Thursday, October 23, 2008

Venture Round: Big Buyers Cautious

With the public markets having finished their final lap around the circular ceramic swimming pool, the hopes and dreams of medical device VCs might drift to the possibility that major medical device companies might step up the pace of mergers and acquisitions.

After all, the fires raging on Wall Street have stripped the valuation off many a developed device company, creating potential values for major medical device companies looking for a bargain.

But device companies aren't biting ... yet. Those attending our first ever Medical Device Investor Day listened as business development executives representing the industry's major medical device makers listed their likes and dislikes for the audience at Boston's Westin Hotel.

Overall, business development folks from nearly a dozen companies gave a backstage view to their own business and development offices. In almost every case, companies laid out strategies that included a healthy dosage of mergers and acquisitions.

But these big device companies will be careful shoppers. Price will certainly come into play, but it's not the biggest concern. What is? Data. Data. Data. Exec after exec implored the entrepreneurs in the audience to have as much data and evidence at the ready when the due diligence starts.

Even more importantly, big device buyers say the data must be clean and ready to withstand a vigorous review from the FDA and CMS. Sure this sounds obvious, but one device exec says FDA regulators are stretched too thin to give equal review to every application. Therefore, smaller companies might get a pass with less data but once that small company is acquired its product will be given the Big Company treatment. Biz Dev folks hate surprises.

Finally, these acquirers aren't going to be pushed into a deal by plummeting prices. Instead, these companies say they'll continue to target only companies that fit snugly into their company's strategic plans. Dennis Crowley, vice president of corporate development for Covidien Ltd., says those companies that have only "limited strategic value ... I hate to say it, but they're dead." [UPDATE: We regret that this quote from an IN3 panel was misattributed to Dennis Crowley of Covidien. He did not say it and it doesn't reflect his views.]


A few weeks ago, we presented the doom-and-gloom scenario the venture capital industry faces as part of the fall out of Wall Street's meltdown. As promised we explored the possible ramifications even more closely in our upcoming START-UP magazine here.


As we suggested in our earlier post and explored further in our current article in SU, venture capital firms are beginning to run into a bit of resistance to call downs. Venture firms typically call on their limited partners who have already committed to their funds to transfer dollars at a regular intervals, perhaps quarterly, or whenever the VCs have a deal lined up. This piece by VentureBeat says LPs are beginning to balk at call downs.

Calpers isn't one of those LPs, as far as we know, but it did lose a bundle. (Hat tip to the WSJ's Deal Journal blog.)

This no doubt will bite into deal flow. In the past, VCs might have borrowed money to cover the call down until the money was transferred. (This not only gave the LPs more time to comply but it also boosted the internal rate on returns for the VCs.) But banks simply aren't lending money out these days.


We're not sure if every venture capitalist is this careful, but one device investor we talked to said he's been spending a fair amount of time meeting with his portfolio companies to ensure that the money his firm invested is safely invested.

His concern seemed very real. Typically, a company that raised millions in a venture round would stash a few months of expenses in an easy-to-access checking account, with the rest going into money market funds or some higher interest-earning vehicle.

Prior to the passage of the bailout bill, this VC went from company to company inquiring about the location of invested capital and exploring whether or not the location was the safest possible. As he said, he didn't want to be in the position to tell is LPs the money he'd invested was lost in the markets.


(Photo courtesy of Flickr user timparkinson via a creative commons license.)

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