9 min reading time

Prolific group contributor Paul Stein was recently at a scientific society conference that had a session on entrepreneurship for scientists and engineers. The moderator asked the three speakers what their budding companies’ exit strategies were. Each one stated “being acquired by a larger company.”

Here is Paul’s perspective.

“In the last few years, the startups that got acquired had technology that fit a Giant. The rest, whose work break out and don’t fit any specific molds, like the three at this conference, well, not so much.

We all know startups creating their slide decks to introduce to potential investors must fill in the blank for “Exit Strategy.” Without the acquisition choice, several companies go the corporate IPO route later in their investment cycles. However, this has proven to be no where near as lucrative as would have been thought (GI Dynamics, Obalon, Enteromedics).

So even the person on the street would logically seek to place his or her money safely elsewhere. And, for those who invested early, their only return is feeling pain.

For the medical device industry today, perhaps that Exit Strategy slide needs to be rethought, possibly left out.

If you have technology to meet an unmet medical need, perhaps you need to think about going it alone into the future. In other words, whatever you make, you had personally be ready to sell yourself, perhaps forever.

Now, this might not be so bad once the device has passed all the regulatory hurdles. There are plenty of happy private companies out there. But what does this ultimate possibility look like to potential investors, angel, venture capital, whoever?

After reviewing the technology, they have to ask themselves how they will make their X times investment, and how long will it take?

For now, going it totally alone may have to be way from beginning to end.”

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I thought Paul’s writeup was provocative so I elevated it to today’s group announcement.

Entrepreneurs and “Giants,” what do you think of Paul’s conclusion?

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JANUARY 10 MEDTECH SHOWCASE in SAN FRANCISCO

I’ll moderate the opening panel at this year’s Medtech Showcase: http://medgroup.biz/Medtech-Showcase-2017

It’s an opportunity to show your innovation to an interested crowd as the healthcare industry descends on San Francisco for the 35th annual JP Morgan Healthcare Conference.

If it looks interesting for you, send me a private note at JHage@MedicalDevicesGroup.net.

In the meanwhile, here’s a quick (and potentially informative) read. The event hosts interviewed me: http://medgroup.biz/Joe-Hage-interview

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DISCUSSIONS

China’s CFDA updates devices classification catalog

US Foreign Medical Device Employment
http://bit.ly/H-1-spons

When starting a new sales position, how long would you say it takes to start producing significant revenue? 3 months? 6 months?

How to ascertain Cataract Surgery Rate

Time’s 25 Greatest Inventions of 2016 – Medical Devices Over Represented

The End of Homeopathy?

The Business of Needles

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To those celebrating, happy Thanksgiving.

Joe Hage
Medical Devices Group Leader

P.S. We park the good stuff at http://medgroup.biz/MDG-SITE Register there now to stay up to date.

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Diarmuid Cahalane
Co-Founder Of Metabolomic Diagnostics And P4ML
Excellent analysis. Too many life science startups are looking for exits based on tech type companies from the ’00s

G. Aaron Maestri, Ph.D.
AUDAXION: Neuroimmunology-based Peptide Rxs | Bioentrepreneur • Roche Alum • Stanford MR&D Fellow • UPenn NIH Postdoc • 15K
Great stuff!!

Lou Halperin
Executive Leadership / Growth Catalyst / M&A / PE-VC Strategic Advisor / Operational-Financial Excellence
There are many ways to attract investors and to allow investors to have a return on their capital. A liquidity event does not have to be an out and out sale as Ross Bundy highlights. Investors should provide your company more than just capital. ESOP’s, dividends, distributions and a wide variety of mechanisms exist for investors to benefit while supporting the growth of your business. The angel investor mantra of looking for 30x return is a measure of business plan and growth potential, not an expectation of performance. Success for any business is to demonstrate that there is an addressable market with an ability to develop clients/customers and generate profitable, sustainable revenue. A great idea is not enough. The best technology does not always succeed in the market place – Beta vs. VHS, CPM vs. DOS, etc.

Oded Biran
Global Business Leader | Life Sciences
Ross Bundy- I agree that it shouldn’t be in the deck, but – you definitely need to think about a good answer if (and when) a potential investor asks you that question.

