Last week I attended the MedTech Investing Europe conference in Lausanne, Switzerland. While at the meeting, I met with a number of entrepreneurs – some of them first timers, some serial entrepreneurs with successful exits already behind them. What were the key insights?
Panels included M&A and strategic alliances; global game changers; and structuring your investment for success. Underlying all of these was the not-so-hidden agenda of what do you have to do to get to an exit? This included everything from thinking about your likely buyer at the outset, through to investment rounds and structuring, and even trying to predict what buyers may want to acquire in 5-10 years time (anyone’s guess?).
Between all the discussion, panels, and informally meeting with entrepreneurs, here are the key insights that I took home:
1. Talk early to potential partners. This is relevant to strategic alliances, investors and yes of course, for potential buyers. You don’t want to disclose confidential information early, but you should be ready and willing to share key information that gives the investor or buyer a reason to keep you on his radar. Sometimes, this may even be for 2 years or more before a deal is expected. But no deal ever gets done in 6 months, and all deals are eventually done between people not companies.
It’s all about getting to know and trust individuals. Your buyer wants to track you over time and see that you actually make good on your plans – you do what you said you were going to do. Or even if you come across roadblocks (all entrepreneurs do), you figure out a good way around. It can also be invaluable to have insights from investors or buyers early as they likely have a broader perspective than the entrepreneur at the coal face.
2. Gear your company up for the right buyer, early. One serial entrepreneur I spoke with over coffee had some really deep insights on this. He had come from a corporate background, then was a CEO/ entrepreneur of a UK medtech. He achieved a trade sale to a big US medtech for over $300 million. As he knew his likely buyer was an US company, he made sure everything was in a fashion and form that would make it easier for an US company to buy and integrate.
This included everything – a few examples were cleaning up the shareholder cap table (buying out minority shareholders that could have killed the deal), and ensuring highest quality systems and processes consistent with a big corporate (avoiding the need for costly repetition of work). It even included using US English on the company’s website (I’m a big fan of this and even use US English on this blog – I don’t ever expect to be bought, but know that more than half my readership is from the US).
3. Get sales traction in 3 markets. A big medtech buyer doesn’t expect you to become a global sales and marketing machine. That’s not the focus of an innovative small medtech, and its something the big medtechs are far superior at. However, they are keen for projects to be de-risked – so regulatory approval alone is not usually enough. The buyer wants to see early clinical and end-user traction in a few local markets. This will likely include UK/ Europe (more for non-US companies, but could apply to US medtechs too as they gain early adoption first in Europe with CE mark before earning FDA approval). The buyer will be tracking many small medtechs on its radar – a promising technology is good, but early and growing market adoption is much more compelling.
4. Don’t underestimate funds required to gain early adoption. Usually, medtech entrepreneurs expect to have to raise some $millions to enable technology development, clinical trials and regulatory approval with CE mark and FDA 510(k) or PMA. But getting an early adoption of your product can consume just as much if not more money than the innovation stage. I’m glad to say most of the companies that were at this stage recognized this – and fully expected and had in their strategic plans requirement for $5M-$10M or more to enable early market adoption. But from time to time I still come across companies that haven’t figured this into their plans. The sooner entrepreneurs understand this, the better.
5. Look at non-obvious buyers too. Everyone immediately thinks of the super-large medtechs when considering an exit. If your buyer is a listed company and worth $5-$10 billion or more, they’ll likely have cash and for most entrepreneurial medtechs you could be a neat tuck-in acquisition. However, don’t ignore the companies that are listed and say, $500 million – $5 billion market cap.
While these will probably have less available cash, they may have several other facets that make them attractive: (i) possibly a founder-entrepreneur CEO still at the helm who empathizes with your position (ii) some cash and some liquidity in shares that means you could still get a good exit (iii) the buyer may be using a buy and build strategy itself as it builds critical mass, so may be willing to look at strategic acquisitions with less sales traction (iv) Potentially a better headline valuation since they may have to compete with a larger cash buyer.
All this talk of exits may seem counter-intuitive to advice I’ve received and written about here before to build a sustainable, growing company. But actually, it makes perfect sense. Companies don’t get sold, they get bought. Build a great company, with all the above characteristics, then the buyers will come.
Finally, if you ever get the chance to visit Lausanne, jump at it. I’d never been before, but spending some time on foot exploring the city, the lakeshore and the old town was a treat.
By Raman Minhas.
Medtech Value Investor 