Will Rise of Corporate Investors Lead to Return of Device Returns?

Article preview from Start Up- January 1, 2011

Corporate investors are taking an interest - and equity stakes - in more medical devices start-ups.

Will Rise of Corporate Investors Lead to Return of Device Returns?

Article preview from Start Up- January 1, 2011

The acquisitions of Ardian Inc., Sadra Medical Inc. and Asthmatx Inc. at the end of last year demonstrated the value of corporate investors. [201010155] [201010151][201010121] The acquiring companies – Medtronic Inc. in the case of Ardian and Boston Scientific Corp. in the other two – held equity in the companies they purchased. Medtronic led Ardian's Series C round in 2009, while Boston Scientific bought a piece of cardiac valve company Sadra in a 2006 financing. [200930093][200630583] Boston Scientific also once owned a piece of Asthmatx, but it sold off the stake in the company as part of a large divestiture of portfolio companies in 2008. ( See "Saints or Saviors? Secondary Buyers Offer Exit for BSX, Others," START-UP , July 2008 [2008900141].)

The sequence of acquisitions is partly coincidental. Corporate acquirers don't need to own stock in a company to recognize value, but venture capitalists clearly have come to appreciate the value of belonging to their company's syndicate. Any apprehension that investors or portfolio companies once had about working with corporate investors has been worn away by the harsh reality of the day: capital is increasingly hard to come by in this market and having a clearer pathway to exit is more important, even for early-stage ventures, than ever.

Corporates are answering the call. According to an analysis of venture capital financings completed over the past three years, the percentage of financings that count a corporate investor within a syndicate is on the rise, with 16% of such deals in 2010. The percentage increase may be small, but it clearly reflects new interest. In 2010, corporate investors completed 12 new investments in companies versus eight follow-ons, the continuance of a trend toward strategic investors adding to – rather than just maintaining – their portfolio.

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