Paul M. Stein
Chief Scientist, Inventor, and Entrepreneur – Dedicated to the Treatment of Critical Unmet Medical Needs
Ross, I wholeheartedly agree with Joe. I just wish he posted my last comment above yours. So, in just two days, we have discovered that this is now the age of the “sophisticated” investor, like Lou and your company’s investors. For those people reading all this and are now brave enough to take their great idea to the company level, 1) how do they find those people, and 2) what exactly should one put in that slide deck, if anything, regarding cashing out investors to lure them in? Should one just speak about potential future financial returns and leave it at that? Or talk about possible “exits” only nebulously in the Q&A if asked?

Joe Hage
🔥 Find me at MedicalDevicesGroup.net 🔥
Ross Bundy, if I could have given your reply two “Likes,” I would have. What’s more, if I had the funds to invest in you, I would.

Paul M. Stein
Chief Scientist, Inventor, and Entrepreneur – Dedicated to the Treatment of Critical Unmet Medical Needs
My good friend Lou presents an interesting and, new to me, view of investment consideration, “patient capital”. Rob also alluded to “dividends”. Are there investors who would be willing to accept only profit returns, such that, down the line, whenever that is, their initial investment is made back and then a constant income stream proceeds forward? Would these sort of folks be in the minority? Hence, for the right product, if investors become, in reality, partners, should the “exit strategy” slide truly be dropped?

Ross Bundy
Co-Founder and Co-CEO at CARDEA
Having made around 200 pitch decks for my company thus far, I can say for certainty that every entrepreneur should dump the exit strategy slide. Non-sophisticated investors want to see a return on their funding, but sophisticated investors and particularly the VCs that are still investing after 2016 know that if you build a great company with a great product then the returns will show up. If you have an exit strategy on your deck, then it shows all you care about is the money, but the reality is that many potential acquirers buy companies for many reasons that often have nothing to do with your product or technology or business. Focus on building the company, the business plan, the model, and execution.

Even if your company is not a potential acquisition target, there are numerous ways to cash out investors in the end even without an IPO, ways that show up once your company is profitable. ESOPs, leveraged buyouts, or paying dividends are all options.

Julie Omohundro
Principal Consultant at Class Three, LLC
Guy, Is there a problem with establishing a (not sure what you mean by “real”) profitable business and growing it until it reaches a limit? Isn’t that what every company (and industry) does, one way or another? Isn’t that pretty much definition of a successful company?

Kirk Becker
Sales for the Plastic Injection Industry & CNC machining
Great discussion all. Each startup has to understand and develop their funding path – business planning 101. The smart ones have mentors with vast business – medical device experience to help them know which questions they need to be asking – and answering for themselves.

Bob Dodge
Retired
Venture capitalists are in business to make money, and the financial opportunity is directly related to the proposed product’s utility. A product with small sales regardless of who is selling it will not attract much VC capital. I think a rational business plan has to include a believable plan to take the product directly to market and is self-sustaining from its own revenues. Lacking that, you have a development plan that runs out of money and has a technology fire sale. With a go-to-market plan, you always have the option to be acquired for the right price, but you have a strong bargaining position.

Lou Halperin
Executive Leadership / Growth Catalyst / M&A / PE-VC Strategic Advisor / Operational-Financial Excellence
“Exit” is just one of the possible outcomes for an investor. As an Angel investor I always looked to “monetization” for my investment rather than “exit.” when looking for capital as an early stage business, the business needs to understand its stage and the type of money it is looking to obtain. As everyone who participates in this forum understands, not all capital is created equally and each business needs to be sure that the investors from whom they take money are compatible and consistent with the vision of the business. Whether it is quick strike capital or patient capital, all investors know what type of ROI they want and businesses need to respect the objectives of the investor. And I agree with my former colleague and friend that “Just because something can be done doesn’t mean it should be done.”

