What Impact Does a QMS & Regulatory Have on Fundraising and Pre-money Valuation?

How does a quality management system (QMS) and regulatory affairs impact fundraising, pre-money valuation, market access, and commercialization for medical device companies?

In this episode of the Global Medical Device Podcast, Etienne Nichols talks to Cristiano Fontana, founder and CEO of ThreeBridges.

ThreeBridges is a consulting firm that provides business development advisory services for startups, distribution companies, and subject matter experts (SMEs) in the global medtech market. Also, Cristiano is a co-founder of CrossBay Medical, Inc., and partner of IStarter and ClubDealOnline.

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Some highlights of this episode include:

• When someone evaluates and/or values a company, QMS and regulatory impacts fundraising rounds and pre-money valuation by asking for backup evidence as well as understanding business models and financial motives.

• Cristiano describes the common paths that startups and entrepreneurs take when considering valuation. Start with a clear idea of the entire journey to create a reliable and consistent business plan.

• Cristiano’s fundraising strategy is knowing how much money is needed for different stages and consistently targeting the ideal investor (tier 1 or 2).

• When approaching investors, expect a lot of ‘no’s’ from investors, but you only need one, ‘yes.’ It’s a learning process to identify QMS/regulatory inconsistencies related to fundraising and pre-money valuation.

• Medical device companies may face specific challenges, such as demand, expertise, and selecting investors. Also, know about regulatory approval, debt, and reimbursement and mitigate risk, generate cash flow, and grow with a QMS.

• There are several differences when it comes to fundraising in the United States compared to the European Union (EU), including the amount of equity/money in the market and investors’ expectations of how a company is managed.

• Cristiano offers advice on the dilution of funds and company ownership. Consider how the money will be used and the actual versus relative numbers of valuation.

Links:

ThreeBridges

Cristiano Fontana on LinkedIn

EU Medical Device Regulation (MDR)

FDA - Pathway to Approval

ISO 13485

Greenlight Guru YouTube Channel

MedTech True Quality Stories Podcast

Greenlight Guru Academy

Greenlight Guru

Global Medical Device Podcast Email

Memorable quotes from Cristiano Fontana:

“Come up with a business plan that is reliable as far as a business plan can be reliable.”

“You need a deep understanding of your business model, your market potential, your value position, so that you understand what really is the potential of the product.”

“Many times, people are not succeeding in fundraising or are delaying the time for getting their money because they’re not targeting the right people.”

“You need, also, to show that you know what a QMS is, you have that in place already, and it is really efficient and well managed. Having something that is well structured that is tailor made but is well recognized on the market that is working.”

Transcript

Announcer: Welcome to the Global Medical Device Podcast, where today's brightest minds in the medical device industry go to get their most useful and actionable insider knowledge, direct from some of the world's leading medical device experts and companies.

Etienne Nichols: Hey, everyone, welcome back. Today, we're going to be talking with Cristiano Fontana, with Three Bridges. We're going to be talking a little bit about fundraising and pre- money valuation. Cristiano is a co- founder of Cross Bay Medical Inc. He has over 15 years experience in the healthcare environment. You'll be able to tell throughout the episode that I do not speak Italian, but Cristiano is very gracious in the way I pronounce his name, and so forth. In addition to his role at Cross Bay Medical, Cristiano serves as a partner of iStarter, one of the top European angel- led accelerators, created by 100 top managers and entrepreneurs. He's also a partner of ClubDealOnline, which is an equity crowdfunding portal that connects growth- ready entrepreneurs, like startups and SME's with investors. In 2018, he founded Three Bridges M& C, which is a consulting firm that provides business development advisory services for startups, distribution companies, and SME's in the global med- tech market. He was born in Milan, Italy. And Cristiano studied economics, business, and later earned a master's degree in corporate management and an executive MBA and an executive in corporate finance at SDA Bocconi. Cristiano has a lot of experience to share with companies who are seeking funding. I hope you're able to gain some valuable insights in this episode. Thanks. Hey, everyone. Welcome back to the Global Medical Device Podcast. This is Etienne Nichols, your host. Today with me is Cristiano Fontana. We're going to be talking about QMS and the regulatory impacts on fundraising, pre- money valuation, and market access, and commercialization. I'm laughing a little bit, because I've already messed up. So, Cristiano has one in the bag and hopefully we can get through this podcast and have a good time today. Cristiano, do you want to talk a little bit about your company? We have some detail to get into about fundraising, but maybe, we can talk about what you do at Three Bridges.

