Angel Investing 2.0: MEDKAP’s guiding principles

Twenty-five years ago, entrepreneurship researchers already understood the motives of business angels: Earn some money and have fun doing so. However, understanding why and how companies become successful was on a different and much lower level than today. Consequently, investors focused on other criteria than they do today: In the late 90s and early 2000s, (mainly male) angel investors used their (mostly male-dominated) networks to invest in (mostly male) founders that they believed would be successful because of their physical or psychological resemblance to them. Business plans were vital since it was difficult to locate other sources of information about the industry, context, and the case. Using the internet as a resource for research was unusual and seen critically.

An important factor driving the structure of the clubs was the geographical distance between the founders and the funders: The closer, the better, so they could interact more easily. Angels were expected to invest at least 50,000 francs per deal in at least one or two deals per year, so the club could not focus on one industry – the deal flow would never have been sufficient. Angels investing in a startup additionally had to invest their time and effort to help the company  – without compensation.

Many of today’s angel clubs were founded in these times. Consequently, they focus on geographic nearness and are industry-agnostic. Angels prefer individual investments in a few companies, potentially including a seat on the board. Social bonds within the club guide investment behavior.

The concept worked and still works: Some established angel clubs are very successful, even though many clubs suffer somewhat from an aging membership clientele that is fully invested. Thus, it’s pretty standard that investment frequency and ticket size become smaller and smaller the older a club is.

The last 25 years have brought significant developments. Most importantly, we know much more about entrepreneurship, and technology allows us to optimize the investment process significantly. 

We’ve built The MEDKAP investor association to benefit from these developments for the benefit of entrepreneurs and investors.

MEDKAP has three main goals:

•         Make investing easy and efficient for entrepreneurs as well as investors
•         Maximize the chances of success for entrepreneurs as well as investors
•         Have fun cooperating with startups and make money with them.

To achieve these goals, we implemented a set of methods and tools. None of these are unique, and many other organizations use one or the other – but MEDKAP incorporates all of them. Additionally, MEDKAP continuously researches and implements best practices once their benefits are clear – e.g., using AI for automated due diligence.

MEDKAP’s Guiding Principles for HealthTech Angel Investing

MEDKAP follows these 12 guiding principles:

Treat founders with respect. First and foremost, MEDKAP and its investors understand that the founders want to achieve something extraordinary and rare: They build a new company that strives to change the world a tiny bit to be a better place. Entrepreneurs know their odds, but they still do it. This earns our utmost respect, but is not an obligation to give them our money.

Industry focus: Nobody can predict the success of a startup. However, the odds can be increased if all the people working with the company – including the business angels – help the company. This works best if all the stakeholders know the industry well. Because of this, MEDKAP focuses on one industry: We want to maximize the chances of our startups and the investors.

HealthTech: We believe that some of society’s greatest challenges lie in the medical and health fields, and we know this industry well. Therefore, we focus on HealthTech – and only HealthTech.

Geographically open: Nowadays, technology allows people to connect in various countries and continents in seconds – it doesn’t make sense to restrict investment activities to a small geographic region. MEDKAP is therefore open to HealthTech startups in Switzerland and neighboring countries, and, of course, it allows members of various countries to join.

Diversity: We encourage diversity since it makes startups more successful and will make MEDKAP more successful. On the MEDKAP board we reflect this through members with diverse backgrounds, such as Pharma, Medtech, Hospitals, Digital Health, Entrepreneurship or Medicine. We are striving to become more diverse.

Local and international networks: One of the critical resources in entrepreneurship is networks. Because we and our investors know and understand HealthTech, we also have extensive networks in the industry. We push this further by joining international, HealthTech-related investor networks. We thus remove geographic barriers but encourage focus on our target industry.

Buy specialized resources, don’t build them yourself: We strongly believe that it’s more effective to hire a specialist than to try to build competencies internally – especially given the high salary levels in Switzerland. MEDKAP, therefore, has a sister organization, KAPSLY, that helps startups find and work with specialized service providers. Whereas MEDKAP is a non-profit association, KAPSLY is a commercial company. However, MEDKAP startups are not obliged to work with KAPSLY in any way.

Accelerate the go-to-market: The combination of the above helps to accelerate the go-to-market of the companies, thus reducing the need for further investment rounds, reducing dilution for founders and investors, and increasing the survival probability. 

Use technology to accelerate processes: MEDKAP embraces the use of new technologies to increase the efficiency of all our activities. We obviously work extensively with video calls, remote meetings, and shared documentation. We experiment with AI to provide additional information to the investors, and we will investigate other new technologies and use them when they are ready to be used. 

Use syndication to allow for small ticket sizes: We strongly believe that investors should have an extensive, diversified portfolio – ideally, 15+ investments. To make this happen, we syndicate investments, allowing for tickets starting at 5,000 CHF. This opens up angel investments to investors with smaller budgets.

