Tips for investing in a medical device startup

[Dreamgiver]

My partner and friend started doing some research a couple of years ago and is now done prototyping and about to start mass production of a new device.

He has been very private about it but has agreed to show it to me and the device has good potential. His research group has won several grants and awards regarding this specific device. He has never solicited money. A while back I asked him to let me know when the next round of capitalization would come up. They are now selling shares. I have a business background but never invested into a medical device startup. Any tips or resources anyone can point me towards? So far I have received a CAP table, a term sheet for the sale of the shares, and an executive summary for the company (mission, market share, forecasts, product pipeline, and such). They just hired their first COO. I reviewed the contract for the COO and it satisfies my standards.

[SWEng]

I am a software engineer that's been working with medical device startups for 15+ years.

Pretty much you got a standard package for a potential investor (including demo). I would look into evidence of safety and efficacy of the device (research publications, clinical trials data,...) and their quality system. Quality system can be a deal breaker in acquisition process because it may turn out that regulatory requirements haven't been met. ISO and/or CE certifications are usually indicators that everything is ok. A third party quality system audit can give you the best picture about company's quality system.

 

[jfoxcpacfp]

Dreamgiver wrote:

Any tips or resources anyone can point me towards?

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Very basic advice: Don't put any money into it that you cannot afford to lose, that you will need in the next 5 years, or that will ruin a great friendship if it doesn't work out. There are too many things that can go wrong and, once you put your money in a friend's startup, it's a long way to the finish line, even for very, very good ideas.

However, if you invest, I hope you hit the mother lode. Good luck!

[Zaphod]

Agree with above. Have to think of it as a moon shot. Even if a solid device with addressable market and doing better than the standard, its not always enough to take off, politics, insurances, etc...sometimes win out. So make it worthwhile but just write it off as a total loss for now and put the amount in accordingly.

If your partner is part of the company/researcher shouldnt you already have significant shares? Or do you mean work partner?

[Hatton]

My story about this is very bad. (I know I have posted this before so skip it if you have heard it.)  I used to belong to an Angel investing group.  I heard a deal presentation about a new type of incubator for growing neural tissue.  Evidently it is finicky to grow.  The inventor of the device had a Harvard PHD.  Several people who had started local companies that had successful IPOs were investing.  The numbers looked good.  Patents were applied for. So I invested.  The inventor/Phd walked into a room full of university Phds and shot 6 people. Several died.  The company lasted a few years, made a prototype but eventually declared bankruptcy. I quit the group and no longer will consider this type of investment. Startups are risky.

[Dreamgiver]

Zaphod wrote:

Agree with above. Have to think of it as a moon shot. Even if a solid device with addressable market and doing better than the standard, its not always enough to take off, politics, insurances, etc…sometimes win out. So make it worthwhile but just write it off as a total loss for now and put the amount in accordingly.

If your partner is part of the company/researcher shouldnt you already have significant shares? Or do you mean work partner?

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Work partner.

[SWEng]

hatton1 wrote:

My story about this is very bad. (I know I have posted this before so skip it if you have heard it.)  I used to belong to an Angel investing group.  I heard a deal presentation about a new type of incubator for growing neural tissue.  Evidently it is finicky to grow.  The inventor of the device had a Harvard PHD.  Several people who had started local companies that had successful IPOs were investing.  The numbers looked good.  Patents were applied for. So I invested.  The inventor/Phd walked into a room full of university Phds and shot 6 people. Several died.  The company lasted a few years, made a prototype but eventually declared bankruptcy. I quit the group and no longer will consider this type of investment. Startups are risky.

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I think I've heard about this. AL?
4 out of 5 medical device startups will fail for various reasons, so yup startups are risky.

[Hatton]

Yes