Thursday, August 21, 2008

Venture Round: Covidien Ventures Out

The announcement that Covidien Ltd. launched a venture fund should come as no surprise to faithful IN VIVO readers. We reported on the groups's creation back in our May issue in a cover story on the company. Despite our prodding, the company opted not to provide details on the group until this week.

But the news still warrants review as this is a significant departure for Covidien, the former Tyco Healthcare. In its previous life, the group now known as Covidien had a dismal record when it came to investing in R&D and new technologies. (See chart, right.) In the late 1990s, Tyco grew its health care business through significant acquisitions of low margin hospital supplies and other mostly low-tech endeavors.

Trouble hit in 2002 when Tyco fell under the weight of its storied investigations. At the time, the company didn’t have the resources to commit to R&D even if it wanted to.

But all that is in the past. Covidien is a full year removed from its Tyco ties, and it’s working to restore its research and development capabilities.

The press release doesn’t give much information, but VentureWire Lifescience offers a bit more. Most interesting is the team Covidien assembled to make the investments (which will be $5 million on average in early stage companies.)

Covidien has built a team of three to manage its new venture wing. Daniel T. Sheehan, a former general partner at Affinity Capital Management, is heading the new operation as vice president of corporate venture capital. He is joined by Dave Neustaedter, former director of commercial strategy and advanced technologies at Stryker Development LLC, and Joseph Graham, who worked in strategic marketing for Covidien's patient care and safety business.

Covidien deserves credit for dipping into the venture business to find its new leader. Too often, corporations try to staff their venture groups from people within the organization. (Of course, it’s usually difficult to lure folks from the venture side back to the corporate venture side.) An experienced venture capitalist should come with the contacts to find deals that might not typically be shopped to corporate investors (i.e. VCs looking for some dumb corporate money.)

The additions of Neustaedter and Graham give the new group expertise both in corporate innovation as well as the ins and outs of Covidien itself, which is a far flung organization with businesses and divisions across the globe.

Covidien's move might be deemed a bit counter-culture as the number of corporate devices investors and acquirers is dwindling. But the company has been on a frenetic shopping spree over the past two years, buying eight companies over the past two years including some big-ticket buys like Vivant Medical and Confluent Surgical.

Still the company isn't taking big chances with its purchases. Instead, it's moving into opportunities that lie within or generously abut its current borders. "When you look at the acquisitions that we've done, they are focused and purpose-driven," Jose Almeida, head of Covidien's medical device segment, told us back in the spring. "They have niche specialties and market advantages, and they are synergized to our sales channels. They augment our technology base. They bring potential double-digit growth for the 10-year period that we analyze the sale."

We expect the venture group will take the same measured approach, but perhaps Covidien will let its hair fall down just a bit further.

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