Planning and Executing Your Exit as an Investor

M&A in the medical device industry

When you start a medical device company, you spend many years on R&D, then clinical regulatory phase. Then, you have to take the device to the market, which is a huge change for a small company. 

Once you reach the commercialization stage, you need to expand. You have to bring in various people, such as sales teams. However, sometimes it doesn't make sense to build such a large structure for just one product. As investors, we step in and become more active, seeking partnerships or even acquisitions to bring these devices to the market.

International companies like Medtronic, Boston Scientific, and Edwards already have the sales force, capacity, experience, and knowledge to launch such devices successfully. For them, it's just an add-on, whereas for a company, it's like starting all over again with a significant investment and, at times, frustration.

Minority position during Investment 

As a public company, we have a responsibility to provide information to our investors. Our investors are capitalists who buy and sell shares, and sometimes companies prefer not to share too much information. To minimize the need for excessive reporting, we usually take a minority equity position in most of our investments. This way, we can avoid disclosing too much information publicly. However, we still aim to be active.

Taking a minority position often means being less involved. To address this, we syndicate with others, bringing in additional funds that don't solely come from Almada. This allows us to play an active role in the company, such as securing a board seat or even a chairman seat. It's crucial for us to bring our knowledge and expertise to the company.

When to think about an exit

When we established Almada, one of the questions on the table was when to think about an exit. What would be the deliverable that a company needs to have in order to create an M&A? 

We want to have an M&A as soon as possible, a few days after we invest. We want to have our money back at a multiple. However, this rarely happens. After evaluating various factors, we found that in the medical device industry, there are two main points that contribute to a successful M&A.

The first is after regulatory approval. Disruptive products that require extensive clinical trials tend to attract strategic and international companies after obtaining the necessary regulatory approvals, mitigating the clinical risks.

The second point is after achieving market traction. If we have an improved “me-too" device, we need to take it to the market for at least one or two years and demonstrate its appeal to physicians. So, in summary, I focus on two points: after regulatory approval for disruptive products and post-initial sales for improved “me-too" products.

Getting involved in the exit

Usually, we take an active role in the company, specifically on the board to get involved in an exit. When a company reaches one of the two stages we discussed earlier, we begin engaging with strategic partners. We have routine calls with them and meet at least once a year during the JP Morgan healthcare conference.

During these meetings, we pitch our portfolio to them and gather information about their interests and timing. When the time is right, we reach out to them and initiate discussions. For instance, if this company has received FDA approval, we’ll start discussing the next steps. 

In some cases, we involve an investment banker. We approach a few investment bankers and match them with the company. They then lead the process, reaching out to strategic partners who might be interested in the specific device or technology.

For example, we typically meet with someone in corporate development at Edwards. We approach them and schedule a meeting. During the meeting, we introduce them to our portfolio. We try to walk on what fields they’re in. 

Using Edwards as an example, they are a very valve-focused company, so we wouldn't present them with a urology product. We discuss our structural heart portfolio with the appropriate team, whether it's the business development (BD) team or a specific department team. 

They may provide feedback, such as expressing interest but wanting to see more clinical data or preferring to wait until the product reaches the market. We gather this feedback and share it with our companies, guiding them to focus on areas like clinical data. Once we have the necessary data, we can present it to the interested party.

Working with the CEO

Firstly, we never do it alone. We don't travel around selling our portfolio independently. We work hand in hand with the CEO and management. They are aware of our activities and, in fact, they encourage us to do it. 

Consider a young CEO, perhaps new to the role or even if it's their second time as a CEO. They may not have an extensive network or experience in the industry. It becomes easier for them when someone else opens the door and introduces them to the company, the CEO whom they should probably listen to. Or we provide a concise one-page summary and open the door for the CEO to deliver a full management pitch.

It's like a quick dating process between me and the strategic partner or international party. The outcome of this quick interaction is that the CEO will have the opportunity to engage directly with the strategic partner. I don't want to be the one leading the deal or tailoring it. Ultimately, it's the CEO's responsibility. My role is more like a matchmaker, which is my duty as a board member or chairman.

Today, there is a major conference here in Israel, and most of my day has been spent sitting down with strategics or venture capitalists who may be interested in syndicating or investing after me. We discuss our portfolios. It's like discussing our children. 

