Begin With The End In Mind

Wow – two big medical device exits were announced in the past week: Boston Scientific bought Sadra, and Medtronic bought Ardian.  Most successful medical device startups are ultimately acquired, enabling their investors to achieve a financial return and reputational enhancement. (With sufficient return and reputation, the investors will be able to raise another fund and keep their jobs.) Relatively few medical device startups remain standalone businesses, earning a return for their investors by going public or throwing off profits. Still, it’s usually better to build your company to be successful standalone, as it puts you in the best negotiating position vis-à-vis acquirers if and when they come.

There are likely to be four to six potential acquirers for your company, although there are occasionally less and sometimes a few more. Who are they?  The four to six most likely potential acquirers are typically companies that:

• sell to the same physician call point as your company will (e.g. arthroscopic surgeons)
• sell to the same provider call point as your company (hospital, surgicenter, office)
• sell and support the same type of product (single-use disposable, reusable, implantable, capital)
• have an acquisition history
• have the financial wherewithal to execute the purchase

In other words, acquirers are a good fit if they can leverage their existing sales channel to bring your technology to market.

Acquirers purchase startups for two main reasons: either you threaten an existing franchise (e.g. interventional valves) or you add an additional product that fits with their channel to sell to an existing call point (aka “tuck in”). Don’t expect capital equipment companies to be on the lookout for disposables, and vice versa (although it’s not completely out of the question these days). If potential acquirers don’t have one of these two reasons to buy, you better have a good story why they would be interested.

Rarely, an acquirer will purchase a late-stage startup to add a new franchise in a market where they don’t currently play. JNJ’s recent purchase of Acclarent is a good example. At an early stage, I wouldn’t plan on that.

It’s important to validate potential acquirer interest. Seek out their New Business Development team, and assess their interest in the space. Is your product application in their current product mix (i.e. you are a threat) or strategic plan (i.e. they have bought off on the market opportunity)? Ask what their criteria are for a defensive (usually superior IP with compelling proof-of-concept) or a tuck-in acquisition (usually successful demonstration of adoption). VC’s and New Business Development teams have dealt with each other many times in the past. So, VC’s will talk to New Business Development teams in their due diligence. Make sure you know what the New Business Development teams are going to say.

A paucity of likely acquirers is one more reason that creating a new market is the riskiest startup market type. So, begin with the end in mind. At the earliest stage, identify and validate the likely acquirers for your proposed company. Potential investors will want to know, because if they can’t get their money out, they won’t put their money in.