Paul M. Stein
Chief Scientist, Inventor, and Entrepreneur – Dedicated to the Treatment of Critical Unmet Medical Needs
Guy and Richard, yes, you are totally correct to wonder just what sort of device and company can be produced this way. It may be that with the “usual” investment coming so hit or miss, more often than not, miss, the “usual” type of device, and company, are no longer possible. Perhaps if the device cannot fit the go-it-alone model, people should totally rethink if they should even bother devoting N years of their lives to that. But, for those who still wish to proceed with Tom’s sort of perfectly amenable device, the bootstrapping model is alive and well.

It’s truly unfortunate that our industry has come to this point, but people need to proceed in whatever direction with eyes wide open. Stein’s First Law of Medical Devices is more relevant today than ever, “Just because something can be done doesn’t mean it should be done.”

Paul M. Stein
Chief Scientist, Inventor, and Entrepreneur – Dedicated to the Treatment of Critical Unmet Medical Needs
Guy, your arguments are totally understood. Yes, all investors in every roadshow want to see that exit strategy slide, but that doesn’t guarantee any bites from them. In my own experience, after meeting with dozens of perspective investors and showing that “exit strategy” slide speaking about acquisition by some Giant, there was a paucity of nibbles. Perhaps they knew what reality was. My piece was specifically about those whose technology doesn’t readily fit into a Giant’s niche. The World of funding has absolutely changed post-Recession, and hoping for a pre-Recession investment miracle, for many, not all, is illogical.

Julie Omohundro
Principal Consultant at Class Three, LLC
I was under the impression that that last slide got tossed sometime ago already.

What does totally going it alone mean? No investors and you pay out of pocket all the way? Why do you have to be prepared to sell yourself? To whom? Or do you mean to sell your device yourself? To whom?

Do companies choose the IPO route only because acquisition isn’t an option for them? Or are there circumstances in which they choose IPO over acquisition?

As for passing “all regulatory hurdles,” name three. 🙂

Alessandro Biglioli
CEO at Elsius Biomedical Inc.
Couple of thoughts:
1) acquisition is a distinct possibility if you already had contacts with the big guys and they said they are interested but want to see clinical results.
2) you have a business plan that allows you to distribute dividends and grow market share.
Investors need to be “covered” no matter what and it’s the responsibility of the founders (and the CEO) to make sure they get value for their money.
The decision of what to do in case of an acquisition offer is ultimately of the shareholders but it’s the management responsibility to make this decision tough, in the sense that the option to keep growing organically should be as appealing as the one to sell.

Tom Mariner
COO at SynchroPET
We went from “hey kids, lets do a company” to dominating the marketplace in a medical device systems market — took 8 years. But little investment to get to nine figures annual revenue, just insane talent.

I always counsel to plan for delivering a product, collecting and doing it again. Most of the startups I am associated with are terrified of regulatory. They shouldn’t be – it keeps the amateurs out — while you get a grown-up company. And leaves systems that will be easy to transfer if an “exit” is made.

Do you really think a big company would trust a product that hadn’t passed muster with 60601-1, 14971, etc?

Richard A. Lotti
President & CEO at Cranial Waves Medical Inc
Joe, I am afraid to say that Paul’s conclusion is completely unrealistic. Today the cost to bring even the simplest medical device from concept to market is measured in millions and a sophisticated one in hundreds of millions. The next step of commercialization is even more expensive particularly for devices that are sold into hospital systems where the purchasing of “new” products is heavily scrutinized. The old days of a “relationship” sale are long gone. It is true that the IPO market has been non-existent for virtually all medical device start-ups. The only realistic approach is a collaborative one with a Giant. Dancing with this devil is risky and requires experienced executives and not entrepreneurs. Rich

Bruce Christie
Owner at BAC Engineering
I share Paul’s concerns. My experience with VCs suggests that they’re not interested in projects that aren’t “get rich quick” schemes. As Paul suggests, myriad projects exist that will never get funded because they can’t achieve 95% profit, don’t have a disposable component, lack a current billing code, have fewer than a million potential customers, decrease cost of procedures but reduce doctor income, lack a team of the usual suspects, or want an inventor to be a part of the team. My point is that any one of these factors can shoot down your funding, and that the investment criteria applied today result in lots of activity in cosmetic or palliative products rather than curative ones.

Gregory W.
CEO at Poiesis Medical
Way too broad…. my thought was why am wasting my time reading this for what it is worth.