📈 An inside look at MedTech investing in 2023

While everyone else is talking about the latest Zuckerberg/Musk drama, and cocaine being found in the Whitehouse…

Here’s the story you haven’t heard: After a record 2021 in Medtech venture funding – and a sharp dip in 2022 like most industries – we could be at the beginning of the next hype cycle/funding wave thanks to the “Just Add AI!” narrative infecting basically every industry.

But unlike the comparatively easy-to-understand business models of most hardware/software companies…

The “move fast and break things” mentality simply isn’t an option in a high-stakes environment like healthcare.

But according to McKinsey

Where is there an opportunity to potentially create value?

Answer: the most expensive real estate found in most hospitals – the Operating Room.

That’s what we’re talking about in this Weekend Edition of Private Capital Insider.

Let’s dive in,

-Equifund Publishing

P.S. In case you missed it, Jake Hoffberg is going to be guest speaking at a symposium, the Surgical Investor 2023: The Operating Room of the Future on July 20-21st in Carlsbad, CA. (note, when you click that link, it will automatically subscribe you to the event guest list and you’ll get an email with all the details)

We’ve got 10 guest passes to this exclusive event. If you happen to be in southern California during those dates and want to come, click here to get more information about the event, and how to possibly get a guest pass.

The event is an IN PERSON event that is limited to accredited investors only.

The Challenge of Financing Early Stage MedTech Companies

When most investors think of early-stage investing, they usually think of the high-flying software companies that have defined Silicon Valley for the past 20-odd years.

After all, several of the most valuable stocks in the world – like Apple, Google, and Microsoft – all got early funding from venture capital firms.

But back when many of those companies were just starting, tech investing was still a very new idea, and venture capital was often the only place adventurous enough to fund these ideas.

However, the playbook for tech investing is pretty well known at this point. The software industry has greatly matured since the dot-com bust, and it’s not nearly as “risky” as it once was.

This is due in part to the entire tech ecosystem evolving and becoming more decentralized. This, in turn, has significantly brought down costs to start new tech companies.

In fact, In 2008, Y-combinator founder Paul Graham made a rather shocking statement...

There’s a lot to unpack in this statement, but perhaps the most interesting one is this...

The reason there aren’t more innovative startups isn’t because they don’t exist, it’s because the professional investors who allegedly specialize in high-risk ventures are far more conservative than they present themselves.

Even worse, their investment models are based on old paradigms that aren’t necessarily useful in today’s investment landscape.

For tech companies, it’s pretty easy to see how radically early-stage funding has changed over the past 20 years.

In the early 2000s, there was already a well-developed ecosystem of VCs in Silicon Valley…

But they tended to prefer to fund companies that seemed like a “sure thing” instead of taking a chance on risky startups with unproven technical founders.

And because these VCs were pretty much the only game in town funding deals, they dictated the terms.

For the founders, this meant they usually had to agree to non-founder-friendly terms from the VCs in order to get funding…

And had the very real risk of being ousted from their company and being replaced by the VC’s favorite band of suits.

But then, the modern tech infrastructure started to develop…

A combination of open-source software, modern web frameworks, SaaS developer tools, cloud hosting, and better distribution channels made it easier for Founders to start developing their products.

This meant technical founders who couldn’t raise money from VCs from the power of an idea could instead bootstrap their way to a “minimum viable product” to get early traction (and then funding).

This, in turn, shifted the balance of power into the founders' favor, and in turn, began to change the entire fundraising landscape for tech companies (and the types of deals founders could negotiate).

Easy access to flexible, institutional seed funding led to an explosion of tech startups, and today this is the default path for tech startups to get started.

However, in MedTech, it’s not like you can max out your credit cards, quickly build a new drug or device, test it on a bunch of people, and hope for the best.

In many cases, it requires millions of dollars, and years of work, before a product can be taken to market and commercialized.

Not to mention, those multi-million dollar check sizes often mean non-founder-friendly deal terms.

