Video Transcription
Bill Little 00:05
Bill, well, thanks everybody for joining us today. My name is Bill Little. I'm with a firm called Orchestra BioMed, and I have the distinct pleasure of moderating today's session about raising capital and liquidity, and where is it going to come from. What I thought I would do before asking our panelists each to introduce themselves and tell us a little bit about their individual funds is just give you some context on the overall market. I think most of us, if asked, would suggest that the last couple of years in capital markets have been really tough, no doubt about it. We had a pre-call as a group, and one of the things we talked about is how we think it’s looking forward. So today, we're going to talk a little bit about what we think it looks like moving forward, and also about alternative ways of potentially raising capital. First, before we kick off, I'd like to once again thank the LSI team. From my perspective, this meeting has become the meeting of record for investors and strategics, and of course, startups. The ecosystem that Scott and his team have helped to create and now lead is really integral to where we're going as an ecosystem. There's no doubt about it; there's never been a greater need for innovation in our ecosystem to help patients and to help healthcare systems. But also, innovation in how we fund and how we get these great technologies to market. There are over 750 companies here at this LSI, and in speaking with Henry Peck last night at dinner, the alumni from LSI this year alone has raised over $1.6 billion just this year. Was it pretty gloomy? Yeah, it was pretty gloomy. Is it looking better? I think it is. So with that, to tee it up, I'd like to ask each of my panelists here to introduce themselves and tell me a little bit about your fund and introduce yourself to the audience. Michael, you want to go first? Sure.
Michael Wasserman 02:29
So good morning, everybody. Michael Wasserman. My background is originally technical. I spent the first seven or eight years of my career as a med tech operator and entrepreneur. Like many of you, I've now been investing for almost 25 years in med tech. The first couple of decades was with a group called H.I.G. Capital, based in Miami. Now I'm investing with Elevage Patient Square Capital, which I'll tell you about. I've spent the last five years being Alex Schmitz's personal assistant, where my responsibilities are bringing him his matcha latte and cutting grapes in thirds. So Patient Square is a healthcare private equity fund run by the former senior management team of KKR. We are currently investing out of a $4 billion fund across the healthcare spectrum: med tech, diagnostics, life sciences, and tools. Elevage invests in venture growth stage opportunities from early to mid-clinical, all the way through commercial, putting about $50 million to work per investment.
Bill Little 03:47
Great. Thanks, Michael. Diana?
Diana Saraceni 03:48
Sure. I also have a technical engineering background, an MBA, and a bit of management consulting and investment banking before starting my career in venture capital, which is now 25 years of venture capital experience. I co-founded a venture capital company called 360 Capital, investing on a European level. I'm still active and raising funds and investing in all sectors. About seven or eight years ago, I felt I wanted to focus on med tech investment opportunities, as well as a broader life sciences scope. I co-founded, with two other partners, Panakes Partners, the fund I'm representing here. I'm still a managing director with my co-founders and run this company, which has about $300 million under management and about 22 portfolio companies to date, with a lot of capital available for new investment. At Panakes, we primarily invest in med tech but also in biotech. Ticket sizes range from $1 to $10 million, from seed stage to pre-IPO rounds. We're pretty stage-agnostic. Our sweet spot is Series A and Series B. We look at everything, including not only proper medical devices but also diagnostics, IBD, and digital health. A little bit more borderline in med tech, as well as biotech, as I mentioned. Thanks. Geographically speaking, that's mainly Europe, but we also go beyond Europe to the U.S. and elsewhere.
Bill Little 05:35
Sure, there's a lot of people in the audience here that have great ideas for you. Thank you. Alex, I'm going to apply for...
Alexander Schmitz 05:39
Alex Schmitz, available system. You don't want that position.
Michael Wasserman 05:46
It doesn't pay well.
Bill Little 05:48
Alex Schmitz is with a firm called Endeavour Vision. Perhaps you've heard of this. Alex, you want to go ahead?
