Q&A: Early Funding Supports Medical Technology in 2022

According to Silicon Valley Bank Healthcare Investments and Exits Report.

The analysis showed companies raised $3.2 billion in seed and Series A rounds across 485 deals in the US, UK and European Union, up from just over the $3.1 billion raised from 503 transactions in 2021.

While total funding in 2021 has broken records, it has certainly been outstanding, said Jonathan Norris, SVB’s managing director of healthcare business development and one of the report’s authors.

But he said investor interest in healthcare technology is still strong. Norris sat down with MobiHealthNews to discuss why early-stage deal-making has remained solid over the past year and how startups should approach funding in 2023.

MobiHealthNews: Looking at the medical technology segment, what are the main takeaways and takeaways from funding in 2022?

Jonathan Norris: One is that the seed portion of the A-series medical technologies continues to receive a truly significant investment. In fact, if you represent this as a number for the entire year, it is actually the highest value it has ever been. You see a lot of these early-stage investors hiding in the Series A seed because it keeps them from worrying about these 2021 valuations that we’ve seen in the market that we’ll have to deal with at some point. But it allows them to make reasonable estimates early on. It also allows them to fund 12 to 24 months and potentially think that the next round will be on a slight upside outside of a down market.

I think the second is when you look at the overall investment in the sector, it’s down quite a lot compared to 2021. But in fact, 2021 should be seen as an outstanding year, and that goes for all the different health sectors. In each individual sector, records were set for the number of companies and dollars invested. We had records for venture fundraising, we had records for the number of IPOs and M&A. This is an exceptional year.

How will you balance this with what you have seen in 2020? You can see that the first half of the year has been quite strong. The second half was slightly lower, but still at the pace of 2020. So, I think you’ve seen, first of all, that he’s coming back to a reasonable pace for 2020, which was kind of a record before 2021 rolled around. So it’s still a very healthy pace. Secondly, I think the reduction is a kind of adjustment from 2021.

But it also comes down to time and investor attention. Because what was happening in 2022 was that investors were really looking at their existing portfolio companies. Which companies need funding? Which companies can attract external financing? And if they can’t raise outside funding, what does an insider round look like? Do I need to think about changing the business plan? Do we need to think about changing the flow of cash? Do I need to think about a full reversal? And so they really took time away from considering new investments.

And then frankly, just because we saw the public market change so much in terms of rewards, it was really hard to think about late stage valuation, even if you really wanted to do a late stage deal. Thus, 2022 was less active and less loaded with dollars compared to 2021. But still it was a pretty good year in terms of dollar usage. And that just goes against the fact that there is so much capital out there and there is so much interest in this sector.

MHN: You noted the transition to companies and investments of an earlier stage. What do these companies need to do in 2023 to keep the momentum going, especially if later-stage deals stay stagnant?

Norris: We were interested in focusing not only on companies that received investments in 2022, but also on companies that raised investments in 2021 and at the end of 2020, who needed to figure out what Series B would look like for them. Many times they ended up running insider rounds and promoting Series B fundraising.

What we’ve seen here – and I think it’s the same in biopharmaceuticals – is that the milestones that make this next round possible have shifted. New investors can push these companies to do more. [For example,] we need to show the transition from pilot projects to commercial contracts. We need a back-up plan for profitability, which seems crazy for a Series B, but still. We want to see revenue. And we want to see what it looks like when you step on the gas pedal and start increasing income very, very quickly. And what would it look like if you were going to cut costs a bit and just focus on increasing them at a slightly slower pace?

There is actually a lot more focus on what is this income plan? What value are you really providing to your client? And can you quantify? Because this is really going to be where rubber hits the road for health tech. You really should focus on performance, but you should also focus on reducing costs and showing real results. To me, this is really the story of what opens up Series B in terms of the medical technology sector, and that really should be the focus of these companies.

MHN: You said that it seems a little crazy for a Series B company to have a profitability back-up plan. Do you think it will be difficult for many of them to show that they are really cutting costs, or they have good health outcomes, or they have a plan to make a profit at this stage?

Norris: Yes, it will definitely be a challenge. I think this is really related to the question of whether this sector has been refinanced? And the answer is yes, but I don’t think it’s any different from any other health sector. But medical technology is overfunded, and it has been overfunded at what you would call aggressive valuations in 2021. Now you would look at them and say foam [valuations] because you look at what companies are valued at today.

I think it will be a challenge. I think people can agree with that, but I also wouldn’t be surprised if I see some consolidation in this sector, even on the private/private side. Two companies with interesting technologies in more niche markets are teaming up to possibly create a platform. Some of these really big, highly valued private companies that have a lot of money and are looking to expand their platform either with new technologies, or with neighbors, or even with an acquisition [purchasing a company mainly to acquire its employees].

The fact is that there are very few places for new investments. While the VCs are excited about the new fund under management, their partners let them know. [limited partners] to slow down the pace and we have definitely seen a slower pace.

So there are dollars available for great companies. The question is, how much free capital do good companies that show progress have? And the answer is: it depends. It depends on the space you are in, what milestones you have achieved and what your plan is for the future.

It is impossible to maintain the level of investment that we had in 2021. So naturally it all comes down to how to create the best company you can? And sometimes it will come at the expense of consolidation.