Starting a Medical Devices Company, Diagnostics Laboratory, or Contract Research Organization (CRO)
Startups in the life sciences, bioscience, and biotechnology industries often face completely unique challenges and carry the burden of widely varying risk profiles, making them quite idiosyncratic.
These idiosyncrasies can make entrepreneurship in the life sciences challenging, making it hard to map out the exact steps a founder can or should take to increase their chances of success.
However, when starting a business focused on creating a medical device, diagnostic kit, or provide research services to other biopharma and biotech companies, the path to success can sometimes feel more “clear cut.” You typically spend less time investing heavily in R&D and more time developing and selling a commercially viable product that generates revenue.
Selling a tool or service is an amazing way to remain independent. You can retain control of your company, rather than dilute it. However, it can affect your speed of growth.
In this article, we’ll cover the basics of creating and funding a company that provides a tool or service to other businesses in the life sciences industry.
There are some “best practices” we can distill for you that can help you if you have an idea for a product, process, or tool that will likely generate revenue from the get-go. These companies are the most likely to bootstrap initially. Additionally, we’ll pay special attention to the implications of “paying as you go,” where you fund your operational growth and expansion using your revenue streams.
But first, let’s review some definitions!
What is a Medical Device Company?
Medical device companies are known for developing innovative medical devices and components used to diagnose and treat various medical conditions and diseases. In some cases, a device can even prevent or cure the condition or disease.
Like biotech startups working on applied research, medtech companies often perform significant R&D and go through clinical trials and regulatory approvals.
What is a Diagnostics Laboratory?
A diagnostics laboratory is any laboratory that performs diagnostic services and tests which provide medical and healthcare professionals with vital patient information, allowing them to provide an accurate diagnosis.
Tests involve a physical examination, and can be invasive or non-invasive. Examples include various imaging tests (CT, MRI, and mammography scans), fluid sample collections (blood, serum, and urine samples), and cell sample collections for cultures.
Diagnostics labs don’t typically go through the same R&D phase other life sciences startups go through, since they’re providing a service right away that can generate revenue. However, some labs create their own diagnostics kits, which take time to research and develop.
What is a CRO?
A CRO, short for a contract research organization, is a person or business that provides contracted research services to pharma, biotech, and medtech companies.
CROs are also sometimes referred to as clinical research organizations; however, this distinction can depend on the services the CRO offers. Specifically, whether or not the individual or business will manage clinical development and trials for their clients.
The services CROs provide are typically specialized, with the person or business having significant expertise in a specific area of focus or with a specific phase of business development. This includes a wide range of services, such as:
- Drug development
- Assay development
- Clinical development and trials
- Feasibility and site management
- Data and logistics management
- Biostatistics and bioinformatics
CROs have been part of the life sciences ecosystem for quite some time, and their relevance remains high today as companies continue to outsource their preclinical drug discovery and clinical trials management to CRO businesses.
What Is Bootstrapping & Is It an Option?
Bootstrapping is when a founder builds a company from scratch using his or her own funds and resources, like personal savings and lines of credit on a home, and if you are fortunate, cash from initial (and ongoing) sales. This is in place of using external funding and outside investments to launch a business.
However, bootstrapping and fundraising with external investors are not mutually exclusive funding methods. You can, if you have the money, choose to bootstrap, and then, later on, fundraise as well.
The bootstrap approach to starting and running a company is usually based on the idea that you have a profitable service or product to sell from the start, such as consumables, diagnostic tests, medical devices, or contract research.
You expect to make immediate profits, and most likely plan on funneling those profits back into the company, fueling growth of operations and more.
If you are starting a medical devices company, diagnostics lab, or CRO outfit—and you have enough money between you and your co-founders to begin operations—bootstrapping might be a viable option for you!
An excellent example of a founder who bootstrapped is Jake Glanville, who co-founded Distributed Bio in 2012. At Distributed Bio, he designed their core antibody engineering and universal vaccine technologies. He also built and grew the scientific teams, and developed a development strategy that led Distributed Bio to becoming profitable, all without outside investment.
After the company was acquired by Charles River Laboratories, he founded Centivax and spun-out his assets in COVID-19 therapeutics, antivenom antibodies, broad-spectrum vaccines, anti-wound pathogen antibodies, and more.
In academia, Glanville developed seminal methods in the fields of high-throughput antibody repertoire sequencing, repertoire decoding algorithms, single-cell TCR receptor & phenotype sequencing, and computationally guided antibody library engineering, to name a few.
Not only is it a great example of bootstrapping a business and developing a strategy that allows an organization to stand on it’s own legs quickly, it’s also an excellent example of translating the skills you acquire through your academic career into a successful career in the industry.
Knowing how to create a profitable company, especially when you don’t plan on taking outside investments, is a huge piece of the puzzle.
