Start-up medical-technology companies are finding it harder to raise venture capital, thanks to "an anemic IPO market and ever-more selective buyers," Ernst & Young says in a new market report.
"Even though the overall level of venture financing has remained relatively steady since the financial crisis, the challenges have squeezed VCs' returns on investment and driven them to invest in more mature companies that offer the promise of quicker, more predictable exits," according to the management firm.
A few early stage companies that stand out from the crowd because of factors such as "novel technologies or proven management" might be able to buck the trend, but that won't be the case with many medical technology companies, according to the report. Technologies delivering only marginal cost benefits or improvements to existing technology could be out of luck when it comes to early round financing.
While U.S. and European medical-technology companies raised $27.4 billion in the year ending June 30, a 26 percent increase over the previous year, 80 percent was in the form of debt, Ernst & Young reported. Non-debt funding fell by 22 percent. The debt financing went primarily to large industry leaders, according to the report, with nine companies raising more than $1 billion each.
"Meanwhile, many smaller firms struggled to obtain funds to support their R&D and product launch efforts," according to the report. Signs point to venture-capital funding remaining tight, meaning medical-technologies companies wanting to attract funding will need to focus on technologies and market segments with clear pay-offs, Ernst & Young said.
U.S. firms attracted $21.6 billion of the overall funding, for a 43 percent increase over the previous year. Three U.S. medical-technology companies went public during the 12-month period examined, raising $194 million. By comparison, eight U.S. firms went public the previous year, raising $539 million.
Earlier this year, San Francisco-based Burrill & Co. reported that venture-capital investments in digital health companies more than tripled in the first six months of 2012, to $499 million from $156 million in the same time period in 2011.
Meanwhile, new health IT ventures that struggle to capture venture capital might be able to turn to "crowdfunding" to attract equity investment from a new website called MedStartr. The overall crowd-funding market was pegged at $123 million earlier this year by Forbes.
To learn more:
- read the market report
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