Innovation in Financing — How Can Investors Preemptively Remove Financing Risk in Medtech Venture? | LSI USA '25

David Uffer  0:05  
Hello. Welcome to this morning's panel. We're going to talk about preemptively removing financing risk in Medtech ventures. My name is David Uffer. I'm going to moderate this session. I'm the managing director of Trinity Life Sciences, which is a 1200 person strategy consulting firm, and I'm more than thrilled to be able to have this esteemed panel with me, all of which I've known for quite some time. And I'd like them to just give a short introduction, which I don't think they need, but it's format and protocol, little bit about themselves and their firm and organization, then we'll get into some discussion topics,

Murielle Thinard McLane  0:47  
please. Yeah. So Muriel Tina McLane, I'm the head of intuitive venture. So we are the corporate venture arm of intuitive investing out of a $250 million funds, fund one and two combined, active investor in the world of re imaging, the world of minimal invasive care. And unlike other CBC, we are financially returned first and strategic second.

Kevin Chu  1:18  
And Hi everyone. Kevin with F Prime Capital. F prime, we're an early stage venture fund. We actually invest in a number of different industries, but healthcare is probably our biggest vertical, about 4 billion assets out of management there, spread out across therapeutics, Medtech, and help it. Within Medtech, predominantly device, we'll also do some tools and a little bit of diagnostics, but within device pretty agnostic, so anything from ablation catheters to neuromod to implants and across therapeutic areas, we usually get in pretty early stage. So within the device world, following initial clinical proof of concept, and then that point, we're getting involved, helping to get the company to pivotal readiness, and then ultimately funding a pivotal study, getting it to regulatory clear. And so that's kind of the value reflection that we like to ride typical check size five to 50 million up front, try to get up to 25 million over the lifetime we're holding, doing that out of a $750 million Health Care Fund

Susana Amorim Lopes  2:22  
I'm Susanna, and I'm with gelda healthcare. We are a transatlantic venture capital fund headquarters in Amsterdam and an office in Boston as well. On the venture capital side, we have six funds under management. Our latest fund, fund six is $800 million we will do 20 to 22 investments. So fairly concentrated investment strategy. We have done eight investments thus far. So a few more to go with the vintage from 2023, two thirds of what we do with med tech. 1/3 is biotech, and we are agnostic within the healthcare space, we invest in initial ticket size, 15 to 30 million, and then over the lifetime of a company, we keep reserves for follow on runs. 

Dennis McWilliams  3:10  
Dennis McWilliams, I'm with Sante Ventures. Sante early stage investing healthcare only, but within healthcare, we do med tech, biotech and health tech. We're currently investing out of our fifth fund. We have offices in Austin, Texas, where I'm based, and Boston. Prior to that, actually, I was an entrepreneur, so I was on the other side, built a couple companies, both on the biotech side and the Medtech side. So certainly know that. Know the plight of many of you in the audience, but glad to be here and Dave, look for the conversation.

David Uffer  3:45  
Thank you for the introduction. It's not easy. Being a CEO of a startup. We understand the challenges and everything, but don't think being an investor is just a easy task either. There's some data that I was looking at, and shockingly, believe it or not, not every startup makes it through to exit. So what you have to do is look at risk factors, what tolerance your firm has for certain risk and what you can retire, while you can de risk everything, you have to look at what is acceptable, and what we wanted to talk about today was the financing risk. You can deploy 10, $20 million in a round and get the company to a milestone, and are you assured that they're going to continue to get funded through that next milestone, all the way to either IPO or great growth and potential exit? So I was talking with Kevin the other day about a deal with Amber therapeutics. I want to use that as a segue into just retiring risk of financing through the next series. Kevin, you want to start us and talk about some of the ways you've looked about this and maybe a little bit on that particular deal. Yeah.

