Canadian Life Sciences VCs Lead the Realization Parade
April 3, 2009
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“Liquidity Shrivels Up For VCs in First Quarter” was the banner screaming across the wire services earlier this week. While true, what was lost in the subtext were a few important observations for Canadian VCs, particularly those focused on life sciences:
- That healthcare investments generally fared better than their counterparts in ALL other venture backed sectors with transaction value in the Q1, 2009 actually exceeding that in Q1, 2008, albeit on a smaller number of transactions (Dow Jones, PE Analyst)
- There were “13 health care deals generating $1.31 billion in the first quarter of 2009″(Dow Jones, PE Analyst) and Canadian VCs played significant roles in four transactions that occurred during the quarter. Lumira Capital companies Ception, Alveolus and Guava all announced acquisitions by strategic buyers during the period as did Virochem which had enjoyed sponsorship from CDP Capital, Solidarity Fund QFL, and the BDC.
- Medtronic Inc., which has not been particularly acquisitive for some time, stepped up big during the quarter, making two North American acquisitions – CoreValve Inc. and Ablation Frontiers Inc. – and also acquiring Israeli-based start-up Ventor. Rather than being “Rock-Bottom Pricing” as was the theme of the press releases this week, the Ventor and CoreValve transactions were done at valuations that generated 10-15X returns for their investors despite being relatively early stage companies. The later two acquisitions in particular should also bode very well for other companies in the structured heart area, including Lumira Capital’s investee Cardiac Dimensions, as Medtronic’s key competitors address their own needs and desires to compete in this segment of the market.
Liquidity and realizations DO NOT HAPPEN by serendipity. The story behind each of the recent realization transactions in our portfolio is different, but what I can say is they would not have happened without the management teams and investment partners having a clear set of realization objectives for their companies. The shareholders of Ception were not looking to sell, (however we all sure understood the value proposition to an acquisitor, the key development objectives that needed to be fulfilled and what we would and would not consider for an exit), but when the opportunities for a high value exit started to emerge ahead of plan, the BOD and management team knew where they wanted to go and did a great job of securing a high value transaction. The Guava and Alveolus deals emerged from very different circumstances in that the directors, management teams and shareholders of each of these companies concluded some time ago that they were more likely to thrive in the hands of strategic shareholders and therefore should be sold. In both of these cases, the transactions completed were the product of a thought-out and managed process, with Guava being sold to a buyer with whom it had initiated a strategic partnership 9 months prior, and Alveolus being sold after a “fully marketed” process in conjunction with an investment banker. Lately I have been thinking a lot about the issue of driving realizations, not because of the state of capital markets, but perhaps in spite of them. More and more we are hearing of investors and BOD members who aren’t prepared to pursue a liquidity event because of the current state of the markets. I think I understand this behavior for the top percentage of each VC’s portfolio of investments – those companies that truly are the cream of the crop and that will likely command exceptional multiples in a more buoyant market. On the other hand I think there is little evidence to support the contention that average companies will suddenly become exceptional when markets improve (yeah we all can point to that mediocre company that suddenly improved or that crappy company that some strategic buyer just had to own, but those situations are truly exceptions and not something upon which fund performance can be managed or sustained). The simple reality is that sometimes we get it wrong (there I said it) – we misjudge management’s capabilities, the market size, the competitors, the IP risk, the product development risk, the clinical challenges, the regulatory environment, our ability to value add or any of the other myriad variables that affect the outcomes of our companies. Sometimes these misjudgments can be fixed (and I am sure all of us have lived through the process of trying), but more often than not they are fatal or semi-fatal. When this happens we don’t do the companies, ourselves or our investors any favours by diverting valuable human and capital resources to companies that are simply always going be average or worse. Acknowledging this is tough. It means acknowledging a fatal mistake to your partners, your peers and yes maybe even to your spouse sometimes. Failing to do so is however so much worse. So the point? The drop in liquidity this quarter is likely as much a function of unrealistic expectations on the part of the shareholders and management teams as it is a function of the market. Today’s market represents an outstanding time to cull the weak and underperforming from our herds so that there is lots of grass and water for those that are left (I am thinking in terms of western metaphors these days in anticipation of the CVCA’s up and coming conference in Calgary). A 1x change in the revenue exit multiple makes a $50 million difference in exit value for that winner $50 million revenue company and only a $10 million difference for the underperformer doing $10 million in revenues. I certainly know where our team wants to focus its energy and efforts as the markets improve (but we are of course also happy to take the big wins like Ception in this kind of a market). Note: cross-posted at Capital Rants.