This is the fourth and final part of our discussions with Jérome Marzinski, where we continue our focus on MedTech investing and how innovators can attract investors in the current market conditions. We presented earlier 9 Business Trends to Consider in MedTech Investing,and we now point out some major hurdles that project teams should avoid to be successful in their funding rounds. With a number of recommendations and useful market insights from investors' circles, we hope this last episode will trigger some reactions and meaningful connections between MedTech experts, investors in venture capital, private equity, and other funds, startup owners, and project teams developing the healthcare technologies of tomorrow.

Benoit Becar: We discussed the shift towards value-based projects in MedTech, and in Healthcare in general. When considering the funding of innovative technologies, what is driving the interest of investors?

Jérome Marzinski: In early-stage funding, investors will walk away from MedTech projects that do not fulfill these criteria:

1. Market size and TAM (Total Addressable Market) below €10 billion.
2. A wobbly value proposition not focusing on clinical improvement nor health economics.
3. A weak management team without sheer diversity, which is even more true for an early-product stage company only made of scientists. Different profiles such as HTA (Health Technology Assessment) experts, seasoned executives in commercial roll-out, and exit strategy and M&A (Mergers & Acquisitions) recognized experts should be included right at the inception point of a project. Only few leadership teams have such skilled profiles and diversity. This is by far the #1 challenge to overcome.
4. No digital capability embedded or engineered out of the product itself.
5. Inability to execute the roadmap as a result of all the items above.

B.B.: With this in mind, what advice would you give to startups before they enter funding rounds?

J.M.: As mentioned earlier, a fiercer selectivity is expected from both venture and corporate ventures funds. Raising funds will even become a more competitive and challenging process. One of the tips I could give to potential startups involved in a fundraising process is to slightly postpone it for a few more months and re-work on their presentation book: teaser, investor slides deck, and financial forecasts. A more realistic forecast should be modeled to really identify the true levers improving business performance (revenues, EBITDA, market penetration) while also paying attention to the strategic positioning and the competitive landscape.

Valuation will be lowered due to a higher uncertainty related to COVID-19; however, ownership percentages will likely soar while entering through term-sheets or SPA (Shares Purchase Agreement). Never forget that lower ownership percentages proportionally increase the exit valuations required to meet investment returns requirements.

B.B.: With the current market conditions, which investors will be supporting MedTech innovation in the coming months?

J.M.: The role and involvement of venture funds is paramount for MedTech innovation funding. Interestingly enough, during the COVID-19 lockdown, private savings have exponentially soared to unachieved peaks. Local governments haven’t been able yet to direct this pile of savings towards the funding of innovative medical technologies. Their amount of invested capital in series A financing rounds still looks too low to push innovation in the marketplace. As a result, startup companies need to work closely with early-stage funds to close their series A round.

"A strong opportunistic window does appear for funds willing to accelerate on build-up execution strategies"

B.B.: In the recent weeks, what transactions have drawn your attention? Are there any specific directions that you noticed in the investor community?

J.M.: The funding market of early-stage MedTech has not crashed yet. Over the 2020 summer, a few transactions were closed in very exciting therapeutic areas:

• NovaSight (here) and LensGen (here), in ophthalmology.
• NeuroPace here) for neurostimulation and brain monitoring.
• iRhythm (here) in remote cardiac monitoring.
• Aerin Medical (here) in ENT (Ear, Nose, and Throat).

A strong opportunistic window does also appear for private equity funds that are willing to accelerate on build-up execution strategies (M&A deals) for portfolio companies due to lowered acquisition prices compared to six months ago.

Missed opportunities will thus negatively impact business performance of portfolio companies, giving rise to an increasing pressure on expected IRR (Internal Rate of Return).

B.B.: As an expert working closely with MedTech investors, you are regularly approached by funds to assess projects, technologies, and teams during due diligence phases. Can you share with us a few elements on your methodology and some obstacles you have experienced during your evaluations?

J.M.: I’ve been hanging around research labs from top-notch institutions (in in-vitro diagnostics for infectious diseases, robotic-guided platforms, neurostimulation devices, and imaging systems) over the last year. When somebody asks me to assess a new project in a very early-stage phase, during the first meeting I am used to asking the same simple questions. In nine cases out of 10, not one of the founding team members could properly answer all of these three questions:

1. In very basic and tangible terms, what is the problem your product intends to solve?
2. How much could you price the solution you developed to solve the problem?
3. Who is going to pay for it? Co-payment, payors, patients, hospitals, physicians, etc.?

This looks simple, but I’m always stunned by the nature of the answers to these crucial questions.

"Picking and retaining the right talent remains a major setback for early-stage companies"

Very early-stage projects fundamentally lack market access, health economics expertise, and acute business judgement. This induces more hindrances to raise appropriate capital for startups - and this is not going to change for sure.

Picking and retaining the right talent remains a major setback for early-stage companies. A better operating support from funds might be worth considering.

On the financial side, as a result of the surge of COVID-19, investors' expectations will get more restrictive and revised IRR expectations will force them to fine-tune their financial forecasts. This is to become a long-term trend from now on, and project owners need to be aware of this.

"The need for long-term advisors and senior experts will become compelling for early-stage funds"

B.B.: You just mentioned the need for better operating support from funds. In my discussions with fund managers, I see indeed the rise of more proactive investors, in high demand of operating partners bringing sector knowledge, leadership experience, and coaching abilities to the funds' portfolio companies. Do you see other specific skill gaps to fill in the funds' teams?

J.M.: Healthcare and namely MedTech investments require the right focus and a full-fledged vertical expertise. This can only come from market insiders of this industry. The big gap they are also facing is the right expertise for investing into healthcare IT and tech-enabled services due to the shortage of talents.

The MedTech industry tends to become more complex than it was 10 years ago (due to a more stringent regulatory framework, a trickier commercial route-to-market, and a very costly product development). Thus, a crucial need for long-term advisors and senior experts will become compelling for early-stage funds which really want to be highly successful.

‍