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Angels and Money

Author: Ethan Agritelley
Wednesday, July 12, 2017

Angels and Money: Financing Your Medical Device through Angel Funding

Blog written by: Ethan Agritelley under the supervision of Christian P. DiPaola, MD

Dr. Leonard Schultz—retired general surgeon and lead innovator in operating room smoke evacuation and filtration—calls the process of medical device development a “journey of recurrent obstructions.” I recently talked with Dr. Schultz about his ventures as an entrepreneur and medical device inventor. Dr. Schultz holds over 40 domestic and international patents for devices that remove fumes during surgery and is the founder of two medical device companies, including Nascent Surgical.

Developing and funding a company are essential to long-term success in creating and selling a medical device. Before bringing a medical device to market, however, there are a myriad of early steps—concept development, patenting, prototyping, manufacturing—that must be funded. How does this funding seriously start? The answer is angel investors.

1. Who are Angels?

An angel investor is a high net worth individual who provides capital in early stages of research and concept development. Specifically for medical device entrepreneurs, angels kick start the process beyond personal investment.

Angel investors fill in the gaps between the stages of innovation and invention for an entrepreneur, especially for technology-based medical devices. Ultimately, they are the intermediate financiers after the entrepreneurs exhaust $30,000-40,000 from their own personal pockets, their immediate family, and their friends, but before receiving funding from venture capitalists or equity funding.

2. Characteristics?

Unlike traditional venture capitalists, angels:

  • Invest anywhere from $50,000-$2 million of their own money for about 1 year
  • Do not use legal contracts to protect their investments. Since angels typically don’t invest on as large a scale as venture capitalists, formal contracts are not cost effective.
  • Form a “network of trust” with the entrepreneur by forming close relationships. It is said that angels “invest in the entrepreneur, not the viability of the product.”
  • Actively monitor the development of the medical concept and prototype
  • Patiently wait 5-7 years for a return on investment

3. When does financing occur?

Financing for any business is typically partitioned into “rounds,” each of which specify the type of stock being sold to investors. During the early years of a start-up company, financing is divided into approximately four rounds: Seed, Series A, Series B, and Series C. Series A, B, and C all involve financing from venture capitalists. I will primarily focus on the seed financing round, where angel investors play the most significant role.

What is seed financing? Akin to the lifecycle of any plant, you must plant a seed in rich soil and nourish it before the seed can mature into a fully functioning plant for harvesting. In the context of financing—the seed is the product concept and the seed to initially develop and test their concept to a point of functional maturity where venture capitalists are willing to invest more heavily.

As Dr. Schultz noted, for both companies he founded, seed funding was composed of two major costs that initially financed his smoke evacuation invention: intellectual property commitment and prototyping. On average, both enterprises cost around $30,000-40,000, on top of the patent search fee of about $500.

4. How does financing occur?

Additionally, Dr. Schultz explained how once he had his product concept, he traveled around to various hospitals and companies that would gain the most from his device. This enabled him the best chance to receive funds from companies or angels, alike. Unlike the formal and professional process of venture capital financing, angels use more informal methods of funding, like online crowdfunding platforms or angel groups, described more below. Angels can fund through various vehicles, including a limited liability company or investment funds.

Another method Dr. Schultz used to offset investments was to negotiate exclusive rights to manufacture and sell the product to the LLC’s.

5. What are the risks involved?

Angels invest in pre-revenue companies—before commercialization and revenue generation. Angels are not guaranteed return on the money they invest. In fact, when an angel funds only one product or concept, he will typically not break even. Most take a portfolio approach, however, and after about six separate investments, they historically have a better probability of breaking even or receiving a positive return.

So although angels can and do make money from their investments, the methodology is high-risk and very uncertain. To decrease this uncertainty and protect their investment, angels:

  • Invest in areas that they are knowledgeable or passionate about.
  • Invest locally
  • Co-invest with 6-12 local and like-minded angels

Today, about 30% of angel funding comes from these angel groups, also known as angel syndicates. Not only do these syndicates diversify risks, but they also increase networking that in turn may help bring the product to the market. Currently, the Angel Capital Association, a hub for angel syndicates around the United States, is the largest professional association in the world.

6. What are the limitations?

The SEC highly regulates angel funding. Under Title 17, angels must be “accredited investors,” who have:

  • An individual or joint marital net worth of at least $1,000,000 (excluding homes)
  • Yearly individual income greater than $200,000 or a joint marital income greater than $300,000 for the past two years and the reasonable expectation of reaching the same income level for the future year

Angels are the best investors to finance early-stage medical technology research and development or initial prototype designs. By forming syndicates, building portfolios of at least 6 companies and investing locally, angels mitigate the risks associated with funding their own money, while supporting local business and national funding relationships. Angels provide the seed capital necessary to jump-start companies by preceding the larger sums of money funded by venture capitalists that bring medical technology devices to the market.


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