Cristiano Fontana: Sure. First of all, thanks for having me. It's a pleasure to be here. Just a few words about myself and my background. I'm in the med- tech space since more or less, almost 20 years now and background is 100% business, more on the corporate finance, let's say side of it. But then, in professional life, I started and been working in the commercialization of medical devices for almost 15 years. Been involved in many different clinical areas, all the major surgeries, orthopedics, Ob/ Gyn, pediatrics, also diagnostic. And I would say working with the corporation as a partner, as a distributor like Medtronic, Bayer, and so on, but also many other small companies that wanted to introduce new technologies into different territory. So I really learned how to introduce medical devices in different systems. And I also, co- founded a startup back in 2009 in the Ob/ Gyn space called Cross Bay Medical, where I'm still board member, based in California and we have taken through FDA. So I learned a little bit the path from product development to regulatory and so on. And we had three early deals with corporations, licensing for global rights. And then I decided to move into the consultancy side of the business and I founded Three Bridges where I'm CEO. And we are a consulting company, 100% focused on med- tech helping mainly early stage, and so startups, finding their way from product development to fundraising regulatory and market access and initial commercialization. So we're a small team of professionals with different expertise. There is people in the team that are more engineering product dev oriented, other that are regulatory, myself that I do. And probably we're going to talk about that a little bit also fundraising and pre- money valuation, and other that are pure marketing and sales. The team is based in US, Europe, Middle East, and Singapore. So this is what we do. And we also of course cooperate with Greenlight Guru and we have a partnership in place. So that's also one of the reasons why.

Etienne Nichols: Well, I'm glad to have you here. And your extensive background, I think is going to be very beneficial to a lot of companies if take advantage of maybe some of the advice that you give today. One of the questions that comes to mind when I talk about pre- money valuation or the impacts on fundraising, we talked a little bit, or we mentioned in the beginning QMS and regulatory impact. What does that look like to you or someone coming in to evaluate a company or value a company? What are they looking for?

Cristiano Fontana: So they are looking first to understand, is it from the entrepreneur side, let's say they ask for evaluation in order to understand or having some backup and stand behind their demand and ask when they're looking for fundraising and try to raise funds. And they're asking for some time just for evidence that can back up what they would like to have as an evaluation. And they also looking for understanding, let's say the models that they can use to value their company. And they also like to understand how much is the ownership that they have to live. And so it's also a matter of understanding exactly the fundraising strategy and the dilution strategy. That's not just about the round they're facing, but also know the following rounds that probably they will have to go through in the next phases. And yeah, so that's the first thing, but also then it turns to be many different things. It turns to be our internal exercise to really challenge their business model. And it turns to be sort of negotiational stand perspective where they would like to give less of the company to the investor. But many times they don't have an idea of what kind of investor they're talking to and what really their valuation or their financial models that they build really can help them toward a different investor. Which is very different from a business angel to a family office, to a VC institutional investor. You have to approach the conversation to those investment in different ways.

Etienne Nichols: Okay. That makes sense. So early stage entrepreneur startups, like you said, there's different paths. What are some of the more common paths or can you describe some different things that maybe an early stage company needs to be thinking about?

Cristiano Fontana: Regarding what the evaluation or...

Etienne Nichols: Yeah. Regarding the valuation. So if they're going to be approached by... What's the best way for them to start looking for that fundraising or I don't know. There's so many different ways.

Cristiano Fontana: Yeah, but I understand your point. So the first thing would be to really have a clear idea of the entire journey. So what it will take from that understanding really their business model, their story, their narrative. Come up with a business plan that is reliable as far as a business plan can be reliable, but at least that there is a consistency between the strategic view and the narrative and the numbers that you have been able to attach to that story. At that point, you understand also you need really a deep understanding of your business model, your market potential, your value proposition. And so that you understand what really is the potential of the project, because from that point of view, you need to understand also the kind of ecosystem where you are. For example, it changed a lot if you're busier in Italy or in US, in terms of what kind of money you will have access to and what kind of expectation the market will have. So all these combined can give you, let's say some information to put together a sort of a fundraising strategy, which means at the end understanding how much money supposedly you would need from now to a possible way out or exit, exit windows and how you will ideally split that amount in a sort of perfect dilution strategy. And at that point, you understand that when you have split all these different rounds, as many as you need from one to X, you also understand the amount of each one, which is ideal. And so at that point, you should understand at least what kind of investor you should target as tier one, as tier two, because many times people are not succeeding in fundraising or delay the time for getting their money because they're not targeting the right people because there is not a consistency between what their proposal is and to who are they proposing project.

