Trends in Early-Stage Boston Med-Tech Investment

By Stephen M. Honig

Duane Morris supports a proprietary platform in Boston that permits emerging life science and med device companies to pitch to a varied group of investors, from qualified angels to major pharmas. We also represent companies seeking financing and independent investors in this space. In assisting in due diligence during the first eight months of 2021, certain matters have been emphasized in diligence review.

At the seed round of financing, this year we have seen primarily SAFEs and not convertible debt. The cap rate on these offerings has been subject to negotiation. Some investors believe that the cap rate is indicative of the pre-money valuation the company anticipates for the preferred round of financing targeted for the next raise, which is not necessarily correct as intervening developments can be material and cap rates are set for other purposes.

Investors show strong interest in the use of AI in remote diagnostic settings, an area in which many deals are offered; but investors are also closely examining the source and depth of the database underlying the AI, as quantum of data is seen as key to likely market traction for such companies.

For preferred rounds, particularly those designated as “seed preferred,” pre-money valuations are under great investor scrutiny, perhaps as an antidote to frothy valuations which reflect valuations in public offerings and SPAC transactions. One compromise is to phase investments in tranches with milestones to relieve some of the pressure from pricing larger offerings up front at valuations which are feared too high.

Boston’s market for early stage capital in life sciences, med devices and supporting services remains robust but competition for funds is intense, and we see continued sharp negotiation of terms given the number of options available to the investment community. (Readers should note that these observations are anecdotal and Boston-centric.)