Using Revenue-Based Financing to Grow in the Pandemic

October 15, 2020

One revenue-based funding investor shares real-world examples of firms that gained access to cash without giving up a piece of the company

For well-positioned medical device companies, recessions and uncertain economic conditions are surmountable challenges. But a recession as deep and uncertain as the COVID-induced shutdown can leave a lasting mark for companies still requiring capital investment.

In 2020, medical device companies suffered from the twin challenges of a near moratorium on elective medical procedures and deep disruptions to their supply chain. According to GlobalData, “Between 70–100% of all the aesthetic procedures performed in the U.S. are estimated to be delayed, postponed, or canceled due to COVID-19.”

Analysts, meanwhile, assure demand is still there. It is expected to fully rebound as soon as the virus subsides. This valley of paused revenue and continuing expenses can be dangerous territory for even strong companies. Venture capitalists smell opportunity. As a result, company founders can find themselves giving away a significant portion of ownership to land financing that will help them weather a short-lived economic event.

Revenue-based financing is an alternative. No equity is exchanged in return for funding. The investment is simply paid back from future revenue.

Decathlon Capital recently funded several medical device companies, understanding the short-term disruptions to the industry did not change the long-term picture of robust growth over the long term. The medical device industry is expected to experience compounded annual growth of 4.1 percent over the next five years, according to Lucintel.

For Decathlon Capital, this moment in time is an opportunity to fund solid companies with powerful growth potential. For the companies, it is a perfectly timed cash infusion during marketplace disruption without having to hand over a piece of the company.

Following is a look at some recent medical device deals that highlighted the strength of the medical device market and the flexibility of revenue-based funding.

Aesthetics Biomedical
As previously mentioned, the aesthetics space in healthcare has experienced a nearly total pause during the pandemic. But, the long-term picture for an innovator like Aesthetics Biomedical is extremely bright.

The global aesthetics market was estimated at approximately $52.5 billion in 2018, according to Grand View Research, and is expected to grow at a compounded annual rate of 8.9 percent through 2026. That growth will be led by non-invasive and minimally invasive procedures—which Aesthetics Biomedical specializes in—and powered by the population growth in the 30-65 year-old demographic.

Aesthetics Biomedical’s unique aesthetics innovations include the Vivace and SoMe products. Vivace is a fractional microneedle therapy device that naturally stimulates collagen production and reduces the effects of skin aging. SoMe is an anti-aging skin care product that uses a patient’s own platelet-rich plasma to deliver personalized skin rejuvenation.

The demand for these procedures and therapies, on hold during the pandemic, are likely to rebound sharply as vaccines or virus therapies give patients confidence to resume selective therapies.

Interestingly, Aesthetics Biomedical had a term sheet from a venture capital firm in front of them when they decided to pursue revenue-based financing.

Sonacare Medical
Sonacare’s high intensity focused ultrasound is actually a step forward in the type of invasive surgery that is problematic during the pandemic. The company markets a surgery-free alternative for the ablation of tumors and other unwanted tissue.

Sonacare’s FDA-cleared technology and powerful growth profile attracted Decathlon Capital to the company, whose owners and executives also had a venture capital term sheet in front of them. Their “surgery without a scalpel” model reduces recovery times. Sonablate, the first high-frequency ultrasound probe to be commercialized, is particularly effective in treating prostate cancer with precision.

Decathlon Capital’s funding allows the company to continue growth plans without having to go back to the equity markets during a particularly difficult time to raise money at fair valuations.

Additional Cases
These two funding deals in the midst of the COVID crisis are similar to other medical device and medical equipment investments Decathlon has completed recently.

Irrisept, a wound irrigation product, accepted Decathlon Capital funding, paying back the investment early with cash and some equity it raised at a higher valuation as the company matured.

Heart Sync, another Decathlon Capital investment, was acquired by Japanese medical device company Nissha. The heart defibrillation electrode maker paid back the Decathlon investment as part of the transaction.

These transactions showcase the flexibility and company-friendly approach of revenue-based financing, especially in a growing industry that may be hard to properly value during an unprecedented pandemic.

During an economic crisis like this, companies are approached by equity players looking at the pandemic as a way to offer terms not friendly to founders. Revenue-based funding investors offer something different. There is no valuation event so there is no down round that could signal, incorrectly, weakness after the pandemic passes. Revenue-based funding is a simple funding approach that is often a superior way for companies to continue growing as business owners are able to access capital for growth without any dilution, change in governance, or operational involvement from an investor.