Regardless of what your business strategy is and how much control of the company you plan to retain, if you have significant personal resources and/or are able to generate revenue, you have more choice in whether or not you must seek outside investors for funding.
Some companies are lucky enough to generate revenue—and positive cash flow—right away.
If this is you, the cash flow you generate can help finance product development, pay salaries, and more. (Cash flow is a measurement of the money that is moving in and out of your business in a period of time.) However, if there isn’t enough cash coming in and out of the company to pay for product development, salaries, and equipment, you may find yourself considering fundraising as an option.
Is It Better to Scale Operations Through Bootstrapping or Fundraising?
It’s a great question! Using your own funds and generating revenue can leave you with more control as a business owner, giving you the freedom to run your business the way you want.
But, fundraising can often get you access to large amounts of capital, depending on the interest in your business from investors. This huge cash injection can really accelerate your operations and growth, and make protecting intellectual property more financially viable.
So, you have to ask yourself: do I want to sacrifice speed for control, or am I okay with giving up some control to achieve my goals even quicker and grow the company even larger? It’s a bit of a reductive question, as running a business isn’t that simple. However, it illustrates the different paths you can take as an entrepreneur.
To reiterate, creating a business model that can immediately generate revenue means you won’t have to rely on outside investors because you have another source of capital investment: your own cash flow.
However, how much revenue you’re able to generate can depend on a number of factors, such as your leadership as a founder, timing, and product-market fit. If you’re generating enough profits to grow at a rate suitable to your business goals, then you’re in a good position.
That being said, if you’re looking to scale up your business at a faster rate, then taking on outside investments may come up in discussions with your co-founders or team. This could mean working with an angel investor or venture capital firm.
There are a number of alternatives startups can look into. Small business grants and commercial loans are often a great option for early-stage companies that have little initial capital.
Although they often have requirements that vary from market to market, being approved will often depend on your track record and/or profitability.
When applying for a loan, most traditional mainstream lenders will require documentation that includes your financial history, cash flow projections for 3-5 years, credit history, and a solid business plan.
If you don’t end up qualifying for a loan, you may consider applying for a small business grant provided by the government, which typically offers grants to companies engaged in scientific research and development.
These alternative sources of funding are an ideal option for growing your company’s infrastructure, especially if you are focused on selling a tool or service and do not plan on taking on outside investors. Having the know how for funding your business multiple ways will greatly increase your chances of securing a loan, grant, or investment.
You may not be able to achieve the same rate of growth as a company that takes on outside investments if the amount of revenue you generate is insufficient. But, speed of growth will ultimately depend on your goals as a founder.
So, does it make more sense to bootstrap or fundraise? It will depend on your goals and needs as a founder or co-founder.
The Pros & Cons of Bootstrapping
If you fundraise, you’ll most likely exchange equity in your business for capital from an investor. Having less ownership means you (and your co-founders, if you have them) won’t be the only one making decisions. The investors will most likely have a partial say in how the company is ran.
There will also possibly be other terms attached to the investment, meaning investors will gain certain privileges, such as voting power, liquidation preferences, the right to transfer ownership, inspect corporate documents, and dividends, among other privileges.
On the other hand, if you bootstrap, you will be able to retain more control of your business. This means more decision-making power in your hands.
There is no guarantee that you will always retain full ownership of the company, but you won’t have to give up as much control if you’re developing a service or tool that generates immediate profits.
It is important to note that, because it’s your money, time, and resources on the line, you are taking on all of the risks on your own.
So, although you won’t have to worry about ownership, voting, board, or financial control in the same way that your VC-backed counterparts will, you will be taking on more personal responsibility and risk. This is an important consideration when choosing to bootstrap your company.
Parting Thoughts: Pay-As-You-Go Vs. Accelerated Growth
Developing and commercializing a new technology, whether it’s a medical device or a new therapeutic, can be challenging. From at-home diagnostics to experimental gene therapy, startups in the life sciences will face a number of funding hurdles. Providing a service in the form of contracted research can also require heavy lifting upfront, both financially and operationally.
For most “pay-as-you-go” companies that generate revenue with a product, there is not as much money to fund the infrastructure required to grow operations—these requirements generally include hiring more employees, expanding into a larger lab space, and procuring more equipment.
This natural progression of growth means you will take longer to reach certain milestones. Nonetheless, because you retain ownership, you retain the ability to make decisions for the company, steering your business’s strategy in the way you see fit.
If that sounds like the optimal path for you and your business, then consider bootstrapping. However, if your goal is to grow as quickly as possible, you should consider your fundraising options.
This article is informative. It is not meant to represent legal advice. Before making any legal or finance decisions for your business, it is best practice to consult with a legal expert. Additionally, if there are any questions you have regarding equipment leasing, please let us know.