For many big medical device companies, awash in cash and hungry for innovation, the decision to form a venture arm seems a natural one. No need to hassle with raising a fund or deal with demanding LPs – just hang out a shingle, set aside a relatively modest pot of money to invest, post some generic investment principles that allude to being ROI driven yet strategically aligned with the mothership, and voilà! A corporate venture group is born.

Even without a venture arm, the big medical device companies often invest in early stage companies directly through their operating units or corporate funds. Early equity investments can translate into a nice discount on an ultimate acquisition. Boston Scientific, one of the few in the category without a venture arm (understandable since not so long ago purging many “venture-like” assets post-Guidant acquisition), has made several such investments, including Sadra Medical, where Boston participated in a $19M series B in 2006 and then bought the company in 2010 in a deal worth $450M. Boston’s acquisitions of Intelect Medicaland Asthmatx also followed early strategic investments.

But why do the others think a venture arm makes sense? And what are these venture arms doing? Let’s look at a few and see if there are clues:

Covidien Ventures
Covidien Ventures was formed in 2008 with the mission to “…invest in areas of strategic importance to the Company with the goal of providing early exposure to innovative technologies and enhancing market intelligence in healthcare products.” The interesting word choices here (“early exposure”, “market intelligence”) highlight the important spying function of corporate venture fund investments. Often for a sum equivalent to a rounding error on the parents’ financial statements, the VC fund gets at least an observer seat on the board and an open door to the management team of the companies they invest in.

A less sinister intent of the corporate venture group is to enable investment in a big new product area that doesn’t fit neatly into any of the existing businesses – case and point is Covidien Ventures’ 2009 investment in the stealth obesity device company ValenTx.

Medtronic Ventures and New Therapies
Medtronic claims to have both an “Internal” and “External” venture fund, placing big bets on it’s own R&D machine (spending 9% of revenues, or $1.5B, on R&D in 2010) and even bigger bets on late stage or commercial acquisitions such as Ardian(note that MDT led Ardian’s 2009 $47M Series C round).In an investor presentation, Medtronic says it has 60+ minority investments and uses its External Venture Fund to invest early and as an “option on internal programs” – a hedging strategy of sorts.

Novartis Venture Fund
This group is probably the largest and most active healthcare corporate venture fund, with about $2 billion under management. While Novartis primarily invests in tangential space to the medical device field, they have made a couple notable investments in med tech, including Visiogen & Ablation Frontiers. Of all the healthcare corporate venture funds, they seem to be the most ROI driven, though probably value the snooping opportunity, too.

Overall, one gets the impression that corporate venture funds in the medical device arena aren’t doing a ton of deals, or at least aren’t talking a lot about the ones they do. Maybe the ROI mission is largely achieved by consolidating the early stage, non-core (but always strategic) shopping, or in the shopping itself as a source of competitive intelligence.

So if you are an emerging med tech company looking for a strategic investor to put some money into your next round, you may or may not have luck with the venture funds. The ROI on your time and effort might be better with the operating units, that is if you have the right strategic value proposition. This is especially true if you want to leverage the investment into an acquisition down the road. But remember, an early strategic investor can be a double agent in your inner circle, not to mention marking your company as “taken” and potentially capping your value.