I present my portfolio to a colleague in venture capital, and they present theirs. We identify potential areas of interest and consider if we want to learn more about this company. Or they might say this potential is intriguing, and they can ask us to introduce them to this company. So, it's all about matchmaking.

Keeping track of potential acquisitions

First, I take notes. At the end of the day, I go over my meetings and make sure to send the necessary follow-ups. We exchange emails to keep track of things. This is our job, and I try to keep everything in my hands.

I would add one more thing. It's crucial to be a good listener. Sometimes they may mention something important, and if you're not paying close attention, you might miss it. For example, let's say you present a technology that the company decides to use for a specific indication. 

However, the technology could potentially apply to other indications or patient populations. If the strategic partner suggests moving the needle slightly in a different direction, it could make the technology more interesting to them.

You should listen carefully. I'm not saying you have to blindly follow whatever they say because you don't know if they will ultimately acquire you. However, you need to listen and take the information back to consider and decide if you want to move in that direction or not. If you are not listening, and if you always have it your way and not look around, you may miss the target.

There are some companies I saw that decided to have it their way, and at the end of the day, we could not sell them or we could not create an M&A because the market changed and the strategics were looking for something else and we left with them. 

Unfortunately, we left with them and we had to either shut them down or sell only the intellectual property (IP). This is detrimental for venture capitalists, the economy, and the overall macroeconomy in Israel.

Finding the right buyer

When it comes to networking, I don't have a specific way to define or identify it. I work with a list of strategic partners and try to determine the best contact within each organization. I aim for open discussions where I can learn from them and they can learn from me. At the end of the day, I believe in keeping every door open to any discussion because you never know which will open you to get something. 

For long-term relationships, I focus on people with whom I feel a chemistry. It's a mutual exchange where I give and take.

To maintain these key relationships, we try to schedule regular calls with them. We attend specific meetings and conferences where we know we'll have the chance to meet. I mentioned the JP Morgan healthcare conference in San Francisco. 

There are also two major conferences in Israel where we encounter many foreigners coming and visiting. We exchange information through newsletters, providing updates about our fund and receiving updates from others. These are the ways we nurture relationships. We receive newsletters from other venture capital firms on a quarterly basis. 

Another way to maintain relationships is during board meetings. When we gather in the boardroom, we meet our colleagues from other venture capital firms who have also invested in the same company. We have dinner before or after the meeting, and during the meeting itself, we find opportunities to connect and discuss not just that specific company, but other ventures as well. 

This is another perspective on why it's valuable to have other venture capitalists around the table. The specific deal we have with one VC may lead to another deal with them in the future because of the established relationship. 

And by the way, it's another way of how to do intel about VCs. By observing how VCs behave during board meetings, it also provides insights into their ethical codes and compatibility. It's another way to know what’s going on.

Managing exit planning disagreements

There are times when disagreements arise among board members. Some VCs may want to invest more money  in another tranche and take the company to another stage for a larger exit in two years. 

Other VCs are smaller and may prefer an immediate exit due to financial needs or the desire for a successful story or whatever. There is always a debate about when is the right time to do an exit, as well as how to make the final decision. It's a tough question.

In such situations, we usually use a lot of knowledge from investment bankers who can provide us with data and comparative analysis. 

• What would be the exit size now? 
• What would be the exit size in two years? 
• What do we need to do in order to get an exit? 
• How much risk does it take?

At the end of the day, one group has to convince the other group in order to reach an agreement, and sometimes it is tough.

Hold periods do come into play. An investor will want to see an exit, an M&A, or money back before they finish the life of the fund. Nobody wants to end the fund life and stick with a few companies that are still there because he needs to continue and manage them or take care of them or sit on the board and he doesn't get any fee for that.

Everyone prefers to achieve an exit within the fund's lifespan. It counts very strongly, and this is why different opinions arise on the board, and ultimately, someone needs to make a decision. While it usually involves debating and convincing each other, at the end of the day, there are articles. 

For those who invested, the last one has more power over the rest. And so you have to look at the articles and understand who is controlling this company or this specific decision in order to do that exit.

Who controls exit decisions

The final say rests with the shareholders. Within the shareholders will be some groups that will have more power than others, depending on the articles, but it varies. 

