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You can be swayed by a prototype that looks almost like a finished product.  But prototypes are not products.  They are not even close to being products because of the amount of work necessary to follow good design, development, and documentation practices required by the FDA's design controls.  Don't be lured into thinking that the prototype just needs a pretty cover before you can start shipping product.

Technical due diligence for medical device startups usually begins with the traditional analysis of the underlying technology by technology experts.  That can only assure you that the product is based on sound science and research.  It does not tell you how much work is need to complete the development of a saleable product.

 Medical device development experts also need to look at the quality of the engineering to estimate just how much it will cost to convert the prototype to a product.  Do not trust the estimates of the engineers and scientists who created the prototype.  Because of their closeness to the technology they will almost always underestimate how much development work remains.  Chances are, they have limited experience in developing medical devices into manufacturable products.

Look at the documentation that has been created for the prototypes.  Is it up to the FDA's design control requirements?  How much work will it take to rework the documents to get them into a usable form to start product development in a regulated environment?  Remember that the goal is not to rewrite the documentation to make it look like design controls were in place.  The goal is to document that the development took place with proper design controls.  If the startup divulges that the documentation needs a "touch up" for compliance purposes, it can probably be assumed that a controlled design process was not being followed, and that they prototype developers don't have a clear understanding of the design control requirements for medical devices.

You're investing in not only in the technology, but also in the team that will convert the technology or prototype into a saleable product.  How much of the team exists, and how much are you investing in the ability of the startup to attract product development talent?  Is the development team experienced in medical device product development?  Recognize that product development in a regulated industry like the medical device industry requires special skills, adherence to good engineering principles and processes, and a familiarity with the regulatory requirements.  If the startup reveals that it is depending on a "guru," or that the technical team has not done medical device development before "but product development is all alike," due-diligence alarms should be sounding.

Building a development team with full-time employees has the benefit of keeping the technology development close to home.  Assuming the employees stay, they are available for long-term maintenance and upgrades of the product.  But building a team of new hires is not without risk.  How long will it take to find a team with medical device experience?  Will they work well as a team?  Will you be able to keep them long term for future support?  What are the ongoing costs and needs for the team?

Many startups rely on independent contractors who work onsite.  The advantage of this approach is that the technology is developed and controlled onsite.  The long-term cost is reduced because the contractor is gone at the end of the project and is no longer an expense.  The risks are similar to those for employees.  How long will it take to find the contractors you need?  Will they work well with employees as part of a team or are they too independent?  Who will coordinate the efforts of a group of independent contractors?  And there's an additional drawback:  it is unlikely that the same contractors will be available for future support of the product.

Outsourcing product development is often appealing for startups.  Long-term cost and overhead commitments for employees can be minimized.  The team may already be in place and probably has worked together successfully on past projects.   A good outsource company can significantly reduce time to market.  If medical device development outsource companies are used, you'll benefit from hiring their specific expertise not only in technology, and product development, but also in compliance experience and project management.  

Because outsource companies pose their own risks, you need to perform due diligence when selecting them.  They will become as important to your investment as the startup in which you have invested.  Verify that they have successfully completed medical device projects in the past.  Ask for the specific role they played on the project.  Verify it with the reference.  Ask to meet the team that will develop your product.  Verify that the company actually has the resources they claim.  How many on the team have medical device experience?  When was their last medical device project?  What is the company's track record with medical device development projects?  What percentage of projects started have made it to market?  How many are successful on the market?  Have they ever abandoned a development project?  Have any of their devices ever been involved in a recall or patient safety event?  

Serial investors in the medical device industry can improve their odds of success by paying attention to development issues early; viewing prototypes skeptically, getting the advice of experts early; advising their clients in selecting development teams, and in helping startups engineer good development-team relationships.

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