Etienne Nichols: Yeah. That makes sense.

Cristiano Fontana: I don't know if I answered to your question.

Etienne Nichols: Yeah, no. It was a shotgun question. You gave a great answer. I think you covered a lot of ground. But you did make me think of something. So those inconsistencies, when someone is approaching investors, how do they shore that up? Do they just have to go through a few rounds to see where they're missing the mark or do you have suggestions?

Cristiano Fontana: Many times it's a learning process. Well, our values actually that what we try to provide is try to avoid learning the other way. But the reality is that you will have a lot of nos before one yes. You just need one yes from investor and people also many times that they're not ready for that. They get disappointed about the negative answer, but negative answer really. And each time there are negative answer that are constructed. So one of my suggestions is always understanding, not just taking the negative answer from an investor as this, but raise the questions and understand if they found some gaps so that you can fill those gaps for the next one and you will be better prepared. Our role would be to interject that a little bit before and understand if that consistency based on our expert experience is already there or there are some gaps that are clear and so that we can better prepare the story for the investor. And that's what we try to do, but still, every time it's different and every investor in every moment is different. And sometimes they have fair feedback, other times there's some bias in what they do. Some other times they're just out of target, but they don't say that. And they prefer to say something different as an excuse, I would say, or to avoid to say the truth. So you have to also to be able to identify the positive feedback that you get, but yeah, absolutely. Those gaps typically shows up when someone tells you and as in life, I would say, you have to learn from the mistakes. And that's probably one of the key of success for the organizations.

Etienne Nichols: Yeah. That makes sense. And I can see where you're coming from. And a company's not going to necessarily want to give bad or constructive feedback. And like you said, in life I think most people, particularly an investor sitting across from a young entrepreneur, I would guess that they want them to succeed. Obviously they have to turn them down if it's not going to be a fit, but why else would they be listening if they're not looking for a success they're looking for someone they can invest in.

Cristiano Fontana: And also the way you approach, you have to be compelling to investors. So you are also to be convinced about your story, but at the same time, investors many time looks at how coachable you are down the road. Because nobody's perfect in that moment. But many times you invest also in that... Especially as early you get as more, the team is the core of the investment judgment. So if an investor understands that also the team is of course capable, has the right expertise, but is also coachable and can also understand the feedback or the fact that maybe something needs to be fixed down the road. But they know either how to do that, or they're open to learn or to increase the expertise in the team with new talent. That's very important. So expectation is not to be perfect at that moment. Expectation is to be as good as possible to convince someone that you are the right team in technology and value proposition investing.

Etienne Nichols: Yeah. But you mentioned a lot of different areas when you were giving an overview of your background. Could you talk about some of the specific challenges that medical devices face in fundraising, or are there any specific challenges for them as opposed to maybe other industries?

Cristiano Fontana: Well, I cannot tell you compared to other industries just because I've always been in med- tech.

Etienne Nichols: Yeah.

Cristiano Fontana: So I don't have a comparison. But I would say difficulties there are typically because difficulties are coming from the fact that demand is bigger than the offer. So someone will be successful and some other, no. And sometime the fact you have not been successful again can come from many different factors. It can be from a technology perspective. Maybe the technology is not as good as you expect to be, or it can be from the technology is good, but it's not well protected. Or there's not the right protection or you just, again, targeted the wrong people to talk with because that business model does not say, get along with for example VC and or not in that phase. And so you're just out of phasing and you don't understand exactly why. Some other times also, many times it's about team, great idea, good technology, but you know, the lack of ability to execution. And that's one of the major, I would say, subset where difficulties come and no execution means lack of results. Lack of results, it means putting doubts in the investor side. And again, maybe team, but not just the expertise, but the inability to understand that you need to grow as an organization. And so people are not willing to invest in someone that is stubborn too much.

