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Expert: How to strengthen Houston’s $555 million medtech sector

Houston — home to the largest medical center in the world — needs access to more early stage funding for medtech companies. Photo by F. Carter Smith/courtesy of MD Anderson

Houston, an important hub for healthcare and life-science ventures, continues to see significant support for those sectors. And the city’s infrastructure around life-sciences and healthcare continues to grow. Most recently, the Texas Medical Center announced an increase in the size of its TMC Venture Fund to $50 million from $25 million. The Venture Fund was launched in 2017 to invest in Houston-area medical technology organizations and initiatives.

The city is on the leading edge when it comes to investing in digital health startups and the entrepreneurs who launch them. Nationwide, venture capital financing for medtech increased 67 percent from 2017 to 2021, with total financing approaching $20 billion, according to Deloitte’s new study, New Strategies for MedTech Startups. Financing deals for medtech organizations in Texas totaled $555 million during that time. That’s the fourth-largest total in the country, behind California, Massachusetts, and New York.

What investors are paying the most attention to are late-stage diagnostic and digital companies, according to the report. Among the hot spots for funders: AI technologies, at their highest funding level in five years; in-vitro diagnostics (IVD) and healthcare IT, both of which have dominated medtech fundraising over the last decade, raising $48 billion and $36 billion, respectively.

What could use more support are early-stage companies, the kind that get seed and series A funding. The study found that funding for them has dipped to 23 percent of total medtech VC funding in 2021 from 27 percent in 2017. Why? Yields are lower for medtech investors compared to other sectors, and reimbursement for new technologies can be difficult to achieve, meaning companies can’t get paid for their goods or services. Additionally, pandemic-induced factors, such as supply-chain issues, have also impacted funding.

Ever creative, many Houston-area early-stage entrepreneurs are looking to alternative kinds of finance, including pre-revenue IPOs and SPACs to gain entry to public markets as well as build-to-buy, where a medtech incumbent takes an ownership stake with an option to buy the company. They’re also looking to family office investment groups—family-run, generally mission-driven investors who tend to be less formal than VC funds—for financial support.

And venture capital is more than willing to invest in companies, according to the investors interviewed for the Deloitte study. Companies with strong management teams, scalable technologies that address unmet needs for a large market, technologies with low regulatory and reimbursement barriers, and products that can reduce the overall cost of healthcare will catch their attention. Bonus points for efficient, forward-looking companies, too.

Attention to these smaller firms is crucial and necessary, given that 94 percent of the 15,500-plus medtech firms in the United States are pre-revenue or have no revenue at all. Houston is home to plenty of these smaller firms with big potential. Investors would do well to look at them as long-term investments and support them by helping to lay the groundwork for regulatory and reimbursement success, in addition to investing financially.

In adopting this approach, the VC community can make significant strides towards bolstering an already strong medtech ecosystem in Houston.

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Kevin Wijayawickrama is principal at Deloitte and works on the company's risk and financial advisory team.

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Building Houston

 
 

Last weekend was a tumultuous one for founders and funders in Houston and beyond. Here's what lessons were learned. Photo via Getty Images

Last week, Houston founder Emily Cisek was in between meetings with customers and potential investors in Austin while she was in town for SXSW. She was aware of the uncertainty with Silicon Valley Bank, but the significance of what was happening didn't hit her until she got into an Uber on Friday only to find that her payment was declined.

“Being positive in nature as I am, and with the close relationship that I have with SVB and how they’ve truly been a partner, I just thought, ‘OK, they’re going to figure it out. I trust in them,'” Cisek says.

Like many startup founders, Cisek, the CEO of The Postage, a Houston-based tech platform that enables digital legacy planning tools, is a Silicon Valley Bank customer. Within a few hours, she rallied her board and team to figure out what they needed to do, including making plans for payroll. She juggled all this while attending her meetings and SXSW events — which, coincidentally, were mostly related to the banking and fintech industries.

Sandy Guitar had a similar weekend of uncertainty. As managing director of HX Venture Fund, a fund of funds that deploys capital to venture capital firms around the country and connects them to the Houston innovation ecosystem, her first concern was to evaluate the effect on HXVF's network. In this case, that meant the fund's limited partners, its portfolio of venture firms, and, by extension, the firms' portfolios of startup companies.

“We ultimately had no financial impact on venture fund 1 or 2 or on any of our portfolio funds or our underlying companies,” Guitar tells InnovationMap. “But that is thanks to the Sunday night decision to ensure all deposits.”

On Sunday afternoon, the Federal Deposit Insurance Corp. took control of SVB and announced that all accounts would be fully insured, not just up to the $250,000 cap. Customers like Cisek had access to their accounts on Monday.

“In the shorter term, the great news is SVB entity seems to be largely up and functioning in a business as usual manner,” Guitar says. “And they have a new leadership team, but their existing systems and predominantly the existing employee base is working well. And what we're hearing is that business as usual is taking place.”

Time to diversify

In light of the ordeal, Guitar says Houston founders and funders can take away a key lesson learned: The importance of bank diversification.

“We didn't think we needed one last week, but this week we know we need a resilience plan," she says, explaining that bank diversification is going to be added to "the operational due diligence playbook."

"We need to encourage our portfolio funds to maintain at least two banking relationships and make sure they're diversifying their cash exposure," she says.

A valued entity

Guitar says SVB is an integral part of the innovation ecosystem, and she believes it will continue on to be, but factoring in the importance of resilience and diversification.

"Silicon Valley Bank and the function that they have historically provided is is vital to the venture ecosystem," she says. "We do have confidence that either SVB, as it is currently structured or in a new structure to come, will continue to provide this kind of function for founders."

Cisek, who hasn't moved any of her company's money out of SVB, has similar sentiments about the importance of the bank for startups. She says she's grateful to the local Houston and Austin teams for opening doors, making connections, and taking chances for her that other banks don't do.

"I credit them to really being partners with startups — down to the relationships they connect you with," she says. "Some of my best friends who are founders came from introductions from SVB. I've seen them take risks that other banks won't do."

With plans to raise funding this yea, Cisek says she's already started her research on how to diversify her banking situation and is looking into programs that will help her do that.

Staying aware

Guitar's last piece of advice is to remain confident in the system, while staying tuned into what's happening across the spectrum.

“This situation that is central to the venture ecosystem is an evolving one," she says. "We all need to keep calm and confident in business as usual in the short term while keeping an eye to the medium term so that we know what happens next with this important bank and with other associated banks in the in our industry."

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