I'll give you an example. We step into one of our investments, a series D, as the last investor. We wanted control over the timing of the exit. So the majority of Series D shareholders will control this specific timing.

But then came the very early investor and they’ve invested, and if we control the timing, we may get nothing. You can decide on an exit at 50 million, you will get all your money back and they will get zero because of the waterfall structure. We recognized the need for an agreement and proposed a solution.

We agreed at the end that if it’s up to $1 million, we will have the power. They will need our vote as a shareholder in order to make a decision on an exit below $100 million. Because as long as it is below 100 million, the chances that we as an early investor will get something is very low. We want to be involved in that decision. 

Once it is above $100 million, they can decide without us because we will get our money back. So that was the solution, but it varies depending on the life of the company, how strong their parties are, and how dynamic the discussion is at the end of the day.

Negotiation

First, I try to look from the other side and understand what is really important to them. Once I realize or identify what's the most important point to them, I try to give a lot of attention to that, and then I can take the other point to my benefit.

Sometimes people think that all of us are the same, and this is not true. Sometimes for you, what is important is to get some money at the end of the day, and for another one, it is to get more money because it needs to do something else. So you have to realize where the needs are. As we said before, there are many ways to skin the cat or to cut the cake, and this is what we need to do.

So we have to look at the term sheet, articles, or SPA, whatever you do in order to make the agreement with so many terms that you can always negotiate between them. And at the end of the day, it's a puzzle. You give up on valuation, but you take something else. You give up on this specific right, and you take the other right.

So all you have to do is to look on the other side, try to understand what is important to them, and then build up the right agreement. Listen first.

I always listen. Some people think I'm quiet, but that's because I'm trying to learn first. I observe who is in the room, what the incentives are, and what the politics are behind the people. Once I have that understanding, I feel much more comfortable to speak and interact, and to build long-term relationships. It's crucial to understand the other side.

You don't want to reach a negotiation place with a lot of emotion. You want to reach there with a good feeling and then you can build up a good strong agreement and something that you can rely on.

I always say that the agreement is in place, because to avoid places where we are going to fight in the future. You and I can agree easily, but we would like to cover all the places where disagreement will occur in the future. And so, if we work together, we will be on the same side because on those points, we can agree easily. But you have to understand that the agreement is not on what today, it’s for the future.

When to engage with a banker

We don't need a banker all the time, but bankers are helpful when we engage with strategic partners to discuss offers. When we want to shop around, I prefer to involve a bank as a third party to explore better or similar deals and assess if we can get something more advantageous. It's an opportunity to use a bank to shop around while I'm involved in the conversation.

Now, we have a company where we know we’re receiving a term sheet from a strategic partner whom we've been engaging with for a couple of months. However, we want to understand the market dynamics better. 

So we are going to engage a bank who will go around and look. For example, maybe Edwards is the right partner, or maybe someone else is the right partner, because he gives more money, he provides more capabilities to this company. So before we sign with one specific deal, we would like to understand the landscape, and in order to do that, we will use a banker.

It will not harm the deal because everyone knows that this is the way the industry is acting. The deal will only be harmed if we sign exclusivity or a term sheet and then go against it, which is something we would never do. Before I sign something, it’s a free world, I have to shop around.

There are time bomb offers but you’ll be taking the risks. If you decide to sign, you sign and that’s it. You did your calculations, you took the risk that this is a good partner.

We spoke about M&A in general, but not all M&A, or not all exits are good exits. So you have to find the right partner. And sometimes, the right partner is not the one that give a company the most expensive deal or the largest amount of money.

Sometimes the right partner is the one that brings significant benefits to the workers, ensuring their retention for a certain period before any layoffs. As a board, we consider various aspects when evaluating a deal, not just the financial returns to our fund. We have to look globally at what’s going on and the partner's seriousness, their commitment to taking the product to the market rather than shelving it to avoid cannibalizing their own product.

Sometimes it happens. They have a product, they seed your product, which is better. They will buy your product, they'll put it on the shelf, and they will continue to market their product. So you have to think more and not just on the specific amount of money.

I previously mentioned a successful deal I was involved in. It was with a small company that we supported from its early stages as an incubator in Israel. We invested in multiple rounds as the company progressed, conducted clinical studies, and obtained regulatory approval.

