Non-Traditional Funding Solutions For Health-Tech Startups: The Next Wave

The year 2024 is a great year for founders to explore non-traditional funding solutions for health-tech startups. The healthcare sector is poised for groundbreaking innovations and breakthroughs that can deliver significant returns to investors.

The prospect of backing upcoming ventures with industry-disruptive concepts and technological advancements is undoubtedly an investor incentive. Founders start off by approaching conventional sources of capital such as incubators, accelerators, venture capitalists, and angel investors.

Applying to federal and private organizations for grants and support is also a great kickstarter for your new venture. However, the healthcare sector is a capital-intensive sector, and research and development activities need not necessarily deliver results quickly.

Companies need injections of funding not just to develop new concepts, but also to commercialize them into market-ready products. Ensuring that the products are economical enough to make sense to the customer is another challenge med-tech startups face.

Relying on a single source of capital may not be the right strategy. This is why entrepreneurs should have a portfolio of investors they can approach at various stages of their business cycle. When you’re looking for seed and pre-seed capital, incubators and accelerators are ideal sources.

Crowdfunding, friends and family funding, and bootstrapping are also suitable to get started. As the company grows and you have a product prototype, you’ll get venture capital or angel investment. These entities effectively search out early-stage companies and back them to trigger their growth.

Aside from these conventional sources, you can also tap into non-traditional funding solutions for health-tech startups. Read ahead to understand what they are in detail.

Non-Traditional Funding Solutions for Health-Tech Startups – Venture Debt Funding

Venture debt funding is suitable for companies that have developed their products and are ready to start with commercialization. Getting this investment for launching the product in the open market is an effective strategy that founders use.

That’s because they can use the self-sustaining cash flows to pay off the debt. This funding approach is also appropriate for a healthcare company to get venture debt using royalty payments as collateral. The company need not sell the asset but only pay off the debt with the royalty.

Life sciences startups needing funding can also leverage their equipment or any other fixed assets as collateral. Or, they can raise money against their revenues, the IP they have developed, and inventory. These options work well for early-stage and more established startups that own assets.

Med-tech companies that have already acquired venture capital can also consider getting venture debt to extend their runway. The money can keep them operational until they can raise the next funding round or reach a particular milestone.

Debt financing is not viable for startups that have yet to develop a product design. And are in the R&D stage. That’s because they lack consistent revenues and profits to repay the principal and interest. An added advantage is that getting venture debt allows early-stage startups to avoid dilution.

At the same time, if the company is unable to repay the debt, it may have to cede equity. Other cons include the covenants and collateral firms have to offer for funding. Loanmakers may also place constraints on the company’s operations and financial activities that can hamper its growth.

Convertible Notes and SAFEs

As with venture debt, convertible notes and SAFEs are not debt funding but convertible equity capital. Entrepreneurs can leverage these instruments to get money for their startup but not incur debt or cede equity immediately.

Both SAFEs and convertible notes convert into equity later, but each has specific channels through which they can convert. Founders can negotiate the maturity dates, interest rates, and other terms and conditions when entering into these transactions.

While convertible notes are more flexible with their terms, SAFEs have a more standardized structure. Healthtech startups producing physical products like medicines and equipment typically use convertible notes.

Founders need not go through the valuation process, making applying for and getting funding via convertible notes much easier. On the flip side, in the first two quarters of 2023, close to 83% of pre-seed investments used SAFEs.

The key differentiating factor why founders prefer SAFEs is that they have no pre-set deadlines. This factor allows them to use the funds as needed and simply convert the loan into equity when they’re ready.

This is why SAFEs or the Simple Agreement for Future Equity are great non-traditional funding solutions for health-tech startups.

Corporate Venture Capital (CVC)

Healthcare and technology giants are increasingly investing in smaller health-tech startups with much more than just financial support. They recognize these new ventures as hotbeds of innovative drugs, equipment, and care delivery systems.

You can approach these giants for funding and also expect industry-specific expertise and assistance with regulatory compliance. Developing a business plan and transforming concepts into market-ready products need extensive guidance and support that you can access.

Since larger corporations are established in the business landscape, they can help smaller firms access broader markets. They also offer opportunities to enter into strategic partnerships for rapid scalability with cost-sharing deals.

Recommendations and references to networks of healthcare-focused investors and providers can also be a huge benefit. Further, getting corporate venture capital as non-traditional funding solutions for health-teach startups lends invaluable credibility in the market.

Not only can you attract further investment, but you also build a better edge over the competition when convincing customers. Having the brand name as backing can open up many doors for the assured success of the fledgling venture.

Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Why CVC Works for Corporations and Bigger Brands Also

Established brands look for opportunities to expand into unexplored and underserved markets and patient demographics. They also get to access new technologies and cutting-edge solutions to meet demand.

Larger companies are less agile and find it harder to pivot. This is why they prefer to invest in and back small firms as a low-risk growth strategy.

Investments in upcoming startups also allow larger brands to maintain their leading position in the ecosystem and edge over the competition. Of course, the most significant benefit is the potential for rich and assured returns. And even the prospect of a strategic merger down the line.

Both CVC investors and startups can also benefit from funding from investors in the tech sector. These investors are typically keen on backing new companies developing innovations in the big data, machine learning, and AI spaces.