Kevin Chu  5:00  
And maybe before getting into AMR specifically, maybe just some some macro observations that led to us thinking about different deal structures. So I think one thing that we're seeing is more and more we've got these really interesting, exciting and unique early stage companies. But on the investor side, a lot of Medtech investment is actually moving later stage, more oriented towards commercial growth than anything else. And I think part of it is just because, as we all know, in Medtech, things are hard, right? And a lot of times it can take longer and more money to get to the same endpoint. And you know, when you're an investor, you have to think about what risks I want to take. And you know, if there's an opportunity for me to invest in companies that have retired all the clinical, translational risk and all the regulatory risks, and it's just commercial execution, and there's plenty of opportunities to choose from there, then why not? Right? And so there's this general trend that we're seeing of investors moving away, and so kind of less liquidity, and it's chasing less capital that's chasing the earlier stage, which is where historically we focus. And so as we think about new investments, a really important thing to think about is, you know, financing risk down the line, right? If we get involved now, is there going to be an external syndicate that's going to be able to come in and join us prior to us getting to regulatory clearance or approval, and because that is an unknown at the early stage, a lot of times, especially more frequently, what we've started to do is think about, well, is there a way for us to retire that risk early on, even in the early clinical stages. The natural way to do that is to pre build the Syndicate, right? So, whereas historically, you know, you've got companies that maybe are raising a 1520, $30 million round to get from initial clinical proof of concept to pivotal and then raising another pivotal round. What if there's a way for us to soft circle 60% of that pivotal round just from a syndicate that we can form in the early clinical stages? Right That way, it takes a lot of the risk off the table for us down the line, and just kind of helps with the overall investment picture. And so that's exactly what we do with Amber. I think, you know Amber, for those who don't know, neuromodulation company going after urinary incontinence, different from the traditional sacral approaches, and that they're targeting a different nerve. And you I think in a way, we were very lucky. Amber generated some really exciting clinical proof of concept data. This is following shortly after the xonics Boston deal. So there was a lot of excitement, right? And a lot of people interested in the opportunity. So we had the opportunity at a series a point to build a really strong syndicate that had the ability to fund the company through to essentially regulatory clearance. We raised pretty big ground around that. And so I think it was a perfect example of retiring that financing risk early when you have that appetite

David Uffer  8:14  
and mural considerations. Is a strategic looking at these types of structures.

Murielle Thinard McLane  8:19  
So I'll echo so first of all, we're together on Amber, and I would say most of our deals this year have or 20 to 24 look like that, where, as a strategic was less capital to invest, or size check typically are five to 10. We also want to de risk the company all the way through, and want to be there with our capital and our strategic power to help them on the operational side. But we need the f prime, the Gilder of this world, to help us finance all the way through to Kevin's point a PMA today takes about 13.8 years on a lot of capital. It's not was my $250 million fund that it can be there. So it's it's really forming that partnership in the syndicate to help get through some of those earlier risks to from transformational companies that have proof of concept all the way to pivotal is important. Once we get to the pivotal, the other strategics are there, typically for acquisitions, and then you have the growth equity and the crossover funds. So it's really that first inception of time that when we're looking at deals, we're looking at the quality of the product. Is it transformational? But also, who else can we be partnering with on the syndicate part so that we can get to a success? So for us, that's that's really critical. Was looking back last year, there are 425 Medtech investors. There were 450 Deal. So there's just not that many deals that are being done out of the 7,000,000,006 and a half were in series B plus, so again, towards that later stage. So it goes being able to have creative ways to find that early stage, de risking it all the way through pivotal is where we focusing.

David Uffer  10:25  
Suzanne, with your fund, you have over $500 million to deploy that by Nature says that you have to write certain size of a check to be able to participate. And then, of course, you have a thesis in a particular round. Did these structures help you go a little bit earlier with larger checks a or allow you to get in something that's very exciting but earlier stage than you would have had to deploy in an

Susana Amorim Lopes  10:52  
totally Yeah, and thank you for reminding me that we do have a ton of work ahead of us with fund six, as I mentioned, we we are still on the early cycle of deployment of that fund, so 500 sounds about right. David, these structures definitely help us. We love the creativity. I will not repeat, like all the the pros that were already mentioned by Kevin and Muriel here, they do have other advantages that I would like to call attention to on the people in this room. Investors care about things like internal rate of return. IRR and trenching really helps with that. So I know that maybe that's one that's a bit less obvious, but we do have that in mind for our LPs, and it's a metric we report on. So trenching helps with that. And then maybe just one more note on that is tranches can have puts and calls options, and this is a little bit nuanced, but when it when there is a put right on a trench, it means that we have the capital allocated, and we have an opportunity cost on having that capital allocated right. So those are the types of things that we will try to negotiate when getting into some of these deals, and maybe just calling people's attentions to what's on our interest, and we obviously try to meet in the middle, but those are the two things I would like to highlight. So we love these structures. And two, because it wasn't yet mentioned, the IRR and the opportunity cost of having puts on trenches.

