After a MedTech start-up has successfully executed its Pre-Seed phase, largely characterized by a compelling proof-of-concept, the world becomes increasingly complex - requiring discipline and core skills that are new to the entrepreneur and his/her young start-up team
The start-up’s core skills must now be transformed as it prepares for the first human feasibility study. Key additions to the team and advisors are required to install and implement a Quality Management System (QMS), the first and most critical step in preparing the start-up for human use studies. In Quebec’s MedTech ecosystem, LOK and Avisio Qualité are two of the most active players.
Within a QMS, an independent process of challenging, documenting and controlling the quality and traceability of the design and manufacturing process of the first human use product - typically referred to as the Alpha product - is put into place. Without a QMS system in place, regulatory approvals for human use testing and validation are impossible to obtain. And the start-up process comes to a complete and screeching halt! All too often, start-ups fail to devote enough early attention to QMS implementation, resulting in months of delay in progressing to human-use studies.
Under a QMS design control process, product development - including extensive documentation and testing - can fully begin. Vendor selection and certification is a time-consuming but critical part of the process leading to the start-up’s first human use product. As well, teamwork between the design and quality teams is important to effective and efficient product development process.
After many months of intense work, the final stage of the product development process remains. Verification and validation (V&V) testing must be successfully completed. In the Quebec MedTech Ecosystem, Novo is a leading service provider throughout all stages of product design, development and verification. Strategic use of a third party expert such as Novo can dramatically improve the entire path commercialization. At one point, design freeze of the Alpha product is achieved, and the regulatory submission processes to Health Canada and the FDA can begin.
A smart start-up CEO and the team will have held several conference calls and meetings with various regulatory bodies to ensure that all of their information needs and concerns have effectively addressed during V&V. These “pre-IDE (Investigational Device Exemption)” meetings typically require the assistance of regulatory consultants (such as LOK North America) that have extensive experience with these type of meetings and are well-known by the regulatory bodies.
At this point in time, when the scientific, engineering and regulatory risks have for the most part been clearly addressed and clarified, the MedTech start-up can start to set its sights on a seasoned and knowledgeable VC investor. This VC can “price” the technology and its business potential through due diligence and experience.
A “pre-money value” is negotiated between the VC and the start-up, and a term sheet for the final tranche seed round financing is created. It is at this point that prior debenture financings are converted from debt into equity based on the formulaic discounted approach.
Many less knowledgeable investors will try to “price” the technology earlier in the process as just described. In my experience, this is very difficult to do, and it typically results in distractions to the start-up management team, creating delays, frustration and wasted efforts.
In the case of Soundbite Medical, two convertible debentures preceeded the final seed round closing, only months away from the first human clinical trial. This occurred only once engineering quality and regulatory matters had been well addressed, and the path to a “first-in-human” was clear and free of any further substantial risks.
From a VC perspective, this is the ideal time to invest. Many of the start-up risks have been dealt with, and it’s a period just before the value of the company typically jumps two to three times in value after a first successful human case.
Remember: the best financings are the result of optimal timing in the business milestone process. In start-up financings, timing is always key!