Encourage active participation: MEDKAP encourages investors to work with startups and take reasonable compensation for this work. This allows the investors to “have fun” with the startups and the startups to profit from the knowledge and networks of the investors. There must be compensation for this work – but it must be reasonable (meaning that the startup would have to pay a similar amount to another provider for the same service). Thus, investors have a chance to actively work in the dynamic and energetic environment of the startup and, at the same time, recover some of their investment through their services. Obviously, the services must provide real value for the company – e.g., help the startup to acquire (pilot) customers. Paid early-stage board mandates and useless consulting mandates, however, must be avoided. Agreements about paid mandates as additional compensation for an investment are especially discouraged.

Stay lean and flexible: We expect from our startups that they are ready to take opportunities when they show up. MEDKAP does the same: We want to understand and seize relevant opportunities for the members and the startups.

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MEDKAP is an emerging player in the HealthTech space, positioning itself alongside established and successful organizations. Our fresh perspective enables us to adopt innovative approaches and implement best practices, attracting angel investors who resonate with our vision and methodology.

Reach out to our management if you’re interested to find out what we can do for you.

Is MedTech a good investment case for business angels?

I remember vividly a startup, developing a retinal implant to restore a basic sense of sight to people with profound vision loss. Despite its initial success and regulatory approval, the company faced significant challenges and failed in the end. Besides device failures and financial difficulties, the market was not ready for such a “disruptive” technology. 

On the flip side, I recall a startup that developed a cardiovascular drug-coated balloon. After 12 years of navigating countless challenges, setbacks and moments of despair, they finally achieved CE mark approval, had a successful market entry and secured an exit worth over $1+ billion.

Over the last 15 years I have been engaged in several medical device startups as business angel, and regulatory consultant. I observed that on average 9 out of 10 medical startups did not make it in the end and got out of business, even so they had innovative and good products, and all medical devices received CE mark or FDA approval.

The question then becomes: What are success criteria for MedTech investments?

In my observations of why many companies fail, a predominant factor is that the market simply does not want the device, often for a variety of reasons. A common issue is that the product fails to be competitive in solving a clinical problemor does not address an unmet clinical need. Another frequent reason is the inability to secure reimbursement, either because health insurers do not recognize the clinical benefit or the product is deemed too expensive. Hence investors should look for the following prerequisites when evaluating Medtech investments:

1. Clear indication with clinical benefits (market studies)
2. Technological realization (feasibility) is proven and can be patented
3. Positive key opinion leader (KOL) feedback on usability/adaptability to prove the desirability
4. Reimbursement identified and existing or realistic strategy in place to ensure financial feasibility of business model.
5. Last but not least, there must be a strategic interest from big Medtech players to facilitate the distribution and make an exit realistic (rather do not bet on IPO’s). 

Additionally, there are clear market dynamics and opportunities for a business angel to invest in medical startups, which can easily provide a nice multiplication of your investment of 40x and more:

1. Market growth: The MedTech sector is experiencing robust expansion across various segments. For instance:

• The global diagnostics market is projected to surpass $500 billion
• The cardiovascular market is projected to $300 billion
• Dental tech is expected to reach $34 billion
• The surgical devices market is forecast to hit $110 billion by 2030, growing at a 7% CAGR

2. Innovation-driven returns: Successful medtech startups can achieve significant exits.

• One prime example is Covidien, founded in 2002, a leading manufacturer of medical devices and supplies, with products spanning surgical solutions, patient monitoring, and vascular therapies and which was acquired by Medtronic in 2014 for $50 Billion.
• Another example is Auris Health, founded in 2007. Auris Health developed robotic endoscopy systems aimed at early-stage lung cancer diagnosis and treatment. Their Monarch Platform, a robotic bronchoscopy system, was a key innovation. Johnson & Johnson acquired Auris Health in 2019 for $3.4 billion upfront, with additional milestone payments that could bring the total value to $5.75 billion

Challenges remain

Besides those success criteria, MedTech remains a complex and challenging business. The most common challenges are time, funding and regulatory pathway.

1. Extended timelines: MedTech products often require lengthy R&D cycles, clinical trials, and regulatory approvals, leading to longer paths to commercialization.
2. Capital intensity: Substantial funding is typically needed for product development, clinical studies, and regulatory compliance.
3. Regulatory complexity: Navigating diverse regulatory landscapes adds time and expense to the development process.

Strategic Considerations for Angels

1. Leverage expertise: Investors with healthcare or MedTech backgrounds are better positioned to evaluate opportunities and provide strategic guidance.
2. Patient capital: Given the sector’s longer timelines, investors must be prepared for extended holding periods.
3. Thorough due diligence: Careful evaluation of the technology, regulatory pathway, and market potential is crucial.
4. Syndication opportunities: Partnering with other private investors or VC firms can help spread risk and provide necessary follow-on funding.
5. Focus on de-risking: Seek startups that have achieved some level of market validation, such as initial revenue or strong clinical data.

In conclusion, MedTech can be an attractive investment case for business angels, particularly those with relevant expertise and a long-term investment horizon. While the potential rewards can be significant, investors should approach the sector with a clear understanding of its unique challenges and capital requirements.

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