn.
Key takeaways
- Venture capital investment is heavily relationship-driven; cultivate connections and maintain consistent communication.
- A strong initial pitch must be clear, concise, and highlight the team, problem, and solution, but qualified introductions are paramount.
- Thorough preparation for due diligence, including organizing a data room in advance, is critical for a smooth fundraising process.
- Entrepreneurs should diligently research VCs to ensure a mutual fit in terms of investment thesis, fund stage, and operational style.
- The founding team is the most critical factor for VCs, followed by market opportunity, technology, and intellectual property.
- Transparency, honesty about challenges, and a willingness to learn are more valuable than perceived perfection during the investment process.
- For Series A medtech investments, VCs look for demonstrated progress towards FDA clearance and a clear plan for reimbursement.
Key terms
Venture Capital (VC)Pitch DeckDue DiligenceDeal FlowQualified IntroductionExecutive SummarySeed RoundSeries AIntellectual Property (IP)FDA PathwayReimbursementSyndicateFund Lifecycle
Test your understanding
- What are the primary factors VCs consider when evaluating a medtech company, and how might their importance change based on the company's stage?
- How can entrepreneurs effectively prepare for the due diligence process to ensure a smooth and successful fundraising outcome?
- Why is a qualified introduction so important in the venture capital world, and what makes an introduction 'qualified'?
- What are the key differences VCs look for in a Series A investment compared to a seed-stage investment in a medtech company?
- How should entrepreneurs approach building and maintaining relationships with VCs, especially those who initially pass on an investment opportunity?