Strategic Collaboration and Licensing Deals

Entering into strategic collaborations is a viable strategy for life sciences startups conducting R&D to develop IP and IA. These firms enter into licensing deals in the earlier pre-clinical trial phases. As a result, they can get validation for the concepts and non-dilutive capital.

Entering into a partnership can get you support with R&D efforts and funding during the initial trial phases. Once the products, IP, and assets are ready, the partner may choose to license them and provide steady revenues for further growth.

Health-tech companies also work on developing platform technologies and applications for larger companies seeking proprietary products. Collaborating with your buyers injects cash flows into your company while lending credibility that the products have value.

Founders can also rely on their partners for assistance with expertise in commercial and regulatory compliance. This compliance is essential in therapeutics and clinical development.

Fee-for-Service Revenues

Health-tech startups developing platform technologies can sell their R&D skill sets to third parties needing the tech stack. If this is your business model, attracting private equity funding is easily done. That’s because PE investors are keen on backing companies with assured and predictable revenues.

Startups like yours typically have a highly diversified customer base, making them a viable investment prospect. Particularly healthcare startups developing genomics and tools and equipment.

Investors are also interested in ventures operating as a contract research organization (CRO) or contract development and manufacturing organization (CDMO). Although you can bootstrap the firm and roll back the revenues to scale it quickly, that’s a short-term strategy.

As the company grows, you’ll need larger capital and resources to cover higher clinical development expenses. Using fees and revenues works well as non-traditional funding solutions for health-tech startups.

Monetizing Royalties

Monetizing royalties as a fundraising strategy works similarly to revenue-based approaches. These non-traditional funding solutions for health-tech startups entitle investors to receive a portion of their royalties.

The investment deal includes terms and conditions pertaining to the percentage of royalties and revenues investors will receive. The agreement also outlines information about the specific products, operating lines, or sections of the company that make payments.

In exchange, founders receive a single upfront investment or a series of contractual payments. This funding option allows founders to retain ownership without ceding equity or taking on debt.

Investors prefer to enter into deals and acquire royalty rights with early-stage startups. And the opportune time to do that is before the products enter FDA registration trials.

Federal and State Tax Credits and Incentives

Although tax credits are not funding sources, they can prove to be invaluable for a startup still finding its feet. The research and development credit is worth $250,000 and is available to startups engaging in research to develop new products or improve existing products.

In addition to products, new firms can also claim credits for innovating processes, science-related activities, and trial-and-error procedures. Companies are eligible if they have generated less than $5M in annual revenues for less than five years. And if they are not yet profitable.

To claim the credit against their payroll each year, the venture must create detailed documentation of its activities. It must also provide payroll records of the employees working in R&D. If the company has acquired supplies and equipment from third parties, the report will include the information.

Finally, complete details of the patents, prototypes, blueprints, and other IA emerging from the R&A must appear in the report.

Founders who are outsourcing their R&D activities to other countries through collaborations can also look into the tax credits available in their locations. For instance, Australian tax incentives and the orphan drug tax credit (ODC) are available to new firms researching cures for rare diseases.

Regardless of the stage where your company is at or the vertical you operate, you’ll need funding. Unsure about the types of investors to approach? Check out this video where I have explained how to put together a list of targeted investors.

Ready for the Next Steps? – Merger and Acquisition Transactions

Entering into an M&A deal with a company with substantial cash reserves and other resources is an excellent funding strategy. Both companies can pool their Intellectual Property and intangible and tangible assets to build a robust brand.

Founders may have had successful R&D outcomes but lack the resources to transform the IP into marketable products. They can enter into such deals with companies that have failed to develop the know-how but have adequate cash reserves.

However, you’ll only want to consider an M&A transaction after weighing the conditions. For instance, the merger may require you to shut down certain operations or lay off core talent. This option can only be viable if existing investors are no longer funding options.

Founders who haven’t been able to raise adequate equity and are looking for recapitalization can also consider an M&A.

Special Purpose Acquisition Companies (SPACs)

Entering into an M&A transaction with a special-purpose acquisition company is an excellent way to take your company public. When your startup has reached the stage where it is poised for the next step, you’ll consider an IPO.

However, an IPO typically involves expenditure and time, not to mention regulatory compliance. Avoid these hassles by instead partnering with a shell company that is publicly listed. A SPAC typically has backing from high-profile investors like family offices, angel investors, and venture capitalists.

These entities have a robust operating and financial history and are keen on supporting upcoming startups that demonstrate potential. You’ll look for SPACs in the life sciences and health sector and conduct due diligence to evaluate their prospects.

Remember that having raised capital via an IPO, SPACs must mandatorily invest the funds within a fixed interval of 24 months. You can leverage the urgency to negotiate for better deals with the entity.

In Conclusion

Both traditional and non-traditional funding solutions for health-tech startups are now available. Before scouting for the best options for the company, you’ll evaluate its objectives and challenges.

You’ll also identify where the company is at in its lifecycle and future milestones you hope to accomplish. Be mindful of the fact that the life sciences and healthcare sector is innovating rapidly amidst cutthroat competition.

This sector is capital-intensive, and R&D can cost significant time, money, and resources. And that’s before yielding positive outcomes that can be commercialized into marketable products. Weigh your options carefully before diving in.

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