Etienne Nichols: Yeah.

Cristiano Fontana: There's a good part of being stubborn and there is a bad part being stubborn. And so you have also to be really well balanced in that. Those are the first things that comes in my mind.

Etienne Nichols: It's like you said, I guess sometimes investing, you're trusting someone in to a certain degree, so you're going to treat them like that.

Cristiano Fontana: 100%. There's going to be a lot of trust, especially in the, again, the early stage, because you are selling potential. And to sell potential and not results, or you're not in that phase where you can have a traction, you can have a lot of results from the clinical validation, you are selling potential. And selling potential means that it's correlated to who is selling that potential. So it needs to be consistent the story, the numbers should be there. You should be able to defend what number you put in the business plan and so on. You should be able to tell that you know how is going to be the go to market, you know what is going to happen there. You know that you will need a lot of people to get there, but your direction is clear. And you also open to the flexibility because you can have a great plan, but it's never going to be like you imagine. It's never going to be like the deck that you're presenting. If you're presenting the same number in a month from now, you will already have to change it. So you have to be open. I always try to be fair and suggest fairness. I don't know if it's the right word, especially when it comes to business plan and projections. I always say it's better to be open in discussion and explain all the different things that can vary and leverage and modify what is your plan. Because nobody can really claim at this moment that this is what is going to happen. Nobody. And the reality is that if we meet again in three, four months from now probably is not what I told you. And the only thing that you have to, I think it's important really that you show is that you have enough expertise and experience to know that it's not going to be like that, but to know how you will manage it. According to different things that can happen. That's very important too.

Etienne Nichols: It's interesting, as you're talking about that, you're going to have to defend whatever it is you say to a certain degree. I would think medical device companies should be used to that mentality. They know they may get audited or inspected by whether it's the FDA and so forth. So really defending their plan to the investor makes sense. It's part of life I suppose. One thing I wanted to ask about then, it may be a little selfish on my part, representing Greenlight Guru from my side anyway, the Global Medical Device Podcast. And for those of you who are listening, who don't know what Greenlight Guru is, it's an electronic quality management system that allows you to document your processes and procedures and work through a lot of automated workflows and so forth. So from your perspective, Cristiano, when you see a company that has something like that versus maybe a paper based system, is there any difference in the minds of investors or what is that difference? Just curious.

Cristiano Fontana: Yeah. So I would say the QMS and all about the quality and slash regulatory, it became and it's becoming more and more important because it's a crucial factor in the success of the entire project. So if you, let's say, don't put enough importance to that from the beginning of the product, or you are not aware about how big is that factor, what kind of impact it will have in your entire product. It may result in sort of either huge and unaffordable delay or in a total failure. So from an investor's standpoint, definitely as when you're pitching, you have to show that you know about your regulatory path, you have to show that you know about what kind of reimbursement the product will have once is going to be in the market in maybe in different L systems. You need also to show that you know what a QMS is, you have that in place already, and it is really efficient and well managed and having something that is well structured, that is tailor made, but is well recognized in the market that is working and supporting many different companies, definitely is a risk factor that will be flagged out. So that's the main point. So it's super important.

Etienne Nichols: That's a great word that you used, I think, is risk and eliminating that risk. Because I assume an investor, that's one of their biggest concerns is what are the risks associated?

Cristiano Fontana: Absolutely. And QMS risk is associated with the regulatory approval, getting that in the right amount of time or getting that yes or no is about... So the go to market and then it comes back to valuation at the end. Exactly valuation is the same. It's about cash flow, growth and risk and risk is associated to that. So everybody, everything is correlated.

Etienne Nichols: Yeah. That makes sense. There's the easy, I guess, evaluation of that risk and just a... There's a delay to market, but there's also the potential what if you get to market and your QMS had issues and now you have an audit finding, your reputation, so forth.