David Uffer  12:38  
Dennis, come on, mix it up. Be a little controversial here, or what you've seen down that is some of these models. I

Dennis McWilliams  12:47  
mean, no, and I think VCs are always trying to find ways to manage the risk. But I mean, the The unfortunate truth is, we're in a quantum world. This is not new. Tony and like, there's no ability to predict how these things go. And every one of these structures in the 25 years I've been doing this, there are ways that they fall apart. You know, you have syndicate players, you think are solid, that come in and all sudden they decide that they're not going to be participating. You have corporates who have options to buy, who priorities have changed, like these things. And so I think you just always have to be wary about that. This is what you mentioned about the tranching. I mean, there are competing, competing challenges when you manage these risks. So on one hand, you can manage financing risk, which is, I think, top of mind for a lot of VCs right now in terms of syndicating, but there still is science and technical risk in these things. And so tranche is really important so that, like, you know what we say at Sante, since we're traditionally the first money into a deal, you know, you know, if a deal is going to fail, we want to fail as cheaply as possible, so we can then redeploy those dollars and companies that are doing well. So, you know, I think there are, you know, again, the structures that people do at time. Right now, you are seeing more aggregation of capital coming into deals. But as your post money gets higher, that makes emanated more difficult. So it's like, you know, there's trade offs for all of it. And so I think, you know, as VCs and as CEOs, is trying to find that right balance for your company to do it. Because, you know, we all know we're in a we're in a risky business. If we want to do something more predictable, we should do condos. So yeah, which I would have made more money on had I done condos in Austin, Texas, as opposed to doing Medtech innovation. But that's another story.

Susana Amorim Lopes  14:25  
Pre COVID. 

Dennis McWilliams  14:26  
Yes. Pre COVID, yes. 

David Uffer  14:27  
It was funny with I was at a board meeting last week, and I told one of my CEOs, you know, this month, CEO, sure, but your chief fundraising officer this month, does this alleviate some of that pain point where, how often, I mean, everybody's here fundraising, but does it become 2040, 70% of your time raising that capital? Does this help alleviate some of that pain point where,

Dennis McWilliams  14:56  
I don't know, Kevin, I mean, we were talking about one where we've been trying. Trying to do the same thing in a deal and reduce risk with a larger Syndicate, but that, I mean, you got to get a lot of people rolling their oars in the same direction, and that can take a lot of time. And like, every month we're spending trying to reduce this risk, we're not closing and moving towards a finding so again, it's like, you know, there are trade offs with these approaches. And I think you know, you know we, you know we struggle with that at times as investors, because we do want to eliminate all the risk, but it's impossible to

David Uffer  15:27  
do other, other structures that you've seen that have been able to help alleviate the financing risk. Again, you get to a certain milestone, and then it's back out there. Or as you're marching toward that milestone. You're out fundraising again. It's risky that it's going to take a little too long, or maybe I was just a little bit short of gas in the tank. You You have to assure that they get the capital to take the next stage.

Kevin Chu  15:52  
Yeah. I mean, I think, I think someone mentioned earlier, like built to buys right as as another way to to bridge the gap. And I think, you know, certainly we, we've seen those go well. I think we've equally seen those go very not well. And so I think making sure that you have the right mechanisms in place to be able to protect against some of those downsides, right? Obviously, in a in an ideal scenario, having, like, puts on, on milestones, or some sort of structure like that. But, yeah, I think, I think the reality is, like the macro is with macro is, and I think we just have to get creative. And I think, you know, keeping an open mind with regards to, you know, what the people around the table, the investors around the table, or the strategics around the table, are open minded to and then working around those boundaries, I think, is right path forward.

