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.