But in the same way the technology ecosystem brought down costs by creating new infrastructure…

We’re starting to see the same thing happen in the world of medicine.

According to Jared Friedman, Managing Director at Y Combinator…

It should come as no surprise that we here at Equifund like this general trend towards raising money incrementally…

But what we find more interesting is the idea of who has control over the company.

Why? Because if the goal of healthcare innovation is to improve healthcare outcomes while also reducing costs, there is an obvious conflict of interest between profit-seeking investors, and the realities of our ballooning healthcare spending in America.

So how do we think about balancing the seemingly at-odds motivations of patients, physicians, payors, providers, and investors?

If we believe that it’s easier to improve portfolio returns by reducing fee drag than it is by increasing risk…

Reducing expense drag serves a similar function of improving company profit margins without having to increase revenue.

For this reason, if the goal is to provide better care at lower costs, I think it’s reasonable to say that it’s probably easier to achieve this goal through better cost controls than it is a breakthrough technology.

For example, for virtually every procedure studied, 30% are unnecessary if clinicians use rigorous appropriateness criteria.

And even though many believe that new technologies are the ‘magic bullet’ needed to reduce the financial pressure on healthcare systems while, at the same time, enhancing patient outcomes…

Surgeons have also eagerly adopted new technology, which may add to treatment costs without meaningful improvements in outcomes, even if the surgical treatment itself is indicated.

Examples of such “no-value” care can be found in much of the literature on robotic surgery.

In fact, many surgical procedures are performed at expensive inpatient facilities when they could be performed at an ambulatory center for 50% less.

That’s why there may be more opportunity in this tiny 600 sqft surgical theatre to increase efficiency, lower costs, and deliver better patient outcomes.

There are many peer-reviewed journal articles regarding cost savings in surgery, but there is little consensus on the amount of savings and the variables that come into play.

Nowhere is this more clear than the operating room; Multiple per minute estimates exist from <$10/minute to >$100/minute.

According to Anjali Joseph, director of the Center for Health Facilities Design and Testing at Clemson University.

Even worse, U.S. healthcare system spends $1.4 trillion annually — one-third of healthcare costs — on defects, such as surgical errors (e.g., wrong-side surgery), poor outcomes (e.g., sepsis), or ineffective care (e.g., tumor recurrence) undermine value.

In fact, many surgical procedures are performed at expensive inpatient facilities when they could be performed at an ambulatory center for 50% less.

That’s why for the entrepreneurs and investors who can develop new ways to potentially save thousands of dollars per surgery comes an opportunity to unlock billions of dollars in healthcare savings (and potential market cap).

With so many new technologies and techniques working their way into OR, one question is at the forefront:

Who will pay for these new technologies?

The most likely answer: if the investor community isn’t willing to fund these innovations, the costs will inevitably fall onto the patients.

So if you’re the kind of person who likes to be on the cutting edge of technology, now might be a more advantageous time to consider investing in medical device companies that can help deliver...

Better healthcare outcomes at lower prices!

Let’s not mince words. Healthcare costs are spiraling out of control and something needs to be done about it.

This likely means more innovative medical device companies may need to be funded – and successfully commercialized – if we’re going to tackle the problems we face with our aging population and ballooning healthcare costs.

But launching new medical devices isn’t easy. It requires time, money, clinical data, regulatory approval, and crucially, support from clinicians within the system.

The visionary founders aren’t the “tech bros” of Silicon Valley…

They’re practitioners who are building and implementing new solutions that attempt to create “win-win-win-win-win” solutions for the patients, physicians, healthcare providers, payors, and investors.

And that’s what I’m going to be talking about at the upcoming Operating Room of the Future on July 20-21st.

Want to be my +1 to the OR of the Future?

If so, all you need to do is click here and I’ll send you an email with all of the details.

Again, the event is free of charge and by invitation only. Also, you must be an accredited investor, qualified purchaser, or fund manager to attend.

I’ve got 10 guest passes and need to know by Friday (7/14) who I’ll be giving them to.