Large corporations and corporate venture arms in the healthcare space, like Novartis Venture Fund and Cleveland Clinic Innovations, to name a few, are armed with cash and eager to find new technologies that might someday fit into their pipelines.
But is it a good idea for a startup to bring on board these kind of investors, who have interests in the company beyond getting a good return on their investments?
That was the question posed to a panel of entrepreneurs at the Great Lakes Venture Fair last week, some who had worked with strategic investors in their companies and some who had not.
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“We look at a strategic as providing very important validation of what we’ve done but also of the potential of technology moving forward,” said Jon Snyder, the CEO of Neuros Medical, whose most recent round of funding was led co-led by Glengary LLC and strategic investor Boston Scientific (NYSE:BSX). “Obviously they are going to vet this thoroughly.”
The panelists noted that the decision of whether to work with a strategic investor might often be a question of timing. “Strategics are starting to step up earlier in the process,” Snyder said. “We’ve kept in touch with several of them, updating them about our technology because we weren’t really sure when the time would be right.”
Fellow Cleveland startup CardioInsight, which makes a 3D cardiac mapping device, raised a $7.5 million Series C this spring that didn’t include a strategic investor. According to Kevin Mendelsohn, vice president of finance and corporate development, it wasn’t the right time to bring on a strategic investor.
“We first of all looked for what are the milestones for us that are going to add the most value over time, and did working with a strategic help us meet those milestones faster?” he said. “Number two, were we looking to create a partnership for commercialization or development? When we looked at financial strategy, we felt that we needed to focus on what was going to make CardioInsight more valuable, which may not have been in line with what a strategic wanted to do. Third, we asked, did the financing terms alight with the financing plans of our other investors?”
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The panelists underscored the importance of considering how others perceive strategic investments, and how that could affect future opportunities. “The key thing is to make sure that you’re not going to be handcuffed with respect to your potential opportunities,” Snyder said.
That means not giving too much power to a strategic investor, which points to the importance of considering whether a strategic should lead a round of financing, versus contributing to it. “Many times you can actually get yourself in a little trouble by getting money at a high value, and then you have to start talking about a down round,” Mendelsohn said. “In the beginning, you really need to map out what’s the company’s financial strategy long-term, what are those milestones, and how do those strategics fit in?”
With an investment may come a seat on the board of directors. While large companies can provide the kind of expertise, market insight and access to resources that startups are looking for, they can also be the subject of conflict of interest – for example, if a competitor was interested in an investment or acquisition. “Nowadays moreso than not, you see (strategics) taking an observer role, which allows them to give you insight but excuses them from voting,” Mendelsohn said.
If there isn’t a match with a strategic investor now, don’t rule them entirely out of the picture, because they could provide help to the company further down the road. “You’re not just taking their investment; you really want to take advantage of their resources, great connections or people for advisory roles, and great connections to VCs,” Snyder said. “And from a technology standpoint as well, if there are areas where you can get support or feedback, it’s important to keep communication open with them as you go forward.”
[Photo from FreeDigitalPhotos user Stuart Miles]
