By Danielle Silva, Director of Research, Life Science Nation
Over the past couple of weeks, I’ve been speaking with many entrepreneurs developing medical devices regarding LSN’s upcoming Redefining Early Stage Investments Conference. What has struck a chord with many of these entrepreneurs is when I mention that we’re targeting non-traditional investors to attend our conference, such as family offices. Surprisingly, it’s not just because many of these medtech firms are looking to get in front of family offices – it’s because a good deal of them already have.
What I’ve heard from many of these companies developing medical devices is that family offices have been the first round of capital that they have received after gathering up funds from friends and family. This week, I spoke with a west coast based-company developing a medical device where this was the case, but have had countless conversations with other medtech companies that have echoed this trend.
If we take a deeper dive and further examine these two groups (early stage medical technology companies and family offices), they actually have a great deal in common. Early stage medical technology companies are often times in “stealth mode” – they don’t want other companies to know what they are doing, and certainly do not want their competitors replicating any IP that hasn’t been patented yet. Family offices are also incredibly secretive; as such, many of them don’t have websites, and their physical addresses typically can only be found by rifling through hundreds of SEC filings. The majority of the family offices that do have websites do not boast their portfolio companies on their website (like private equity funds or VCs typically do), or even mention what asset classes they typically allocate to. Thus, because family offices like to fly under the radar, they are a perfect fit for stealth mode medical device companies that want to keep their technology – and their investors – undisclosed.
What is also quite surprising is that these medical technology companies are not just receiving capital from small, single-family offices (SFOs) that are making one-off investments in the space; many are also being funded by multi-family offices (MFOs) that are institutional-quality investors, and have several hundred million in assets under management. These MFOs are actively looking to invest in a number of medical technology firms annually, and are not just making one-off investments in the space. I recently spoke with a family office based on the east coast that is actively looking to allocate to several medical technology companies before the year’s end.
So the question still remains – why are family offices so in love with early stage medical device companies? We’ve spoken at great lengths in previous articles about why family offices are attracted to the life science space as a whole, and we’ve touched upon the fact that these groups have a dual mandate – they are obviously focused on ROI, but also generally make philanthropic donations as well, and investing in life sciences fulfills this dual mandate. However, what makes investing in the medical device space so attractive to family offices is that understanding if a medical technology investment is attractive doesn’t require as much scientific knowledge compared to determining whether or not a therapeutic product is a sound investment. Also, what makes the medtech space more attractive than the therapeutics space for family offices is the fact that medical devices receive FDA approval much more quickly compared to therapeutics.
Another reason family offices have become more and more attracted to life science in general is that often times, a family member will be afflicted with a certain disease and thus the family office will attempt to push along the science in a particular area by investing in a company developing a product targeting this disease. This makes family offices particularly unique investors in the medical technology space – as most traditional investors in the space are not indication-oriented. The traditional investors in the medical technology space (like private equity firms and VCs) invest in a medical technology company based on the kind of device they are developing (for example they will look solely for companies developing active and implantable devices). As aforementioned, family offices are more indication-oriented, and so are less focused on how the technology functions and more concerned with what disease the device targets.
So if you’re an early stage company developing a medical device, it’s time to think outside the box, and start targeting non-traditional investors in the space like family offices. You should especially start to consider raising funds from this group of investors if you are a company in stealth mode that has not raised capital from institutional investors. From what I’ve been seeing and hearing over the past several weeks, it seems as if the family office love affair with investing in medical technology companies will only grow stronger.
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