Navigating the Future: Smart Investing in Early-Stage Medical Devices: What to Evaluate and Watch Out For (Part 2/2)

This is the second part of a two-part series. Read Part 1 here.

Authors - Jay Kumar and Mauri Rosenthal, Co-Leads, Medical Device and Diagnostics Life Sciences Sector at Harvard Business School Alumni Angels of Greater New York.

Are you an entrepreneur seeking angel funding? Learn more about how to apply to pitch to the HBS Alumni Angels of Greater New York.

Investing in early-stage medical device companies offers significant upside potential—but also comes with high risk. Unlike consumer startups or software ventures, medical devices face unique hurdles including regulatory approvals, long development cycles, and clinical validation. Conducting thorough due diligence is essential to distinguish promising ventures from those likely to falter.  Rewards can be significant, though, as the rivalry between major medical device suppliers creates a vibrant market for exits when device startups matching their growth strategies reach the right level of maturity.

Key Areas of Evaluation

1. Market Need and Clinical Unmet Demand

A compelling investment begins with a clear and urgent market need. Investors should assess whether the device solves a real-world clinical problem and whether that problem is large and underserved enough to justify a scalable commercial opportunity.

2. Product and Technology Validation

Early technical proof of concept is critical. If the design is incomplete or untested, it’s often too early for investment. Ideally, the product should show some real-world evidence of efficacy through pilot studies, bench testing, or user feedback.

3. Regulatory Pathway

A common pitfall is not knowing the device's FDA classification, which determines the level of regulatory scrutiny, costs, and time to market.

• Class I devices are low-risk (e.g., stethoscopes).

• Class II require more validation (e.g., glucose meters, x-ray machines).

• Class III are high-risk implants needing extensive clinical trials (e.g., heart valves, defibrillators).

Engagement with the FDA or regulatory consultants is a strong positive signal, while a significant misread of regulatory requirements can be fatal to a venture.

4. Intellectual Property and Competitive Moat

A weak IP position is a red flag. Strong patents, trade secrets, or proprietary data can form a defensible moat. Investors should evaluate whether the company can protect its innovation from fast followers or larger incumbents.  Successful exits are predicated on the idea that acquiring the technology is smarter than trying to develop it in-house – and patents generally represent the most important element in this analysis. 

5. Customer and Industry Validation

Medical device investment is de-risked when there’s external validation. Look for endorsements from key opinion leaders (KOLs), clinical advisors, or value analysis committees (VACs) in hospitals. This helps ensure the product meets clinical needs and purchasing expectations.  Strategics often participate early through in-house venture investments, sometimes tied to development or distribution deals.  Passing through diligence from a major device manufacturer is often a signal that the venture is on the right track. 

6. Business Model and Reimbursement

Some devices fail to scale revenue because they lack reimbursement. Investors should evaluate whether the company understands its path to reimbursement—whether through CMS codes or private payor approval—and has aligned pricing, margins, and sales channels accordingly.

7. Team and Execution Capability

An experienced team with prior MedTech exits or regulatory knowledge is often a better bet than technical founders alone. Gaps in leadership—especially in regulatory or commercialization—can stall progress.  Boards which include device industry or medical VC veterans can be a big plus, especially for first-time founder teams. 

8. Capital Needs, Valuation, and Exit Strategy

Early-stage medtech companies often require multiple rounds of funding to reach commercialization. High burn rate, overvaluation, or lack of strategic acquisition interest may affect return potential. A realistic valuation and credible exit pathway—via M&A or partnership—are critical for angel or early-stage VC returns.

Some Common Pitfalls to Avoid

• No design completion or proof of concept

• Long, complex, or undefined regulatory path

• Low gross margins or inability to command premium pricing

• Inexperienced leadership or lack of medtech expertise

• No advocacy from clinicians or hospitals

• Overvaluation relative to risk and stage

Tip for Founders and Angels

We recommend allocating time to review of the venture’s timeline.  One well-crafted slide which shows key development milestones and funding needs for the next 3-5 years helps clarify not only timing expectations, but can also illuminate how risk resolution and valuation are expected to unfold. 

Angels in many sectors avoid pre-revenue companies, but most of our angel-appropriate medtech deal flow balances low to moderate valuations with development risks.  We often work backwards from commencement of revenues – especially product sales consistent with the full value proposition which may require clinical and field experience beyond initial regulatory clearance.  Proceeding backwards to the present should clarify key milestones such as regulatory clearance; regulatory filing; completion of pivotal studies; initiation of clinical studies; completion of pre-clinical work; and design freeze.  Cash required to reach each milestone should be clear along with the expected timing for bringing in institutional and/or strategic investors. 

Investors should feel confident that the valuation reflects the amount of time and risk – including the risk of running out of money – relative to the amount of “wood to chop.”  A clear timeline will also facilitate discussion at later funding rounds.  Not everything goes according to plan, but strong teams will inspire confidence through honest appraisal of how well they’re tracking to plan and why their updated timeline is achievable.

Conclusion

Investing in early-stage medical devices requires more than capital—it demands rigorous diligence and sector-specific insight. By focusing on market validation, regulatory feasibility, reimbursement pathways, and team strength, investors can better identify companies with true potential—and avoid costly missteps.

Are you an entrepreneur seeking angel funding? Learn more about how to apply to pitch to the HBS Alumni Angels of Greater New York.

About the authors:

Jay Kumar co-leads the Medical Devices sector at HBS Alumni Angels of NY along with Mauri Rosenthal. Currently he oversees an investment firm. Previously, he was a Principal in the healthcare practice of a strategy consulting firm, and was involved in his family's manufacturing businesses overseas. Jay holds an MBA from Harvard Business School and BS Mechanical Engineering from MIT. 

Mauri Rosenthal - Mauri Rosenthal is an early stage investor with 4 decades of experience evaluating and developing new medical technologies. His 30+ year career at Pfizer was split between specialty Medical Devices and Pharmaceuticals, with high impact on building leading product positions in a wide range of therapeutic areas. Mauri holds an MBA from Harvard Business School and a BS in Life Sciences from MIT.