Cristiano Fontana: Yeah. And also the, again, valuation I was saying risk, cash flow and growth. And that would impact your growth because once you get to the market, you have to spend your time trying to sell. If you have to fix things that should have been fixed before and spend time, it will be much more expensive and then it will slow down the adoption rate and your growth rate and then always try to suggest. And once you get to a commercial phase, you will be gauged on traction, which is the worst thing that can happen to you because traction, it's never like in the Excel file. And so always my suggestion is always try to push to talk about pilot commercial launch, limited loans, because once you claim your full commercial, then traction is going to be number one. Yeah. So if anything that will slow down there and there's already the market that will slow down your adoption, because it's going to be tougher because something is planning, projecting training also in the QMS or training the trainee, training the reps, training the customers and the accounts. But then there's going to be push backs. There's going to be difficulties. There's going to be unforeseeable misusage or whatever, it's going to happen everything. It's totally different when someone knocks on doctor's door and try to really have them using your technology, then it's going to be the administrative side and blah, blah. It's already a mess. You don't have to make it more complicated. You have to prepare to get you prepared for that notice.

Etienne Nichols: I love that advice about phasing out your launch into the commercial strategy so that you can maybe set yourself up for success, take off bites of manageable chunks, I suppose, of the market is what it sounds like. So this is slightly, I guess, a different direction, but one of the things I noticed we had on our notes, the difference in fundraising between the US and the EU, is that something you can speak to?

Cristiano Fontana: Yeah, definitely. There are a lot of differences that are mainly due to the differences in the amount of liquidity that is on the market. And US is exponential in comparison to what is EU. And I'm based in Italy and Italy is the niche of the EU market. So already France or UK are 20, 30 times the amount that are invested in every year in early stage companies from VCs or a number of VCs. So what is the results coming from it is first of all that if you take the same company, for the same technology for argument's sake, and you put it in Milan, and I don't know, there's going to be probably for the same kind of product development, one company, we raised 40, 50 millions and the other one probably will be able to get one 10% of it. But both we get to the same point. So there's going to be much more, it's also different business model in the way the company company's managed from the, let's say, two areas. It's more, let's say capital expensive invest, but also because there's more liquidity. And also the way investor looks at are more keen on say, I need you to have a... They're, let's say, many times they're positive because it means that you're pushing. Here is maybe, try to spend the right amount. And if you don't have to spend, don't do that. So there are two different ways to approach us on their side, but also because they have less money to put in these companies. And second thing I would say is from the M and A standpoint, they leverage that because typically, if you look at valuation and value in the amount, US is typically, probably majority where it comes, the majority of the value in the M and A. So in the transactions, which means that of course return that investor in US are more aggressive because they, you know, they know that it can get it. For a European investor many times they know that at the end, there's going to be the transaction to the US market if the return needs to be there. And so there's going to be probably more rounds and the company needs to transfer part of the organization in the US. So it's also different path and that's also a big difference in the way investor approach. And then again, the number in the US is totally different than here group of business angels is totally different than here. So the volumes are different that's for sure.

Etienne Nichols: Yeah. So just to make sure I followed, so a company, like you said, in the Bay Area in the US, there might be more money available for them, but also a more aggressive managing of that investment. Is that accurate?

Cristiano Fontana: Yeah, I would say, just to explain better for sure there's an access to bigger amount of money. And that's one thing. So what I was saying is that let's go back to valuation. The same company will be valued two different ways, same company, two different area, because valuation needs to take on count also where it's located and what kind of access to liquidity and funds the company will have and will look at the company, what kind of valuation they offer will make. So that's one thing. The second thing that I was saying, there's also a difference in the expectation of how the company will be managed. In US there's a little bit more aggressive in terms of, they want to see a burn rate. I'm not saying splurging or wasting money. I'm not saying that, but the concept is I need lots of money because I need to attract the best talent and the best talent costs a lot, but I will have a high burn rate. But I will push the project to the next phase, let's say, faster or in a better way. Here, let's say in Europe, probably this is not as aggressive as it is, two angles of the same.

Etienne Nichols: Makes a lot of sense. So even if you have a high burn rate in the US, they're willing to accept that high burn rate, assuming you get a payoff sooner, possibly.

Cristiano Fontana: Okay. I said, there's more will to..

Etienne Nichols: Right.

Cristiano Fontana: There's more will to.

Etienne Nichols: Okay. Interesting. Yeah. The differences are always interesting in that regard. So I'm curious, so you being right there with the Europe, the EUMDR has that affected if a company plans to market to the EU versus the US. Obviously we have those two different companies in two different locations, but how has that affected valuation and what are your thoughts?

