Health IT

Safeguard Scientifics is making staff cuts to save up to $6M and halting investment in new companies (Updated)

The cutbacks at Safeguard come at a time when exits have slowed for the suburban Philadelphia investment firm.

Safeguard Scientifics, a Philadelphia area investment firm that backs technology companies across digital media, finance, and healthcare — its largest portfolio segment, has announced a plan to cut back on personnel and operating cost expenses to realize savings of $5 million to $6 million, according to a company news release.

But part of the company’s strategy also involves halting investment in new companies. Instead, it will focus on supporting existing portfolio companies.

The Company will consider initiatives including, among others: the sale of individual Partner Companies, the sale of certain Partner Company interests in secondary market transactions, or a combination thereof, as well as other opportunities to maximize shareholder value. Safeguard anticipates distributing to shareholders net proceeds from the sale of Partner Companies or Partner Company interests, as applicable, after satisfying the Company’s debt obligations and working capital needs.

Although the steps outlined in the release make it appear that Safeguard is winding down operations, Safeguard CEO and President Stephen Zarrilli said it was creating a more streamlined structure.

“With this new strategy in place, we will immediately create a more streamlined organizational structure that will better position us to focus our resources on the highest-return opportunities while generating immediate cost savings,” Zarrilli stated in the release. “We also expect to realize additional savings over time as assets are monetized and resource needs are further decreased.”

A person familiar with the situation noted that what sets Safeguard apart from a traditional venture capital firm is that instead of raising funds, the business invests off of its balance sheet. To make new investments, the company must have exits and it hasn’t had enough of them of late. Even though the companies the firm has invested in may have grown in value, if there are no exits, it’s not sufficient. Still, the source acknowledged that if all of the firm’s investments had gone as well as they had hoped, these cutbacks probably wouldn’t be necessary.

In July last year, Invitae Corp. acquired portfolio company Good Start Genetics. At the time, Zarrilli said from Safeguard’s perspective, that outcome represented “a significant shortfall” based on the firm’s return expectations.

 “From Safeguard’s perspective, this outcome represents a significant shortfall based on our return expectations. However, considering the anticipated time and cost required to introduce additional technologies and tests into adjacent markets and to further develop Good Start, we believe that a larger, more financially capable enterprise that is focused on genetic testing was necessary to move Good Start’s vision forward.”

In March 2016, Safeguard had a happier exit when Dechra Pharmaceuticals acquired its life science portfolio business Putney for $200 million. Safeguard had deployed $14.9 million in the veterinary genetics business since 2011 and prior to the acquisition had a 28 percent primary ownership position.

Safeguard was one of the largest healthcare investors last year, according to a StartUp Health report. The investment firm, which backs companies at the early, middle and late stages, increased healthcare investments from four deals in 2016 to seven deals in 2017.

Safeguard has restructured the business in the past. In 2013, Jim Datin, who led the capital deployment team, resigned as part of a re-organization led by Zarrilli. The plan was intended to create a flatter organizational structure, produce greater efficiency and effectiveness in deploying capital and realizing exits. But this strategy is much more dramatic.

Update: Safeguard is referring media queries to Joele Frank, Wilkinson Brimmer Katcher, a corporate communications firm specializing in helping companies figure out strategic alternatives for their businesses. A spokeswoman for the company declined to comment on the record.

Pitchbook noted in an October 2017 report that privately held companies are slower to have an exit. It also pointed out that 2017 exit value was on track to be the lowest since 2013. Zarrilli cited the report in Safeguard’s third quarter earnings, and observed that the average time to exit for privately held companies is about 6 years, and the median time to IPO is more than 8 years. One reason for this is that more private funding is available to these companies.

Photo: cnythzl, Getty Images

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