After a successful 2021 and a muted 2022, the past year saw a further decline in venture capital (VC) financing in the medical device space. Several factors led to not just fewer deals being made but a fall in deal value, like high interest rates, inflation, and the continued Russia-Ukraine war.

While the ripple effects of these pressures were seen in the entire medical device M&A space, an exclusive analysis done by Medical Device Network has found that the total value of the VC financing deals, in particular, that were completed in 2023 was less than a third of the previous year.

“The market is cooling off from an overabundance mindset where innovative ideas can raise extensive capital to a scarcity mindset where financing is focused on business fundamentals including unit economics and profitability,” said John Milad, former partner and co-head of the UK-based Healthcare Ventures at the investment mangement firm Downing LLP. The cooling off was also reflected in the broader medical device mergers and acquisitions (M&A) landscape as the value of the top 10 deals shrunk in 2023 compared to the previous year.

A steady decline in VC funding

The total value of deals involving VC financing that were completed in 2023 was $21bn—down by 31.1% from $30.5bn in 2022. This was an even greater drop of 57.4% from the sector’s peak in 2021 when the total value of VC financing deals was $49.3bn. For this analysis, we included data on VC financing deals that were completed each year, regardless of the year of announcement.

The number of VC financing deals was also down by almost 30% in 2023 compared to the previous years. Milad explains that a near 0% base interest rate in 2021 pushed VCs to seek riskier investments to get better returns. But in 2023, base interest rates increased to over 5%, which has made the market more risk averse. GlobalData medical device analyst Andrew Thompson described the 2021 experience as an outlier driven by a medical emergency—Covid-19.

Still, the sector saw small investments like  $12.9m raised by US-based Laplace Interventional in Series B financing. The financiers included US-based VCs such as ShangBay Capital, Features Capital, and Engage Venture Partners, along with Indonesian JWC Ventures. The funds will be used to develop the company’s transcatheter tricuspid valve technology and supportfirst in human trials .

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Thompson adds that Medtech companies are also expected to rely on government grants. In May 2023, the French tissue reconstruction company Tissium secured €50m ($53.8m) in a Series D financing round from France-based VCs including Cathay Health, Mutuel Innovation and Sofinnova Partners. The VC financing followed government funding granted to the company through the French Tech 120 programme. The Series D round money will be used to launch its platform of biomorphic programmable polymers.

Additionally, in recent times, multiple countries have set out policies and grants to accelerate the startup landscape. For example, in February 2023, the UK established the Department of Business and Trade (DBT) which combines the Department for International Trade (DIT) business support elements of the Department of Business, Energy, and Industrial Strategy. In turn, this allows the UK government to offer end-to-end assistance to the Medtech sector including domestic support and international trade.

Growing demand for AI

The use of artificial intelligence (AI) to improve patient diagnosis and treatment has been increasing in recent years. The AI medical devices market is forecasted to reach sales of $93bn in 2023, up 12% from 2022, as per GlobalData analysis. Milad notes that AI has various use cases in the medical device industry has become buzzword to excite interest in investors.

Consequently, the interest in the AI theme has successfully translated into additional funding from both private and government sectors. In June 2023, the UK Health and Social Care Secretary, Steve Barclay announced a £21 million fund for developing AI technologies to diagnose and treat patients quicker. In July 2023, Proprio, secured $43m in a Series B funds, including from VC partners,  for its US Food and Drug Administration (FDA)-cleared surgical navigation platform.

Multiple companies also raised capital to advance the use of AI in imaging. In October 2023, US-based Clarix Imaging raised $10m for its US FDA-cleared point-of-care 3D imaging platform. Clarix Imaging’s device enables real-time assessment of specimens in the operating room for lumpectomy procedures. In April 2023, South Korean Mediwhale closed a $9m Series A funding round for its AI-powered retinal scan technology. The global diagnostic imaging market is expected to reach $45.8bn by 2030, as per GlobalData analysis.

Robotics was another area that attracted large investments. In October, Microsure raised $40m in a Series B2 round from, including VC funds, to advance its microsurgical robot MUSA-3 through clinical studies and regulatory clearings. The company received backing from the European Innovation Council Fund (EICF) and the Dutch Ministry of Economic Affairs. In May, Moon Surgical secured $55.4m in VC funding for its FDA cleared robotic surgery system – Maestro.

Femtech remains one of the sectors  where investments continue to grow in recent years despite the larger downturn trend. Still groups in the femtech sector have faced significant hurdles. At the 2023 pro-Manchester Health Tech Conference in Manchester, UK, experts said the lack of data on women’s health conditions is causing startups to lose out on VC funding. Milad notes that although this sector is receiving significant investments, it is in no way immune to the wider financial trends.

Future outlook

Milad and Thompson both state that the risk-averse financing climate will improve eventually, but the exact timing of the change is unclear. Thompson adds that the market may be returning to pre-Covid-19 levels, and there may be a modest uptick in VC financing in 2024. Milad notes the markets operate in cycles and this current stress will not last forever. He adds, “we will start to see some green shoots in 2024”.

Still, Milad cautions that the companies need to be careful with cash in current times and do whatever they can to extend it. “Companies need to think about all types of funding sources - internal or external, diluted, non-diluted, and have a laser-like focus on spending money on those activities that are really going to deliver the most internal rate of return or the biggest value”.

Milad quotes the economist John Maynard Keynes while saying, “markets can remain irrational longer than you can remain solvent”. Reflecting on his own experience running a mid-sized Medtech company, he says companies need to be mindful of the market and take advantage when the market is generous and tighten their belt to weather the storm when the market is lean.