Investing in medical technology can be highly rewarding, both financially and personally, but every investor should take a strategic approach to understanding a startup's commercial prospects before taking the plunge, says entrepreneur-investor Professor Michael Atar.
After a temporary dip during the Covid pandemic, the global medtech sector is growing rapidly again, with the global medical device sector expected to reach a value of $612.7 billion (£440.5 billion) by 2025.
It is therefore no surprise that the sector is becoming increasingly attractive to private investors, not only because of the potential for high returns, but also because of the clear and real good that can come from the field, benefiting the health and wellbeing of all comes.
That said, as with any investment opportunity, there is risk. Research shows that at least three-quarters of medical startups fail to enter the market, so you should tread carefully before choosing who to back.
But how can you diagnose an unhealthy investment when it promises healthy profits in the longer term?
Unfortunately, investors don't have crystal balls, but there are some important steps that will help you make an informed decision.
Know the sector
Medtech is booming and there are hundreds of new ideas waiting for your support. Some medical topics are particularly hot right now, such as research into cancer, Alzheimer's and Parkinson's disease – and it's easy to get caught up in the rumors.
But just because something is popular doesn't necessarily mean it will be a success, as the sobering statistics about startup failures underline.
It's great to be excited about a potential investment, but it's not enough that it seems like a great idea to you. Like a doctor, you must evaluate the idea impartially to ensure that it is scientifically sound, functional (in the sense that it meets a real need) and that it can be put into practice.
That requires understanding the science behind the idea and whether it will actually make a difference to people's lives when it's rolled out. For example, a study by CBI Insights shows that more than 40 percent of startups fail due to a lack of product-market fit (PMF).
If you do, you'll discover that there are many gaps in the market that for one reason or another are not hyped, but have enormous potential to transform medical outcomes.
For example, millions of people die every year from sepsis (blood poisoning), but this is rarely talked about.
For over a decade, I was the lead investor in the Silicon Valley startup Cytovalewhich has developed and launched a revolutionary device, Interline, that can detect sepsis in less than 10 minutes.
I wasn't passionate about sepsis when I first came across Cytovale, but I was intrigued by medical physics and its use in medical technology.
The most important thing was that they did things right. Sepsis kills one person every three seconds, so they focused on a topic that had the scope to help everyone.
Be careful with complexity
Some medical startups come up with very complex technological solutions. A basic rule is: the more complex the idea, the longer it will take to realize it.
After you've done your analysis, you may discover that the startup doesn't expect to reach the finish line for twenty years or more.
You need to ask yourself whether you are really willing to back an investment that will not mature for a decade, and which during all that time will remain exposed to the same risks that every start-up faces – not least running out of money or burn rate. become untenable.
Rate the team
In principle, a startup is not an idea, it is the people behind that idea.
Therefore, make it a priority to assess the team behind the project. Who developed it, where it was developed and how, and how the team is composed. What knowledge do they bring and what are their track records?
To do this, you need to observe how the team works together. You have to be able to feel at a micro level that they really understand what they are doing, both in a scientific and business sense.
The danger is that the startup is full of bright young and ambitious PhD students who want to escape the university setting, but have no idea of the commercial realities of running a business.
Discovering that the CEO is one of the students or their professors should set off alarm bells, as they have no track record of translating ideas from the academic to the commercial world.
- Seasoned entrepreneur-investor Professor Michael Atar, an award-winning medtech scientist, has the “Midas feel” when it comes to medtech investing, including being a lead investor in Silicon Valley's multi-million dollar success story Cytovale. However, as he reveals, this is underpinned by sound strategic thinking.
Communication is crucial
Never put your money anywhere without speaking to the team first, ideally over multiple meetings.
Only by doing this can you truly gauge how the people behind the startup see themselves. If you have chosen the right startup, it should be clear from the first conversation that your commercial interests are aligned.
If their messages during those meetings are nuanced, so that there are positive and negative aspects, then that is a good sign. However, if all you hear is a stream of superlatives comparing the startup to the biggest unicorns in recent history, be suspicious.
It's not necessarily about their self-evaluation being 100 percent realistic, but at the same time they can't swallow their own hype. They have to follow the money.
Also pay attention to whether communication flows. When you contact the CEO, CFO or other board members, do they get back to you immediately? Do they also contact you, asking them first?
If all goes well, the good news is that you can probably sit back rather than roll up your sleeves with your investment if you prefer to keep your distance. On the other hand, if that alignment isn't there, even spending every spare minute you can on nurturing the startup won't help in the end.
Do your due diligence
The same CBI Insights study found that, after misjudging market demand, the second biggest reason startups fail is because they run out of money.
This happens almost a third of the time, so you need to be prepared to look at a startup's finances with a realistic eye to determine where things are going.
I invested in a company that unfortunately went bankrupt, and that was due to the burn rate. They rented space in the most fantastic labs and went on a hiring frenzy that their finances couldn't support. It was a classic case of acting too quickly.
Related to this is the company's own drive to secure financing. If they don't actively pursue every investment opportunity – government funding, incubators and even more private investors – then the question is whether they will stay the course.
There is an opposite problem for investors. If a startup is raising money left, right and center with ongoing funding rounds, this will obviously have a knock-on effect on your net worth.
For any investor, there is a fine balance between the money the startup spends and brings in, so make sure their finances and your expectations are aligned.
For more information about Professor Michael Atar, visit www.michael-atar.com
