Challenges Faced By Today’s CEO’s of Start-Up Medical Device Companies- And Unique, Innovative Resource Alternatives /
Keys to Achieving Successful Exit Strategy /
By Thomas G. Ferro
President/CEO
Global Orthopedic Network, Inc.
12/12/2011 /
Several factors are influencing how CEO’s of start-up medical device companies position their business including IPO market attractiveness, tight capital markets, and evolving needs and requirements of potential acquiring companies. Establishing strategies that provide long-term flexibility in a company’s development can either lead to success or failure in achieving a firm’s exit strategy. An innovative, new business model exists that can help today’s CEO face these new challenges head-on and turn these changes into opportunities. /
Historically, medical device industry start-up companies were considered an attractive investment. Several factors led to this attractiveness including: favorable reimbursement rates, non-existent pricing pressures, positive demographic trends of an aging baby boomer population, favorable acquisition prices based on high multiples of sales, favorable IPO markets, and technology’s contribution to overcoming existing clinical challenges. Today’s environment is clearly more complex. That complexity places greater challenges on CEO’s of start-up companies. This article discusses these challenges and introduces emerging innovative solution alternatives to assist CEO’s more effectively face and manage through these challenges and achieve desired exit strategies.
Perhaps the greatest challenge facing today’s start-up CEO is effective and efficient cash flow management based on tight capital markets and delayed exit strategies. Effective means achieving more with less while efficient translates to ensuring adequate resources are allocated to key drivers of the business. Investors today are much more discriminating with their investments and demand start-ups achieve more aggressive milestones before infusing additional cash into a business. Furthermore, potential acquiring companies have significantly cut back on R & D resources. This directly impacts the profile of an attractive acquisition target meaning start-ups have to achieve more aggressive milestones to achieve desired exit strategy. Specifically, larger companies are placing greater value on acquisition targets with revenue streams to supplement depleted product pipelines. This places significant more strain on a CEO to manage cash flow effectively and efficiently.
Another significant challenge lies in head count management. Headcount is perhaps the greatest contributor to an organizations cash burn rate and represents a significant hurdle to CEO’s achieving desired goals and maximizing a company’s valuation. With start-ups challenged to reach the revenue generating phase, this becomes a more significant issue, especially the headcount requirements for commercialization- marketing, sales management, and professional education.
Third critical challenge to a CEO is how to maximize their respective company’s valuation. Typically, a start-up focuses in areas where it believes it can be successful. Success is directly linked to internal expertise and resources (human and monetary). A major responsibility of a CEO is to drivefocus within their companies ensuringalignment of goals and resources. One example of this focus is limiting commercialization to the U.S. due to a lack of international experience within an organization or resources to fund a broader commercialization strategy. One example on how this narrow focus can negatively impact valuation is when one looks at an acquisition price of x based on some multiple of revenue generated solely on U.S. revenues. Let’s assume a start-up company has successfully generated $50M in revenues and the acquisition price is based on a multiple of 5. This translates to a $250M acquisition price. If that same company generated an additional $10M in sales in a country such as Japan, this would have driven the acquisition price up an additional $50M to $300M. A start-up not maximizing these additional value generating opportunities only leaves these untapped value generators on the table for the acquiring company. CEO’s are challenged more than ever to be creative in seeking vehicles to capture this added valuation and typically requires outside resources to be leveraged.
The final challenge to be discussed falls under commercialization. Establishment a robust distribution network for a start-up company represents a significant hurdle. Start-ups not only have to spend valuable time and resources identifying and developing a distribution network but then have to in many cases compete with conflicting direction within their distributor network. Specifically, a distributor rep’s main focus is on high revenue products in order to maximize their respective revenue streams. The end result is that companies spend an inordinate amount of valuable time and resources (hiring direct sales management team) in managing distributor turn-over for the non-producers. This scenario also represents a lost opportunity of missed revenues. Each start-up faces the same exact challenge in creating a viable, productive distribution network. This is a significant contributor to inefficiencies in the commercialization process. A significant outcome of this inefficiency is a delay in achieving a cash flow positive solution. There can be no dispute on the value of running a cash flow positive business. It provides a company with much greater autonomy in business direction and decision-making while also making it much more attractive to raise additional capital for further expansion. Additionally, it is also important to note that each fund-raising round further dilutes the equity position of the early investors.
As an organization’s needs evolve as it passes through each business phase, companies need to infuse needed expertise and experience as a criteria for success. This typically comes via headcount additions. CEO’s have to balance cash availability to pay for these additional full-time heads with the level of experience and expertise that the cash will afford. Sacrifices in this area are the reality thus further limiting an organization’s capability of maximizing its value at time of divestiture.
Now that the challenges are on the table, what can a CEO to do to better manage through these challenges? First and foremost, a CEO needs to breakdown the critical elements for success. For a start-up operation, this is typically going to land in the technical expertise area in order to develop a marketable product. To dilute these resources into other areas is most likely unadvisable. Marketing support in early stages is important but does it require a full-time head that negatively contributes to the monthly cash burn rate? The answer is probably no.
This leads to the next question and it relates to the commercialization phase. Establishment of a robust distribution network managed by a direct sales management team is perhaps one of the most significant cash flow burn areas of a business. A CEO should be exploring alternative options that lead to a faster cash flow positive position while burning less cash, and infusing into the organization much needed expertise that will ultimately lead to greater outcomes, including increased valuation.
A unique, innovative management resource is available today to help CEO’s navigate through these challenges. The solution involves establishing a partnership with a firm that is structured to provide support to the growing needs of an evolving organization. The support takes many forms including: providing access to senior industry executives with strong industry ties and customer relationships that can significantly expand commercialization efforts, Industry knowledge to expand commercialization capabilities both domestically and internationally, and perhaps most importantly, having a positive cash flow impact by minimizing additional headcount in sales and marketing management, business development, international expansion, and professional education. The end result is generating a timelier and greater revenue stream. Another major component of this service is access to a turn-key, global distribution network tightly linked to goals and objectives of the start-up company.
A critical factor for success in this business model to ensure the partnership is solidified. A key component in solidifying the partnership and establishing long-term commitment and alignment of goals and objectives is the equity sharing piece of the relationship. In return for an economic solution to start-up companies, these companies provide an equity stake in its company. This ensures total alignment across distribution, contracted management resources, and the start-up company.
Today’s environment presents a new set of challenges to start-up CEO’s; however, with change, comes opportunities. A CEO thinkingout-of-the-box employs creative alternatives to address these challenges that best positionstheir business for success, especially in achieving desired exit strategies.
Thomas G. Ferro is President and CEO of Global Orthopedic Network, Inc. Global Orthopedic Network provides a unique and innovative partnership to start-up and small companies in the areas of contracted marketing and sales management, turn-key global distribution all leveraging strong, established strong surgeon relationships. The Network consists of senior orthopedic industry executives.