Sabeen Shaikh is a healthcare executive with deep industry experiences and a partner leading Crescent Strategy Consulting.
As AI and machine learning have become more important for the betterment of healthcare, the introduction of software as a medical device (SaMD) tools has shown promising results for doctors and patients, foreshadowing the benefits of AI in medicine.
However, despite the growing opportunities and increasing acceptance of emerging technologies in the healthcare industry, SaMD product development has been prolonged. Part of the reason for this is that medtech startup companies are not receiving adequate investment from venture capital firms.
Having worked with numerous promising SaMD companies over the years and having gone through several fundraising journeys, it has become clear to me that SaMD technologies don’t fit into the thesis of many funds, given it is a regulated software product. It does not neatly fall into a deep-tech medtech portfolio that may be used for hardware innovation, nor does it quite fit into a general software portfolio used for working with innovation based on SaaS principles. This has led to an apparent gap in funding that I believe we need to address quickly.
Understanding SaMD
SaMD is software intended to be used for a medical purpose, often involving AI to diagnose and treat patients. Some examples of SaMD include:
• Software that analyzes medical images to detect underlying issues.
• Therapy-planning software.
• Devices that integrate multiple tests to offer recommendations for diagnoses.
• Software that analyzes images and movements of the eye to uncover astigmatisms.
These tools have been developed to lessen the need for physicians to perform ordinary medical practices, allowing them more freedom to focus solely on complex issues and patient relationships. With the proper adoption of SaMD, clinicians could benefit from increased efficiency and accuracy, patients could enjoy improved access to personalized treatment, and healthcare systems could reduce costs and upgrade the quality of care.
The healthcare market mirrors the suggested increase in SaMD development, as the SaMD market is predicted to experience a compound annual growth rate of 11% by 2027. With growing acceptance and potential funding, many SaMD companies are prepared to help revolutionize healthcare; however, as mentioned earlier, their growth is often stunted by a lack of private investor funding.
Why Venture Capitalists Hesitate To Fund SaMD Startups
Venture capital funding plays an important role in the startup of SaMD companies by providing for their early stages of development. Without this monetary assistance, SaMD startups often lack the funding to maintain financial stability, leading to their eventual failure. From my observations, there are several primary reasons for the shortage of venture capital support and funding despite the growing market for SaMD.
The first is that many generalist investors don’t have a full understanding of the complex regulated pathways required to bring a medical product to market. The second is that the cost and production timeline of SaMD projects can seem uncertain. According to the annual HSBC Venture Healthcare Report for 2023, venture capital firms decreased investment by 18% for early-stage medical device companies, primarily because investors favored later-stage ventures for their predictability. A recent market analysis surveying a range of global pharma companies found that “the average cost to bring a SaMD project to market was five times more than expected,” and more than half (55%) of the digital health leaders interviewed expected their SaMD projects to take one to two years to develop, but it took three or more years for 66% of them.
These unclear timelines and price points can understandably make generalist venture capital firms hesitant to invest because of the uncertainty of a monetary return in the usual investment period that is enjoyed with SaaS projects. However, it’s important to understand that the capital needs and timelines for the production of a successful SaMD product will be different than SaaS in several aspects:
• The regulated nature of medical products that require quality management systems to be in line with FDA requirements.
• Clinical validation studies and trials in line with FDA requirements.
• Post-market surveillance.
• More involved go-to-market needs than general SaaS products.
How Investment Firms Can Effectively Support SaMD Startups
1. Evaluate potential partners.
In addition to the typical diligence investors would do on a technology, you can further evaluate the potential of an SaMD startup by asking these key questions:
• Have the right stakeholders been identified in the healthcare ecosystem in order to create effective use case scenarios for the technology?
• Have the value propositions for all the stakeholders that would or could use the technology been validated?
• What is the workflow placement and impact of the technology?
• What are the blue ocean opportunities for the business model?
Reimbursement is always an important focal point, as it should be when evaluating technologies and their potential adoption in the market. However, not all SaMD technologies will be tied to direct reimbursement. Depending on the value proposition of the technology and which stakeholders are most interested in the technology, we are seeing new business models emerge that have revenues coming from new buyers; for example, a corporation may be the buyer, while surgeons are still the users of the product.
2. Work with experts.
Another way to combat the barriers that currently prevent SaMD products from succeeding in the market is to recruit external experts who can provide additional support for commercialization and revenue plans for these companies. When looking for an external expert to partner with, I recommend evaluating them based on these three criteria:
• Domain Expertise: It’s important that the expert has domain expertise in the clinical segment in which the SaMD technology would be implemented. Your expert should understand the stakeholders’ needs within this particular domain, how the technology would be adopted and implemented into the workflow and how to work through identifying the technology’s key value propositions.
• Relevant Geographical Market Expertise: The external expert should understand the healthcare infrastructure, how go-to-markets work for that geography and any nuanced pathways to market.
• Regulatory Knowledge: Finally, your expert partner should possess a high-level understanding of regulatory needs or pathways, as well as be able to provide an initial outline of the potential commercial timeline of the technology.
Conclusion
As noted in the article “The Role of the Future Physician,” SaMD products could allow physicians to “focus on the most complex aspect of healthcare: the patient’s humanity at the center of it all.” I believe that with the help of more leading players and increased investment from venture capital firms, we can effectively introduce these products into the healthcare system.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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