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1. Vol. 4 No.3 March - April 2011 <125/Annual Subscription <750
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Strategy and Options for the
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2. 76 Mar-Apr 2011 Medical Equipment & Automation
Funding Strategy
My earlier article titled “Medical Devices Innovation – Funding, Partnering and
Consolidation Activity in India” published in the May-June 2010 issue of this
magazine evoked many responses from budding entrepreneurs, promoters
and technologists in the health sciences and biomedical and many aligned
sectors. I, Kapil Khandelwal would like to thank the readers for reaching out
to me and providing me with some frank and candid feedback on some
of their issues which they have been facing in scaling their ventures. The
medical technology industry in India will reach around 30,000 crores by 2015.
Demystifying Medical Technology
Venture Funding:
Strategy and 0ptions for the
Entrepreneurs
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3. Funding Strategy
77Medical Equipment & Automation Mar-Apr 2011
C
urrently, a large majority
of innovation in medical
technology in India is
very
low end disruptive innovation.
However, as the industry in India
grows and matures, the high-
end innovation and disruptive
innovations in medical technology
will follow. To succeed, funding
becomesonecriticalsuccessfactor.
I, estimate that for the industry to
succeed and grow, funding to the
tune of Rs 100,000 crores will be
required by the industry to reach
a critical mass and scale. The four
main purposes for which funding
may be required are generally in
medical technology ventures:
• To start and grow a new venture;
• To develop/takeover an existing
venture/medical technology
intellectual property (IP)
developed;
• To change the shareholding
structure of an existing venture
or buy back equity stake; and
• To rescue a venture.
There are different types of
funding mechanisms available
to the promoters (see diagram
below). The next few sections of
the article address some of the
issues around funding strategy for
the promoters.
What makes a disruptive
innovation in medical
technology fundable?
Information technology and
medical technology start ups
have something in common. They
often begin the same way - with a
great idea and venture bootstrap
funding. Innovation in medical
technologies has been growing
in our country. Having reviewed
business plans in the medical
technology space practically every
week and provided my preliminary
advice on what works and what
does not with Venture Capitalists
(VCs), Private Equity (PEs) and
other investors is demonstrating
the financial and clinical impact on
our health care system. Besides,
solutions that have demonstrated
ability to reduce overall costs of our
health care system and improve
quality of life and outcomes is
preferred. Medical technologies
venture funding comes at a time
after the business model and
regulatory risks have largely been
eliminated. However, I suggest an
initial approach that centers on how
the medical technology fits with
the fundamental economic drivers
of our health care system. If the
disruptive innovation passes one
or more of the questions below,
then it has passed the acid test that
would be fundable as a venture:
• First, does the product improve
clinical quality-or at least deliver
equivalent outcomes in a less
costly and better way?
• Second, does the product more
than offset its cost through
reduced overall health care
expense to the system, such as
reducing costly side effects or
replacing or eliminating other
expensive procedures?
• Third, does the product
offer clinical and/or financial
advantages for patients,
insurance, and providers alike?
Some examples of Indian
companies that have demonstrated
successful innovation are given
herein.
What is the Mantra for
Putting the Right Funding
Proposal?
Every entrepreneur’s dilemma
is getting the business model right
and articulating it properly in the
funding proposal or the information
memorandum (IM). Having defined
the value proposition correctly as
outlined above, the corresponding
delivery proposition and the
financial proposition has to be
spelt out clearly. These would
become the inputs to putting the
formal funding proposal that clearly
articulates the purpose of seeking
the funding (Money), clarity in
describing the opportunity we are
addressing through the medical
technology (Markets) and the
ability of the team to ensure the
results (Management). I call them
the 3Ms.
Markets
How large is the market for
the medical technology, and how
compelling is the need? How fast
will the market grow? Generally,
potential market size must be at
Company Product Key Drivers
MediVed Pacemakers
Reduced healthcare expense: Pacemakers cost is Rs. 20,000 to
25,000 below the comparable pacemakers produced by
international companies.