Cristiano Fontana: I think it changed completely the game right now in the long term, because I hope that things will be a little bit less variable here in EU, I'm talking about I'm referring to. But it completely changed again because before there was almost a mandatory path for a European company saying you get... Many times also for US company, get first because it was easier and less expensive. And then target the FDA, even though FDA is always 80%, I would say of the cases, the big target due to the fact that it's the big market for value. And now things have completely changed because MDR made getting approval in Europe, much more complex is still not 100% clear. There are lot of things that, because it's new, so there's going to be a lot of learning process on both sides from notified body and from companies. There is the transaction phase from MD to MDR. There's also a little bit confused or sobering at the moment. Many companies have changed completely their strategy. So looking at the FDA first, if we are not talking about a PMA in particular, but a class two, and then going to see afterwards. So that's definitely something that needs to be taken account because violation is also sometime depends on the model, but sometimes it's also a discount of market and revenues projection, cash flow projection in particular. And so if a target first to go to the US market, it means probably you have stronger penetration or higher revenues before the problem that I see coming is that you can project that, but European companies have no clue to commercialize in US. They just know that it's a big market. They no number, they know the market potential, they know number procedures, but when it comes down to say, okay, are you going to do that? That's a little bit...

Etienne Nichols: Yeah. Playing at your home stadium, I suppose, sort of.

Cristiano Fontana: Exactly. It's different. It's vice versa. Of course US, many times the US company think about domestic in first, second and third place. When they talk about what is your plan outside of US, they don't have a plan. They say, well, we're just focused on invest. So that's also something that we try to help supporting them in having a least a plan, understanding what kind of potential is going to be outside of US in different areas. And whether it makes sense to either execute something already, or just have a plan that can help them in the negotiation. For example, if they have to sit down with the strategic, with the FDA approval, but having a clear path plan and knowing the potential of their technology outside of US can be a good add on in their valuation.

Etienne Nichols: That's a great point.

Cristiano Fontana: Even if they didn't didn't execute it anything. Execute anything.

Etienne Nichols: Interesting. So, yeah, this is kind of going to seem like a little bit of a rabbit trail, I suppose, but the FDA is working currently on harmonizing the current QSR, their regulation with ISO 1345. I'm sure you're familiar. In their proposed ruling, there were about 4, 000 companies that were not maybe never planned to do ISO 1345 or pursue the ISO 1345 certification and so forth, which is interesting. But I assume of that number, I assume those are all then just purely US specific focused companies. That being said, what you're suggesting now is, maybe if they have a broader outlook or more, a global outlook could improve their valuation even.

Cristiano Fontana: Yeah, I'm just saying that if you, yourself sitting down with a strategic that runs global, it wants, let's say take over the company or just licensing from global rights. And if you have no clue what is the potential, or what the regulatory path, what is the market taxes, nothing, of course you don't have two legs to stand on. And so what I was saying, if you don't want to execute for any reason, but at least have done your own work, may give you some skin in that kind of negotiation when, when you sit down and maybe... Of course, it's not going to be 60% of the valuation that you will get out of that deal, but even 10% or 50% is better to have it than not to have it. Compared to probably the effort that he made for at least having an understanding of what technology can work outside it.

Etienne Nichols: Yeah. Sounds like that kind of research would definitely pay off, so that makes sense. Kind of go to a different direction. So I'm curious about impactors on the way out success. So maybe timing and broad strategic overviews. If we talk about funding, that makes sense, you know what you're saying. But then what about the way out success? What are some different things that maybe we can look at it like this? What are some pitfalls you see companies getting into that negatively impact their way out success, or do you have any thoughts on?

