Fundraising Strategies for Early-Stage Medtech Startups

Investor interest in the medtech sector is strong. According to DealForma and JPMorgan, medtech companies raised $16.1 billion from 544 funding rounds, including $3.3 billion from 244 seed and Series A rounds, through the third quarter of 2024.

But these seed and Series A venture capital (VC) numbers tell only part of the story. For founders in the pre-revenue or even the preclinical phase, building a successful funding strategy often means going beyond VC investors, especially because many traditional medtech investors adopt a more careful, scrutinized financing approach and require delayed or more mature inflection points.

Before pursuing priced equity rounds, many founders bridge the funding gap with government grants (non-dilutive fundraising) and accelerator or incubator programs and convertible instruments (non-priced fundraising), such as loans and Simple Agreements for Future Equity (SAFEs). This staged approach helps protect ownership while building the validation needed for institutional investments.

Below, we explore each of these funding approaches — non-dilutive, non-priced, and priced fundraising — examining when to use them, their advantages and limitations, and how to sequence them effectively for maximum benefit.

Non-Dilutive Fundraising

Government grants are the primary source of non-dilutive fundraising that offer medtech founders a way to raise initial working capital without giving up company ownership or equity. Government agencies, like the National Science Foundation, Department of Defense, and National Institutes of Health, fund concepts that align with public benefit missions.

If a medtech startup is not yet generating its desired revenue; its product is still in development, which makes valuation more difficult; or it needs to raise less than $1 million, non-dilutive fundraising can be a good option because it engenders external support, maintains founders’ ownership, and postpones valuation.

The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs are particularly relevant to medtech startups because they are designed to foster innovation in fields critical to public health and safety.

A medtech startup qualifies for an SBIR or STTR grant if it:

• Is a for-profit company primarily based in the US 
• Has 500 or fewer employees 
• Is at least 50% owned and controlled by US citizens or permanent residents

These grants are competitive because they can serve as a crucial first source of capital and an external endorsement of the technology. According to the National Institutes of Health, only 18.5% of SBIR or STTR applicants were awarded funding in the last 10 years. To improve its chances of receiving a non-dilutive grant, a startup must submit a detailed plan specifying how its intended use of the funds aligns with the grant’s goals.

Government grants do have certain limitations, however, such as strict caps and drawn-out timelines. As of October 2023, according to the U.S. Small Business Administration, SBIR and STTR agencies cannot issue Phase I awards above $306,872. Furthermore, grant life cycles can be long and involve award decision uncertainty, neither of which are necessarily aligned with a startup’s cash flow needs.

Because manufacturing medical devices is expensive, founders should not only apply for multiple grants to maximize their funding potential but also consider starting the non-priced fundraising cycle to help meet their capital needs.

Non-Priced Fundraising

While government grants are a great source of non-dilutive capital, in capital-intensive industries like medtech, these funds are often insufficient to satisfy the fundraising needs of a medtech company. Therefore, grant awards often must be supplemented with other types of funding. Raising capital from investors without assigning a precise valuation to the company is a popular form of private fundraising for an early-stage medtech startup because the startup is often too early in development to undergo valuation using accepted valuation techniques.

During a non-priced fundraising round, the investor (e.g., angel investors, startup accelerators) will provide an amount of capital to the startup with the expectation that the investment will ultimately convert into an equity ownership stake in the startup. But the parties agree that the amount of the ownership stake will be determined later when it is easier to value the company (refer to Priced Fundraising).

Like non-dilutive fundraising, non-priced fundraising is a great method when a startup is not ready for valuation or needs to raise less than $1 million, quickly. Angel investors and startup accelerators also tend to prefer non-priced fundraising for its simplicity, promptness, and affordability, as compared with priced fundraising.

The two main types of non-priced fundraising are:

• Convertible notes: Debt instruments with repayment in equity upon conversion 
• SAFEs: Agreements similar to convertible notes but without debt components

Convertible notes and SAFEs allow a startup to defer the challenge of valuation until later in its growth cycle. But investments made in the preliminary stages of a startup’s life cycle are typically riskier for investors. Therefore, investors will often negotiate deal structures to ensure they protect the value of their investment and receive some benefit for the larger risk they are taking (e.g., a discount on the price they pay for their shares compared to later investors or a valuation cap to ensure they receive a certain minimum amount of equity upon conversion).

During negotiation, startups should keep in mind that agreed-to deal structures can have a major impact on ownership stake, with a low valuation cap often being more advantageous for investors. Furthermore, careful consideration is advisable since future investors may be reluctant to significantly deviate from a valuation cap or may seek to include such instruments as part of the pre-money valuation. Common deal structures include:

• Cap, no discount
• Discount, no cap
• Cap and discount (whichever is better for the investor)

Convertible notes and SAFEs are useful fundraising tools if managed thoughtfully, but they can complicate a startup’s capitalization (cap) table (i.e., the breakdown of its equity ownership).

A cap table reflects a startup’s financial health, helping VC investors analyze its current equity structure and predict future ownership dilution. A complicated cap table can lead to poor business decisions, investor loss, and delayed conversion. Whereas a clean, simple cap table can signal founders’ business management capabilities, speed up decision-making, and prevent future investment disputes.

Therefore, if a startup is ready for valuation, founders should consider starting the first priced fundraising round to prioritize clarity and simplicity in its cap table and equity structure.

Priced Fundraising

During a priced fundraising round, the startup and investor agree upon the startup’s pre-money valuation (i.e., how much the startup is worth before the new funds are invested) and how much additional capital the investor can invest into the startup. (The post-money valuation includes the pre-money valuation and this additional capital.) These valuations determine the price per share and reflect the investor’s negotiated ownership percentage, which will be represented by a number of shares relative to the startup’s total shares.

The Securities and Exchange Commission regulates priced fundraising rounds, which means they involve more time and legal effort and cost.

Priced equity rounds can provide a medtech startup with significant capital needed to scale and grow, but it also introduces dilution and complexity to the equity and governance structure, reducing founders’ ownership and control of the startup. As such, startups should carefully evaluate the terms associated with any priced fundraising and seek guidance from lawyers and accountants who specialize in these types of transactions.

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As the medtech landscape evolves, the key to successful early-stage fundraising lies in the ability to protect ownership while raising capital and meeting investor expectations. By carefully sequencing these strategies and weighing key factors — such as growth stage, capital needs, valuation, and investor preferences — securing professional guidance, and aligning fundraising approaches with growth goals, medtech startups can raise necessary capital while minimizing risk and creating a solid equity foundation that fosters long-term growth and lasting investor confidence.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.