Bigtec Labs MicroPCR
Improve clinical outcomes: A bed-side miniaturised, no-frills and
portable version of the bulky PCR (polymerase chain reaction)
machine where the samples have to be sent for testing
Reduced healthcare capex: Costs Rs. 1 lakh compared to a
conventional PCR’s price tag of Rs. 15 lakh.
Perfint
Healthcare
PIGA-CT
Improve clinical outcomes: Uses robotics to make image-
guided, soft-tissue biopsies simpler, safer and more accurate
Reduced healthcare capex: At Rs. 15 lakh a machine, it is less
expensive than other imported alternatives - such as fluoroscopes
- which are double the cost.
Skanray
X-ray imaging
systems
Improve clinical outcomes: High-frequency digital X-rays with
radiation leakage control.
Reduced healthcare capex: Cost is a fraction of the imported
equipment.
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4. 78 Mar-Apr 2011 Medical Equipment & Automation
Funding Strategy
least Rs 350 to Rs 500 crores per
year at least - to justify the returns
investors are seeking. Do many
competitors with similar products
or solutions already exist? Can the
start-up be clearly differentiated?
Does the start-up have an effective
distribution strategy for its targeted
customer group?
Management
What is the experience and track
record of key management team
members? Because it reduces risk,
investors are especially attracted to
ateamthathasindividualswhohave
already “been there and done that”
successfully in their specific roles
at a previous company. Is the team
complete? Early-stage companies
needn’t have all positions filled,
but VCs, PEs or angel investors
like to see that the company can
recruit strong candidates as the
business progresses. Investors
are especially interested in
entrepreneurs who have a special
advantage in a particular market
sector because of their skill set
or experience.
Money
How does the company plan
to make money? Is the pricing
and reimbursement strategy
realistic? Are the margins high
enough to support the research
and development, clinical trials,
and distribution costs associated
with the device industry and still
make an attractive return within
an intermediate time frame? How
will the company manufacture and
distribute the product and support
customers? How will the start-up
compete with companies that have
more resources?
Stacking up this means that the
venture has the potential to grow @
25% CAGR per annum – meaning
it can double in size at a minimum
every 5 years. This level of potential
is required in the funding proposal
(IM) or the business plan that
must be targeted at the minimum.
Anything less would mean the
money is sub-optimally invested if
the business plan is not achieved.
When to Raise money and
from Whom?
This is a billion dollar question.
The promoters must determine
how much money to raise, and
when to raise it. Promoters typically
start out raising a small amount of
money to prove the feasibility of
the product idea, and then raise
more over time. How much money
to raise and when to raise it, is an
issue that needs to be mapped to
major milestones over the life of
the venture.
What Strategies to Follow
at what stage of Funding?
Just as each stage in the
business life cycle of the medical
technology venture brings about
different issues and opportunities
and hence each stage is unique
from the other in terms of risks,
problems, rewards and outcomes
that accompany it. The strategies
that can be followed need to
be carefully considered by the
promoters before seeking the
funding from different funding
sources. The effect on the
business cannot be considered in
isolation but has also to be viewed
in the light of the changes that will
occur as a consequence of the
funding. The above mentioned
table summarizes the strategies for
funding at different stages.
VCs and PE Funding: A
Few Caveats
VCs and PEs may be positive
about the venture. However, the
structure of the investment must
fit their fund profile. VCs and PEs
have specific criteria for their
investments: some invest mostly at
the early stage of a company’s life,
whereas others specialize in later-
stage investing. Additional criteria
can include the following:
• The type of product-whether the
focus is devices, biopharma,
diagnostics, etc;
• The amount of equity diluted;
• The “premoney” valuation of
the company;
• The stage of company
development-initial invention,
working prototype, animal and
human clinical trials, market
launch, and ultimately, growth
equity.
• The projected timing of the
company’s eventual liquidity
and other financial issues.
How does VCs and PEs
Funding Process Work out?
The typical process followed
by VCs and PEs which are active
in the medical technology space is
set out below:
• Determination by the potential
promoters that cash is required
in the venture for growth, buy
back existing investors, or
buying out IP, etc.
