Vantage point – medtech corporate VCs move into the valley of death
Funding for medtech start-ups is in a bad way. For some time risk-averse institutional investors have demanded clinical data, regulatory approvals and even reimbursement before parting with their cash, leaving the youngest companies lost in the so-called valley of death.
Fortunately, the larger medtech companies have woken to the threat this poses to their own development – to wit, fewer new companies means fewer innovative technologies for them to purchase – and have responded by deploying their own venture wings into earlier investment rounds. And where once start-ups might have been suspicious of corporate VCs, they now welcome these sources of cash, though a cynic might point out that they have little choice.
“Corporates play a significant role today,” Rafael Torres, head of healthcare at GE’s corporate VC wing, GE Ventures, tells EP Vantage. He also agrees that they have increasingly moved towards the early rounds to make up the shortfall from institutional funds and are also more active overall.
GE Ventures invests around $200m a year across several sectors, with around a third going to healthcare technology companies. The group chooses its targets with an eye to the future, identifying areas in which disruptive technologies could emerge, and then getting in on the ground floor. Mr Torres gives the example of telehealth, where digital technologies are allowing patient monitoring to move out of the hospital and into the home.
Crucially, GE Ventures is willing to take on the risk of investing in earlier financing rounds from which traditional VC funds have shied away, giving younger firms a fighting chance. “We used to come into companies that had already had institutional rounds of financing,” Mr Torres says, “[but] we have over the last two or three years gone somewhat earlier and led or co-led series A rounds.”
The group, which also participates in later series up to pre-IPO rounds, aims to become the “partner of choice” for entrepreneurs, offering GE’s expertise in developing and launching technology, in addition to cold hard cash. It invests in companies that hold a strategic interest for it, but Mr Torres says that GE Ventures' financial returns are also an important measure of its success.
This is a perennial problem for corporate VCs. They must reconcile the need to turn a profit with the strategic goal of investing in the technologies that will allow their existing businesses to grow. Mr Torres says that this is not in fact a conflict – as he sees it, the technologies that will change the face of the sectors GE is interested in will also be those that sell.
The best of both worlds
An opposing point of view is espoused by Alexander Schachtrupp, chief medical officer of B. Braun Melsungen. Of the top 20 companies by medtech sales, B. Braun is one of only three not to have a venture wing.
“The problem of a VC arm is whether it will be profitable or lead to the development of products that the company may one day wish to buy,” Mr Schachtrupp tells EP Vantage. “It’s one or the other – you’re unlikely to have the best of both worlds.”
B. Braun instead invests in separate VC funds including the Bonn-based public-private group High-Tech Gründerfonds. HTGF specialises in early-stage funding of tech start-ups and typically invests around half a million euros in the seed stage and up to €2m in later rounds.
This relationship with HTGF is a way of reducing risk compared with B. Braun having its own VC arm, Mr Schachtrupp says. Moreover it allows B. Braun to see a return on its investment without having to worry about whether the start-ups it is ultimately funding are an ideal fit with its business.
It also shows that B. Braun clearly recognises the importance of backing companies at the earliest stages, and it is probable that other large medtech groups invest in VC funds in a similar manner.
There is no chance of B. Braun starting an in-house investment arm in the future, Mr Schachtrupp says.
In part, the uptick in medtech corporate VC activity – Medtronic and Johnson & Johnson are among the most prolific, Mr Torres suggests, and this is borne out by EvaluateMedTech data – has been inspired by the role played by the venture wings of pharma companies in the years since the crash.
Robert Millman, chief executive of the cell therapy company Semma Therapeutics, agrees. Semma recently raked in a remarkable $44m series A round made up of both institutional and corporate VCs including Medtronic and Novartis (Semma pulls off a near-miraculous series A, April 7, 2015).
“Start-ups tend not to like to be partnered solely with a [corporate investor], but need additional capital around the table, typically from the venture community,” Mr Millman says. “This model has been employed very well in biotech as well as increasingly in medtech too.”
Perhaps it is surprising that the large medtech groups are willing to collaborate on the same funding round, but GE Ventures’ Mr Torres says this is commonplace.
“We have participated within the past year in three or four financings where there were other corporate VCs,” he says. The presence of multiple corporates is not a conflict, he says, with these other firms being supportive of GE’s intention to collaborate with its investment targets.
This raises the issue of whether investments made by medtech companies can be taken as an indication of their intention ultimately to acquire their targets.
Mr Torres says it would be “very short-sighted” for a corporate VC to have that as their ultimate purpose, and that “the great majority” of corporate investors are not gunning for a takeover. If a corporate VC were trying to corral its targets towards acquisition it might lose the chance of exiting the company in another way, thereby disappointing its co-investors.
Naturally, though, they do happen from time to time – and if the investor decides it wants to acquire it will be well-positioned to do so, Mr Torres says.
If corporate VCs are changing the game for start-ups, might they also change things for the larger companies? Mr Schachtrupp says it would be easy for B. Braun to set VC operations up if it wanted to, but it would have to be clear on its motivations.
“Is it for the company, or for the balance sheet?” he asks. “And if your VC arm is very good, are you still a medtech company?”