We invested in all the stages in all the rounds, and the company completed clinical study and obtained the regulatory approval. Then, the board decided that this is a good timing for the company to be acquired because the board didn't want to go and sell the product or to ask the company to sell the product by themselves because it was an R&D cultural company.

No commercial team, no marketing. Even the CEO was more R&D than commercial. We engaged a banker because we thought that a banker can do a better process and give us the best deal. And the banker approaches all the strategics: the first tier, second tier, and the third tier. Several offers were received and the decision was made in a very different parliament. 

• One was money. How much money are we getting?
• Second, what's going to happen to the employees? 

Remember the employees were R&D guys, so it was very easy for a company to lay off everything, everyone, and close the site in Israel. But they promise us that they're going to continue and work with this specific site, and this specific site will be their R&D site. 

At the end of the day, we have now an R&D side of this company here in Israel, building up machines to continue to do R&D and improve the product. So it was all about money, employees’ status after the deal. And for them specifically, this deal would create a huge benefit for their revenue because they add moderate revenues on other products. And we knew if they were going to be successful with our product, this would be their star product in two or three years, and this is what happened. 

So they took the device, they took the system to the market, they kept the employees. The employees are still working, including the CEO of the initial company, and we got our money. So that wasn't the hardest, that this is a successful last story for me.

Advice on planning an exit

You never plan an exit. You have to build a company. That's what I'm telling the CEO. Always think about how to bring a successful product to the market. If you believe in the market, make the best clinical work that you can do. Build up the manufacturing as you are going to bring the product to the market. 

Exits are happening, sometimes earlier, sometimes later, but if you build up the right company, the exit will come because whenever a strategic will come and visit you, they will see a great manufacturing side. They will see a great team. So as a CEO, you cannot build up a company for an exit.

You have to think about how someone is going to sell the product, how to bring it to the customer. What would be the patient journey in order to get such a device? Because all these questions are important and they will be very important during the due diligence process of a strategic. You have to think about everything. You have to realize it, you have to solve it, and then an exit will happen.

Bad exits

Sometimes, you start with a great product, addressing an unmet need, and everything seems good. But someone is buying your company only to put you aside, and not bring your technology to the market. This is a bad exit. While you may get your money, it feels ethically wrong. 

A bad exit is when I’m not getting my money back. That might be the initial assumption, but on top of it, there might be a bad exit where you sold the company, you got your money back, but the people and the patients are not seeing this technology because of other initiation.

We are in a life science business. The reason I'm waking every day and coming to work with a smile is because at the end of the day, we are going to bring better medicine, better health to our patients. 

Yes, the process involves a lot of money, returns, a lot of negotiations, agreements, sometimes debating and arguing. But at the end of the day, at the end of the process, if a patient gets benefits from what I did in the last 10 years, this is doing my day. And this is something that we all have to remember because the journey to that point is very long, very bumpy.

Sometimes we seek companies, they're seeking money. They cannot bring the product to the next step because they don't have enough money, because it is struggling. The macro economy these days is so tough. People are not raising enough money, and you have to think about creative ways to survive. But in order to cross this journey and to overcome the bumps, you have to think about the mission. And the mission is to bring better health to patients.

Other takeaways

For a CEO, what is really important aside from everything that we discussed, is to have a very good team, a team that you can rely on. You are not a solo player. Investors like to see a management team where responsibilities are shared, and that there are people where you can share information with them and bring you more knowledge. This is important, and also, when strategics do M&A, appreciate that there is more than one person in that specific company. 

Another takeaway is don't cut corners. Sometimes, it's easy. I can reach an FDA with only 20 patients. Maybe I'll do 20 patients and get an FDA approval, and then I'll take care of more patients. I think this is wrong.

You have to walk on the main path. You have to find the right path. Don't waste money, don't waste the time. Find the optimal. I call it capital efficiency. Use the capital in the best way in order to get deliverable. And this is a good CEO in my eyes. And consult, ask, speak with people, open doors, and listen. And then you can make a better company.

As an investor, find partners. You don't want to be alone in one company. You want to have other people, other smart people with their own network. You know, it is so fun and so important when you have three or four people coming from different countries or even the same country, but different networking.

And when you reach a point that it’s time for an M&A, each of us brings his own networking. And then communicate and slowly we build up for the right exit.