Cristiano Fontana: Well, yeah. There's also on this side, there are so many variables and every time if you look at this statistic, clearly the majority of the exit happen on a commercial phase. So that statistic is not a question is a fact. But if you talk with, and that's also, if you talk with the entrepreneur and startups, I would say the majority of the time, they don't think that they will have their exit on a complete commercial phase. So there's always this kind of contrast because they say, no, I'm just getting the approval, probably have some post market start and that's it, that's when I'm going to be bought. So yeah, probably it will happen, but statistically speaking less than. So you need to have a plan all the way, at least knowing how you can do that then, but it can happen also before earlier. So what are the factors? Factors would be many of course. I always say that you don't know when the exit or someone will knock on your doors. You, as CEO of startups or management team of startups need to work in a manner that in any time this will happen, you will be at the max valuation possible for that moment. And that's the way you have to manage the company. So factors, no, of course you need to, for example, have a consistency between the big part of the value of your market potential ease and your strategy and regulatory path. Means that if there are not other condition, if you know that 80% is coming from US, probably you should look at FDA first in any case. If there are not other conditions that you leverage for others path and strategies. That's one. Secondly is how close you are with the end user. That for me is very important because many times companies are, have been funded and products has been developed by a team of engineer and maybe some clinicians, but they have a lack of connections with the market and with the customers. And that means that they cannot get maybe endorsement or the right endorsement. Endorsement is very important with the risk, then it's also right moment to get in touch with which nobody knows when it is. Definitely, something that I always heard and also experience is that you don't have to think that... You get in touch with the Medtronic on Tuesday and you will get the deal on Sunday. So it's going to be a long relationship. Maybe it's worth to start something even when it's early, because then they will see you growing and you start the relationship with the trust. And that's typically what it happens. Then of course there can be some, how do you say? When you fall in love in a moment. But typically what happens is that also there's going to be a relationship because they need to know you and the technology and even the risk, they're not in general. You have to really think about all the stakeholders that will impact your exit and start working on all the different aspects. The market, the strategics, clinical endorsement, putting in place the partnership for commercial network and all these things need to be in each moment at the right level. Again, then of course, if you will need to get to company that technology is sold in 40 countries with 50, 100 millions in revenues, then everybody possibly would buy you because you have the risk at everything. And you did it in five years. But that's the old. And maybe you're returning that moment will be max, even though you have always to kind also the dilution part of it. Because you maybe have been diluted depends also on the fundraising. So there is also a trade off there. But yeah, those are the things that can really impact your exit ability. And then there is the one that, I think it probably is 40% of all the rest, which is luck. Finding yourself in the right moment in the right time is the crucial thing.

Etienne Nichols: We always forget about luck. You're absolutely right.

Cristiano Fontana: No, I know. Because maybe in that moment, that strategic is looking for something in your area. That's one of the key, you cannot control that much.

Etienne Nichols: Yeah. And sometimes we forget, we might increase our luck by increasing our network. So there's a lot of different things there. You mentioned something there, dilution. I think a lot of people maybe when they're early on, they think, oh, I don't want to dilute my funds. I don't want to dilute my ownership of the company. Do you have any advice there? I know it's a broad spectrum, but what are your thoughts on dilution?

Cristiano Fontana: Yeah. First thought is that dilution is just one part of the discussion here. There's the flip side, which is valuation. So many times I'm facing difficulties in having entrepreneur or management or owners say shareholders that they don't want to get diluted. And I always say, well, it depends on how much money, which evaluation, how you will use that money. What evaluation will be the next time? So it's a trade off if. Just for argument's sake, it's better to have 100% of a million or 10% of a billion. So you cannot just speak about dilution itself, it's dilution and the flip side, which is valuation. So it's always something that you have to really to be careful, there is some risk because every time you should try to get less than possible, but you need also to get enough money and especially have the ability to spend that money to let's say, maximize the growth of the valuation of the company. If you are able to do that one, two, three, four, five times, you don't have to matter about being diluted because it's going to be at the end, the money that is going to come in your pocket out, always getting bigger and bigger and bigger. So that's what you have to really look for. But not about the percentage itself, but the real value.

Etienne Nichols: Yeah. It makes total sense. When you start talking about actual numbers 10% of this number versus 100% of that. So that makes a lot of sense. How do you overcome those conversations or just presenting that math? Does that usually get through to people?

Cristiano Fontana: Sometime. I also got the answer. Yeah, I prefer 100% of a million.

Etienne Nichols: Control. Okay.

Cristiano Fontana: I say, okay, up to you.

Etienne Nichols: I wonder if that goes back to the coaching thing that you were mentioning earlier.

Cristiano Fontana: Exactly. That probably is a red flag of possible risk in what the team is. But yeah, it's more to take the discussion to a more comprehensive angle and say you don't have to look at the percentage itself. You have to look at the percentage and bend it in all this strategy and path and that you left to undergo. And if you really understand and execute well, the percentage is not going to be a problem. Of course, you would be better to be at the next percentage possible when someone will buy you out. But at the end, what you really want is 60 million and not 50, you don't care about the percent. You say, yeah, but I had 50% or you said I got 60 or 100 millions instead of 90 millions at that moment. So again, it's not just a percentage, it's about everything.

