We left off in our last blog posting (No Exit Part 1) with some provocative questions about how and whether to factor your exit strategy into your company plan.
One school of thought (that of the now very wealthy CEO of Ardian, so take with a grain of salt) is that companies should don the “Exit Blinders” and just focus on the task at hand – developing and proving the value of the technology. If you build it (and do a bang-up job, and have exceptional luck along the way), they will come. So why does this make sense?
At the very human level, too heavy a focus on the exit can dilute the core mission of getting important technology to market. In med tech especially, people are mission driven – what fundamentally jazzes us is taking a concept and making it a real product that will benefit real people (e.g. save their lives). Everyone understands, and on many levels hopes, that an acquirer comes along well before commercial product leaves the shipping dock. But to be truly worth the enormous effort it takes to develop medical technology, the connection to that ultimate goal has to feel real. So you want to attract and keep the best people? Keep it real.
Speaking of real, the real truth in med tech is that early take-outs don’t really happen that often, and when they do, the payouts aren’t of the eye-popping variety. The big buyers in the market are looking for technologies that have been significantly de-risked and have a clear path to market – ones that can move the revenue needle in the relatively near term. We at S2N did an analysis recently that not surprisingly showed the number of deals, and value of deals, increases dramatically as you get closer to market.
The other reality is that achieving the exit-provoking milestones is taking longer and longer. Median time from company formation to IPO (I know, what IPO’s) has risen from ~3 years to greater than 8 years (Another good analysis). This increase in time to exit has been driven by both the closed IPO market but also the increasing difficulty of getting through the laborious FDA process. Our review of the data suggests that even getting to CE Mark with a breakthrough product currently takes > ~5 years. If history is any guide, don’t expect the imagined Exit Fairy to visit early. And even when you are perfectly primed for an exit, guess what – you are beholden to the whims of the capital markets that are anything but predictable.
Hypothetically, a truly novel “platform” technology might get sold off early on the basis of strong IP and broad applicability, e.g. Helixis (yes this is a diagnostic company but that is how far one has to stretch to find an example in the med-tech world, much more common in pharma). More likely is the scenario where you are captain of the ship through clinical validation of the technology. In very hot, competitive markets this might be a reasonable time to dock in an acquirer’s port. However, for niche, mid-tech or me-too products, perfectly respectable in their investment thesis, you may not only have to prove out your technology but also your market to attract a high value take-out.
Where companies really should plan for the long solo journey is if the product doesn’t fit neatly into big company sales forces or business models. Intuitive Surgical is an example of a company that has built success as an independent company by inventing a market for itself – the surgical robot market – and by creatively building demand by instilling fear among hospitals of left in the non-robotic dust. They created value the old-school way – going public, growing revenues, growing EPS. It can still happen.
The key here is taking a cold, hard look at which of the above categories you fall into, and when you will have built enough value to realistically contemplate the big buy-out. Or maybe you won’t sell after all…