Where can early-stage medical technology companies go to find the next round of capital in what remains a difficult economy? With the help of a well-connected banker, attorney, or accountant, investors can be readily identified. Here's what you need to know about them.

Strategic investors

There are many strategic investors (individuals or firms that add value to the money they invest via contracts and market knowledge) with strong balance sheets looking to acquire game-changing technologies. Many feel that they would rather receive financing from a strategic investor in this weak economy since many strategic investors feel content to obtain a minority interest and not gain control of the company. Some also feel they can negotiate a higher valuation with a strategic investor in this market. Also, strategic investors typically are well versed in regulatory and reimbursement matters and can provide assistance in these areas. While these advantages might exist, it has never been more difficult to get the attention of strategic investors since there are so many companies for sale or in desperate need of financing. Internal merger and acquisition (M&A) departments are working harder than ever to evaluate deals and they are being very selective in evaluating which products are accretive to their current portfolios.

Angel investors

The key to finding money from an angel investor (individuals who back emerging entrepreneurial ventures, sometimes as a bridge to venture capital) is to understand the specific criteria of each angel network or fund and tailor your pitch accordingly. Many angel groups have formed recently to focus on biotech and medical device companies as these sectors plan to grow over the next few decades. This model is a good fit for angels as they are typically looking for long-term investments. While angel funding may be available to satisfy short-term cash needs, beware that the path to regulatory approval seems to take longer than ever these days, which means that commercializing your product without finding additional sources of financing will be a challenge. Additionally, there are some angels that will assist you strategically, but there are many more that will not because they do not have the time or experience.

Venture capital firms

While venture capitalists are working through their own issues at the moment, promising life sciences companies are still getting funded. The primary difference between angel investors and venture capitalists (VCs) is that VCs are typically not investing their own money, but are seeking early stage investments for funds backed by limited partners. Due to the lack of initial public offerings (IPOs) or mergers and acquisitions, VCs are holding onto their investments longer than originally expected. Also, many sources of financing for the VC funds may be pulling back their commitments, as endowment and pension funds must satisfy allocation requirements by reducing the dollars allocated to high-risk investments such as VC funds. While a few funds are closing on new deals, the majority are working to keep their best performing companies alive until they can reach a liquidity event, which these days equates to a sale since the IPO markets are still virtually dead. If you need to obtain venture financing, be prepared to relinquish control of your company, since valuations continue to remain low. If you are looking for a Series B (second) or C round, down rounds (lower valuation than the previous round) are common. Many companies are negotiating bridge financing with conversion features that specify a conversion price to be determined at the next round of equity financing. This strategy could be a good way of avoiding dilution if valuations rebound.

Banks

It has historically been challenging to obtain venture financing from banks since early stage life science companies typically have very few assets to serve as collateral. In the current lending environment, covenants and collateral requirements have become even stricter, so be prepared to provide a personal guarantee if your company has no collateral.

For companies that find funding sources, here are some tips for maximizing the effectiveness of your capital:

• Invest the money in your strongest products that have the most potential for success. When one of these products becomes viable and starts to generate cash, you can then fund your secondary products.

• Invest in low-risk government securities; your investment strategy should focus on preservation of cash.

• Tighten the belt. That is, don't rent space for 30 people when you have only two employees.

• Always take the money. It is better to take the money now when you don't need it and accept the dilution. Learn from thousands of companies that wish they had taken the money when it was available.