• Preparation of business plan
Money In a Box: Sources of Money
1 Your own money
2 Grants and soft loans
3 Revenue from the business
4 A mentor
5 A friend
6 Bankers
7 Revenue with the enticement of
future equity
8 Business angels
9 VCs/PEs
10 Money lenders
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5. Funding Strategy
79Medical Equipment & Automation Mar-Apr 2011
and funding proposal (IM).
• Initial presentation to the VC or
PE firms.
• Preliminary analysis by VCs/
PEs followed by meetings &
visits and Preliminary offer letter
(term sheet).
• Discussions of the terms
by the promoters and their
consultants.
• Acceptance of the indicative
offer given by VCs or PEs.
• Due diligence by the VCs and
PEs team and their advisors.
• Study of results of due diligence
and indicative offer confirmed
or modified term sheet.
• Investment committee proposal
by the VCs or PEs and indicative
terms approved, modified or
rejected.
• Issue of full offer letter (subject
to legal stages) by the investee.
• Legal stages are, first meeting
betweentheVCsorPEsandtheir
lawyers to draft shareholders
and legal agreements, then
meetings between the venture
and their lawyers to consider
its reply and finally a series
of meetings between what
is offered and what will be
accepted and agreed.
• Signing and completion of the
contracts between the VCs
or PEs, their lawyers and the
promoters and their lawyers.
• New investor joins the company
and their board (in most cases).
• New governance processes.
To Appoint or Not to appoint
Professional advisors
I always recommend that
promoters appoint professional
advisors for their technical inputs
in preparing the business plan
and the funding proposal that you
would like to present to the VCs
and PEs. However, it is prudent
to restrict their scope of work.
Outside lawyers and accountants
have their contribution in the
funding process, however they
should be employed at the right
time. Some considerations are:
• Costs burden will increase
on the venture at the start up
phase (certainly)
• Time taken to complete will
extend (probably)
• Harmony between the
management team will unravel
(possibly) It is best to have
the professional advisors’
skin in the game to ensure
success in aligning the
needs of the promoters and
the venture.
Finally, The Indian medical
technology industry is poised
for growth and would incubate
new venture. Opportunity exists
for innovative and committed
promoters who wish to start their
own venture. Once potential start-
ups have developed a compelling
business plan, funding proposal,
investors would be available for
those promoters who follow
the right steps to secure
funding. As many industry
professionals have discussed
with me and found, starting
and growing a venture is a time
consuming and painful process,
but it can be tremendously
gratifying in both personal
satisfaction and financial
rewards.
Stage Potential Investors Timing
Running the Business
Post Funding
Knowing how to get Out - Potential
Exit
Seed Stage
Own money, Grants and soft
loans, loans from friends
and family
When a firm idea/
concept has been
proven
Promoter and associates
develop the concept
Concept fails to meet all the three acid
tests mentioned above. IP is
patentable and a larger partner is
willing to back it up
Start Up
Stage
Own money, incubation
funds (universities,
governments, etc.), angel
investors and VCs
Soon after you have
protected your IP and
filed the patents
Building complementary
skills through the angels
and VCs
Dilutions in the next rounds with
investors
Expansion
Stage
Own money, PEs, bank debt
Prior to going profitable/
cash flow positive
Board-level additions,
newer management talent
to grow the business
IPO, stake sale/merger, buy out by
promoters
Shareholder
Change
PEs, bank debt, strategic
partners
Stake acquisition or exit
by a set of promoters
Consolidation and
management of the venture
IPO, stake sale/merger, buy out by
promoters
Kapil Khandelwal, runs his own investment banking and advisory
services company, EquNev Capital. He earned recognition as an expert in
health sciences, education, agri and information communications and
technology (ICT). He serves several company boards and industry
advisory committees in these sectors. His expertise positions him as
one of the thought leaders in India, Asia Pacific and Emerging Markets.
He holds the unique distinction of being among the elite club of Chief
Information Security Officers (CISOs) in the early-phase drug discovery in
the world. His particular area of focus is investment banking and
business advisory and driving business results through mentoring
leaders and connecting to people in this region.
Kapil
Khandelwal
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