David Uffer  16:45  
Is this, while we have a strategics and core venture capital firms coming into this, is this appropriate model for other family office or private equity, or do you think it doesn't fit within their structures and models

Murielle Thinard McLane  17:02  
for private equity, by definition, they want ownership or by and large, right? So I don't think that necessarily work for them, family office. Why not? Right? We see that. But I want to go back to what you're saying around financial de risking. Well, financial de risking, in a way is operational de risking as well, right? So are you going to miss your milestones, and therefore, you know, not be able to raise the next round? And so for a lot of that, having strategics in the cap table may be helpful, because we can help mitigate some of those risks by bringing some of the skill set that our mother ships have not always, but that's part of the what we're bringing into the table as well. So as you consider syndicate being in a structured deal or unstructured deal, I would suggest to think about that and in other to not be in a situation where you know, the strategic says wants to buy and then, you know, five years later, is no longer there. It's actually have couple of strategics at the table that help, first of all, balances out the power and really help to get that operational benefit while at the same time not incurring the risk. And so we see ourselves more and more at the table with some other strategics in many of our deals. Frankly, I

Dennis McWilliams  18:25  
mean, it's been a positive trend. I mean, thinking about med tech, the complaint that we always have is we always talk about just a lack of just overall dollars in Medtech investing, and that's a challenge, and we feel it's kind of across the ecosystem. So I'd say the adaptation of the large corporates and the venture arm. And, you know, pioneered, you know, by by Jan, Jan Medtronic, and now having intuitive, and, I mean, these have been really good partners of, kind of filling that funding gap. You know that it doesn't come without risk and challenges of its own, in terms of having, you know, somebody at the seat of the table that on one friend, on one side could be a friend, another side could be a fo like, you have to kind of manage through that. But it's been a nice trend on it. And, you know, David, you know, David, you mentioned family offices and other sources. I think right now you're seeing everything, you know, I think given the funding environment and the lack of funding, while the expense of developing technologies is increasing, you know, people are getting trying to be more creative. But look, I can tell you horror stories of family offices like you think they're nice and easy, but some of them think they're really good at this, and I'll make no further comment.

David Uffer  19:32  
Meryl, a little bit more take on your point of the strategics when I had done the structure deal, and it's a usually a call. It's hard to get corporate to sign up for a put and when things go sideways a little bit of whether it's a failed milestone or it looks like it's going to take a little bit more time, or you have to rejigger a particular process. How do you deal with that in these types of deals? Is it back to the negotiating table? Is it back to Okay? Do we continue to cut the next check, or we want to see different How do you structurally set up these operating mechanisms when something doesn't hit?

Murielle Thinard McLane  20:11  
Well, that's why you have those mechanism to have the discussion, right? And at the end of the day, it's really then about the syndicate to decide how they want to approach it. It never happens, right? Milestone are never missed. Come on. We all know that that happens more often than not, and it could be because of micro environment supply chains. I mean, we've seen it all, so every deal is different, but what I've seen is most of the time, the syndicates come back at the table and think through what are the appropriate mile how much more money is needed in other to meet the next value inflection point. And again, every deal is different, but I would say at that point you have multiple people that you need to hurdle the cat right around that negotiation. So yes, you have more when you have a large Syndicate, but at the same time, that allows you to have more brain power, frankly, to rethink through all of those different complications that are out there.

Dennis McWilliams  21:12  
I mean, the bill to buy has been I mean, I think we all, we all talk about Bill to buy. I mean, because it sounds so appealing, and you mentioned Dave, we're right. I mean, the challenge is you never really get that downside protection. And I mean actually, Maria, what I would say when I've seen these, the most common thing I see is that, yes, milestones are delayed relative to capital. But what I see most of the time is, you hit the milestone, and then the corporates like, well, you know, we want to reduce a little more risk. And so there's this kicking the can down the road that can get really uncomfortable. And so while you can't get that put I would highly recommend having other some other type of painful punishment to the corporate whether you wash them to common stock at 100 to one, or maybe there's some IP rights that come because that's very sensitive to them. You got to have something to keep them honest, because the free option ride, they'll take it all day long.

Kevin Chu  21:57  
Yeah, I think that's exactly right. And I think this is going to sound super obvious, but in that initiate, in that initial negotiation, whether it be having multiple strategic on the table or having a really strong syndicate that can threaten, you know, moving it, moving forward, without the strategic, like negotiating from a position of of of leverage, like in that in that initial negotiation, I think that's being critical to get some of those things.

David Uffer  22:24  
Suzanne, have you seen these either easier or more difficult to syndicate when you're opening the pool to other investors that might not have or it's not the flavor that someone like that might have invested at a particular stage,

Susana Amorim Lopes  22:38  
and in that case, in case that the company missed milestones, and there is a renegotiation around

David Uffer  22:44  
in a different structure of these

Susana Amorim Lopes  22:49  
it's an interesting question. It's tough to answer because it's not very case specific, right? And I think to Muriel's point, there is so much that goes into it, from macro conditions to how is the company been performing, and, etc, etc. So I would say starting the discussions early on. From Gildas viewpoint, we we are here. We are very much approachable and reachable, so and open to discussions with anyone. So we don't take, we don't strike anything out of the table.