Etienne Nichols: The absolute numbers versus relative. Yep. That makes sense. So couple of other things that I wanted to just get your thoughts on. So you mentioned when we were talking about negative impactors, you mentioned a few things, the strategics, those conversations, making sure that everybody's happy. You mentioned keeping in touch with the clinic and the end user. I thought that those are different levels almost. In my mind, I think, oh, I want to please the guys with the money maybe, and to your detriment, you forget about the end user, which is really the person you're trying to serve and improve their quality of life. And without that, you're not going to get anywhere anyway. There are a few other things. So you also mentioned the team and I guess one of the things I'm curious about is how do you value that team? Or how do you put a number on that team? Of course, you've got those resumes. This person worked so many years at J and J and so forth. But how do you convince or persuade and show the proof that team truly is worth what they look like on paper? Or is that ever a question?

Cristiano Fontana: Yeah. That's for very early stage, but when you're valuating a company super early, where basically it's a precede or just the idea or even not an IP or file, or whatever. Of course team is a big part of the total amount. Sometimes it's a subjective type of evaluation. Of course you're going to base on their trial and how the team is, the expertise there, if they cover the different area already, or if they're just everyone is engineer and there's nothing else and no business. So you try also not just want to evaluate the person itself, meaning just objectively each person, but as an entire team and all the area that needs to be covered, how many of those are already covered. And if they realize that they're missing that because many times they even don't realize that because they are so, let's say so, not aware. I don't know if it's the right way to say that, but they're so not aware about what it will take. They even don't know that they will need someone that will let that kind of expertise. That's another red flag. So that's the only way that you can do so you can say, yeah, there are people with a stronger record, yes or no. They're all committed or they're not committed, many times there's no one that is really committed to the project, still talking about early phase, but is already a sign. And other times more valuing the team as group of human being and understanding what they have combined.

Etienne Nichols: How do you value that commitment? Is it dollars they've invested or time they're spending?

Cristiano Fontana: It's more, if there is someone that is really taking the project on his shoulders, yes or no. If they still have to look to their let's call champion, someone that would be the... Many times they are project that are funded and let's say developed by really group of expert people but nobody really is committed to that project. They're just giving their really all good guidance for the project, but they don't have anyone that will be the core team. So they have still to build. So that's the commitment. You need also, and this is also one investor, at a certain point investor will demand that. If they have to put money, they would ask people to be fully employed because there needs to be people that wakes up in the morning and eight, 10 hours a day, just want to that specific product. But the point for me is also understanding if there is someone that is putting all of what he has in the product, if it's going to be success or failure for him. It's not going to be like one of the 10 or 15 things that he has in parallel, or he's not going to change his life whether it's going to be successful or not. If there is someone already that more than one that already are putting all their future in that, that's already something that gives for sure, a lot more confidence. If that is also combining with people expertise that are sort of guiding these desire, maybe younger of the funders or funders team or whatever, the management team that's the right combination that you should have at the beginning, then you're growing the company. You will get fully employed and employees, and that's a different story.

Etienne Nichols: That makes sense. We've covered a lot of ground. And I know we've kind of gone in different directions. Do you have any additional thoughts you would recommend for our listeners or advice that you'd like to give?

Cristiano Fontana: No, I'm terrible in open questions.

Etienne Nichols: No, I totally-

Cristiano Fontana: From the school, I never answered to open questions.

Etienne Nichols: That's fair. Hey, you got to stick to your guns. I appreciate the conversation. It was good for me. Maybe we can do this again sometime, but I appreciate it. We'll put some links in the show notes so that people know how to get ahold of you Cristiano and your company. And I hope things continue to go well, whether it's in the US or the EU, things start to make sense. And those of you who have been listening, you've been listened to the Global Medical Device Podcast. Thanks for listening. And we will see you next time.

About the Global Medical Device Podcast:

The Global Medical Device Podcast powered by Greenlight Guru is where today's brightest minds in the medical device industry go to get their most useful and actionable insider knowledge, direct from some of the world's leading medical device experts and companies.

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