Erik van der Burg and the Lean Medtech Startup
If There’s a New Model, What Is It? How Lean Can Be Rewarding
Last month several Biodesign alums had the opportunity for an in-depth personal conversation with serial medical device entrepreneur Erik van der Burg. Many of us were eager for the chance to hear directly from Erik about his approach to medical device startups.
We’ve been exposed to many of the headlining success stories of the past few years, which are always inspiring. However, the current funding environment has made the classic model of a big game-changing idea backed by bold venture capitalists as difficult as ever. Tolerance for risk among funding sources has diminished. This environment has led many in the space to ask: “What is the new funding model?”
Erik’s recent successes point to one fruitful approach to innovating new medical therapies while still reaching the market quickly and benefiting all stakeholders. Some common themes emerged in discussing this fast and lean approach.
Identify needs that can be solved in the near-term, with clear regulatory paths. This allows for a leaner organization by keeping the burn low. Less capital invested in a project gives it a lot more flexibility for future financing rounds and acquisition discussions. With fewer mouths to feed at the table, a smaller acquisition price can yield commensurate or even increased yields for those involved. This approach mandates specific project selection, as many new innovations require large amounts of capital and time for development. For this model to be successful, it is critical to choose projects that can be executed by a small, lean team on an accelerated timeline.
Align incentives on the team
Team is critical at any startup. It is even more critical at small, lean startups where each team member is expected to perform multiple roles to a high standard on a limited timeline and budget. Accordingly, Erik believes in incentivizing employees to align their interests with the company’s. Before institutional funding comes in, employees who are willing to work for only equity are ideal as their performance and compensation are clearly linked. One possibility is to pay survival-level salaries while offering outsized equity compensation. Ross Creek was able to do this and maintain a very low burn rate. These compensation scenarios are not for everyone, but for those who are comfortable with them, they can result in a very capital efficient organization which if successful can yield a greater financial result for the team.
Erik has been successful with a very lean financing strategy. Early on, self-funding and getting team members to work for equity enables progress without delay. Once the project has some traction and is ready, friends and family financing helps get it to the next milestones. If additional financing is needed, either corporate investment or venture capital can be pursued. Sometimes corporate investors will be more in line with the company’s interests than VCs, since they are focused on proving the technology and reaching milestones more than putting money to work and yielding returns. The latter follows the former. Sometimes the desire to invest more money than is needed can lead a company down a path that necessitates more financing, longer timelines, and a wait for bigger acquisition prices. In their own parlance, many VCs need a project to be big enough to ‘move the needle.’ Likewise, there are important considerations when taking corporate investment. Wording and terms of strategic investments are critical to enable the company to pursue multiple future funding and acquisition opportunities without scaring off other potential suitors.
Hedge R&D bets
When possible, Erik likes to “ have at least 2 horses in the race.” Exploring different ways of implementing the same concept can ultimately enable blending the best concepts into a successful final product. Small companies cannot always afford the cash burn necessary for testing one approach, failing, then starting another. Operating parallel paths of development, though slightly more expensive along the way, offers immense cost savings and risk reduction if the initial approach turns out to be a dead end.
This strategy has proven useful in several of his projects. At Appriva, Aspire, and Ross Creek, Erik and team employed this approach to great benefit. At Appriva, the first two more complicated approaches were ultimately supplanted by a third, simplified approach. At Ross Creek, they started out working on a tissue fixation technology, but switched to developing a knotless suture anchor when the current product on the market failed them during cadaver work. In all three instances the initial, preferred approach or product for which they got funding turned out to have issues, and a secondary (or tertiary) approach or product ended up proving most valuable.
Often the idea for which a company gets funded turns out not to be the best approach or the best product. However, through the process of product development, an alternative approach or opportunity can emerge which is significantly better than the initial one. A successful entrepreneur needs to be able to pivot on solution technology, as well as the clinical need being solved.
Know your exits
Widening the scope of the needs identification empowers this lean approach. Classically the patient and the physician are regarded as the ‘customer’ in medical device development. Adding a third customer, the acquirer, to the equation helps ensure the project is focused on technical and clinical endpoints that will be satisfying to a corporate interest.
Erik was able to do this successfully at Ross Creek. This involves meeting early with contacts in operating roles at potential acquirers. Understanding what level of comfort and risk reduction a potential acquirer will need helps guide the milestones and funding needs of the startup. Different corporate groups will want to see different elements of the puzzle solved. A few will be comfortable acquiring once a technology has shown promise in preclinical studies. Some will require regulatory approval before they can move to acquire. Others may need clinical data with which to market, and others will want to see some initial market traction in sales before they act. A clear recognition of what degree of ‘heavy lifting’ must be done by the startup is paramount to being efficient with capital.
Keeping expenses low has an additional benefit: it helps keep the acquisition price low. It sounds counterintuitive, but below a certain threshold, such as $50M, many acquirers can act faster and require fewer upper management and departmental approvals. Some worthwhile deals get killed in this stage where politics and process can act slowly and irrationally. Knowing where this threshold falls is key. A ‘low’ acquisition price can yield outsized returns for shareholders if you get there fast while utilizing a limited amount of capital.
Different projects, different paths
Radical, game-changing innovations are responsible for some of the most important advancements in medical care and attract plenty of attention. They also require big budgets and timelines. Smaller, quicker innovations may not achieve the same celebrity status, but can help improve patient care, physician practice, hospital budgets, and provide equal or greater returns to shareholders. Erik has proven success in this lower-risk, capital-efficient, shorter cycle time model.
Lean can be just as satiating.