David Uffer  23:25  
Are these very selective in where you would use this type of an example of financing, or it it could be applicable across a lot of different investments.

Susana Amorim Lopes  23:36  
And by type of financing you mean trench based, or milestone based, yeah, yeah. This is very common. The type of round we do typically involves more than 50 million raise. And we, if we don't trash, tranche it for milestones, we tranche it for IRR purposes. So you name it, but that is always some sort of structure around it. As I said, the investors care about IRR and and, yeah, and entrepreneurs, it shouldn't hurt them. So I think we are all on the same boat. And then I don't think we, we have done a deal without tranches on the next on the last 18 months,

Dennis McWilliams  24:18  
right? I mean, we consistently tranche I mean, I think the the other question is about some of the other techniques of how we work with corporates and, you know, build to buys and other option based structures. I'll tell you, we think a lot about our portfolio construction. So we would never fill a portfolio full of build a buys, because just we wouldn't want that type of risk in our portfolio. So the way we think about is like, Okay, if we can have one or two build a buys here, you know, we tranche everything, maybe we have a larger kind of more mega syndicate around here, like we kind of pick and choose our companies, and we'll as best we can try to because, again, they fail for so many different reasons that you don't want to have a big bundle of a certain type of risk in there.

David Uffer  24:56  
Yeah. Muriel, how have you seen founders react? Reacting to some of these different whether it's again, the tranche or some of the built to buy, where you

Murielle Thinard McLane  25:06  
so, to be clear, we don't do build to buy, so you're having the wrong strategic for that discussion. When it comes to the tranching, most CEOs actually welcome it. It's a lot of upfront work to Dennis point now you have more people at the table that you need to corral around a deal, the milestone, the valuation and how you're going to deploy to capital over time. But once you're done, you're done for a while, and so it's sort of the trade off between doing it upfront and then running on the operation and execution, or focusing it on a value inflection point to value inflection point that's a little more risky, where you may be, yes, getting a little bit more value inflection point on the line, but you're trading risk for A potential upside. That's a paper upside, frankly. So I would say that in our case too, as soon as at this point, I haven't done a deal recently that's not tranched, unless it's a seed deal, and most CEOs are welcoming that

Dennis McWilliams  26:18  
they do push back on on dilution, the common pushback you get when you get when you try to kind of over structure, over two, like maybe over the larger rounds, is that, well, I don't want to take the dilution of a deal at this price at that milestone. So that's the common piece. So sometimes you can get investors to flex a little bit on that and give you credit for it. Oftentimes they don't. But Mary, you brought up a really good point. I mean, the trade off we try to walk them through is like having your financing solve for three or four years and not having to go out and raise money in between. If you add up the six to 12 months of each of those funding cycles, and you add up that burn rate, it washes out the dilution effect of the capital. So it's just like, I think there's a practicality to it that makes sense, but that's the most common pushback he got,

Kevin Chu  27:01  
yeah. And I think to Dennis's point, you know, I don't think we've seen a Series A to Series B step up in the past, like 12, 18, months. 

Dennis McWilliams  27:12  
Oh, come on, Sante, we get those all the tow except to

Kevin Chu  27:14  
Sante company. You service company? No. But the point is, like, I think, and it comes back to the macro Right? Like, as money moves away from early stage, fewer companies chasing a ton of really interesting or fewer investors chasing a ton of interesting companies, supply and demand, right? And so I think there has to be some calibration around expectations, around step ups, right in the early days. Obviously there will be exceptions, but I think, more generally, not that, that that's what we're saying.

Susana Amorim Lopes  27:43  
This is a little bit of a tangent, but just came to mind that we do have a company we do have built to buy, and we trenched it, and it's a company that's stealth mode, and that's another advantage of this structure, right? Because the company is finance, they are performing well, and we we don't need to be out there fundraising. And

Dennis McWilliams  28:05  
I think the CEO seems unstressed. I mean, likely, yeah, so should be though, yeah,

David Uffer  28:13  
yeah, get them too relaxed. But I think we're well over time. Thank you very much. I think everybody here is always approachable throughout the week. Thank you.