Private companies may invest in a small or young company either as a money-making deal or to access new technology or products.
Greig Altieri and his partners founded Vascular Control Systems in San Juan Capistrano, California, in 1998, to develop minimally invasive tools to treat a common female disorder characterized by excessive bleeding. From the beginning, they knew their most likely exit strategy would be acquisition by a large medical company. Medical technology can take years to develop, is riskier than many start-ups, and requires specialized knowledge to comprehend.
Even a typical professional investor or venture capitalist is unlikely to understand well enough to feel comfortable with such investments. So once Vascular Control Systems founders secured their intellectual property, they focused on venture capitalists who specialized in the medical device field and large corporations active in the medical and women health industries. One of their early and continual contacts was with Johnson & Johnson Development Corp.
Several hundred companies worldwide, including Intel and DuPont, have corporate venture capital arms. They invest in emerging companies, which are better than these corporate giants at coming up with revolutionary technology and cutting-edge product improvements. They want to keep their ownership of a fledgling company below 20 percent so that they don’t have to report in their financial statements an investment that might not pay off for years. These corporate investors are often more interested in strategic advantage than mere financial returns. They look for promising enterprises to bolster some existing product line or marketing direction. For Vascular Control Systems, Johnson & Johnson was a promising prospect because it was making a major play in the women’s health market.
“Corporations are exceptional marketeers but not particularly adept at product development or improvement,” Greig says.
Johnson & Johnson Development was an appealing target for another reason. One Vascular Control Systems founder had previously sold a company to a Johnson & Johnson division, which gave the start-up company an inside contact with the health giant, always a beneficial connection because relationships are so important in corporate investment decisions.
Still, Vascular Control Systems won three rounds of venture capital investments totaling more than $11 million for product development and preclinical trials before accepting $12.3 million from Johnson & Johnson Development for further clinical trials and approval from the U.S. Food and Drug Administration. Before accepting that investment, Greig talked with other major companies in the women’s health arena and even had an offer that would have given that corporate investor first right of refusal to distribute Vascular Control Systems products and to buy the company. Greig took that term sheet to Johnson & Johnson Development, which countered with a strictly equity investment offer, which is better for Vascular Control System’ future.
“Price is part of the investment, but terms are more important,” he says. “In recent years offers have had noxious terms that let the corporate investor get their money back and double dip by getting the product distribution rights.”
If Greig does his job right and the clinical trials go as expected, Vascular Control Systems should have some offers for distribution rights and others for outright acquisition.
“Many companies are born out of a technology idea and go in search of a problem,” Greig says. “We looked at the problem [of excessive uterine bleeding] and went in search of the best solution that would have market acceptance. We have a patent trail that will protect us from competitors for the next 10 to 12 years.”
But long before that, Vascular Control Systems will likely be owned by a major corporation.