Alexander Schmitz 05:56
Absolutely. I've had the distinct pleasure of serving on a board with Michael, and I miss the lattes; that's all I can say. I'm Alex Schmitz, a partner at Endeavour Vision. We're a transatlantic healthcare investor focused primarily on Class II and Class III medical devices. We do selective digital health and diagnostic investments, but we're primarily focused on the more physician-mediated, reimbursed, highly regulated end of the device and digital spectrum. I'm originally from the States, but I've been here in Europe for the last 25 years, all of which I've spent working in venture and med tech. The last decade with Endeavour Vision, and prior to that, in a biz dev strategy role at Biosensors International, which is an interventional cardiology and structural heart company headquartered out of Singapore, but I was in their Swiss headquarters, or European headquarters in Switzerland. We invest mostly in growth stage, so a little bit later than the A and B rounds, mostly focusing on early revenue stage companies, helping them to accelerate commercialization, scale up, and in many instances, kind of cross the Atlantic in either direction—either a European company commercializing in the U.S. or U.S. companies coming over to Europe. It's something that we've had a lot of experience with and like to help our companies with. We manage about $850 million and typically invest $15 to $20 million per initial investment. And that's all I got because Michael forgot to make my latte this morning, so I had to make do with a mediocre espresso.
Bill Little 07:42
Thanks, Alex.
David Kereiakes 07:43
Thank you. I'm Dave Kereiakes. Bill, thanks for including me, and thanks to the LSI team for another great event here. I'll try and be brief so we can get to the good stuff. I started investing in healthcare some 13 or 14 years ago. Most recently, I helped run Providence Ventures, which is the investment and innovation arm for Providence Health, the third largest nonprofit in the U.S. It was fascinating to be inside of a nonprofit as an investor and innovator—a 180-year-old faith-based nonprofit—but really a lot of good learnings. A year and a half ago, I joined Windham as a co-managing partner, and we're investing out of our fourth fund. Windham has been around for over 15 or 16 years. Uniquely, both managing partners have experience investing and operating in med tech as well as software and digital health, and then uniquely, the convergence that we're seeing between those two fields—tech-enabled devices, software that has regulatory risk and pulls unique clinical insight out of a particular procedure, either pre-, intra-, or post-op. We invest $5 to $10 million, $10 to $15 million over the life, and really try to add more value than the cost of the capital to help influence these innovative companies that are solving a material problem. So thanks.
Bill Little 09:05
Thanks. And I'll briefly introduce myself. My name is Bill Little. I'm with a firm called Orchestra BioMed. My background is largely as an operator with firms like Boston Scientific, St. Jude Medical, and Abbott. For the past four years, I served as the Chief Operating Officer of an Israeli-U.S. firm called Neovasc, which ended up being the first, last, and only acquisition that Shockwave Medical ever did. Now Shockwave is part of Johnson & Johnson. For the past year and a half, I've been here at Orchestra BioMed. At Orchestra BioMed, fundamentally, what we try to do is solve late-stage, high-dollar funding needs, typically for Class III devices, typically PMA-type programs that are on the front edge of $80 to $100 million type pivotal trials. We fund in partnership with a strategic partner in three-way deals where we allow the strategic to make an equity investment into Orchestra. We're publicly traded on the NASDAQ. They buy our stock, we take their cash, and we put it towards funding the pivotal study. We add our own capital as well, and we keep it entirely off the balance sheet of the strategic. Upon FDA approval or whatever the milestone may be, the strategic will commercialize the device, and we take a long-term royalty on future sales. As part of the theme today, this idea of where capital is going to come from, I think one of the reasons that we at Orchestra asked to be on this panel is this alternate funding vehicle. If any of you have spoken with strategics, you'll hear very quickly about fear of dilution, clinical risk, regulatory risk, and for many firms, dilution is the biggest hindrance. Looking for ways to solve that dilution problem is something that we're trying to do at Orchestra. So with that as a tee-up, David, maybe I'll start with you. In our prep call, you brought up the concept of non-dilutive financing and other options. Can you give the group your perspective on how you guys look at that at Windham? Sure.
David Kereiakes 11:39
So naturally, I view there are—we all know there's two credit cards. You can use a debt credit card and an equity credit card. Unfortunately, both are very expensive right now and hard to get any credit on that line anywhere, particularly with a new investor coming in. I think the majority of the deals that are getting done are insider-led rounds, which are underreported. I think that number is actually a lot higher when you try to get a new investor in because of funds focused on cash management and trying to make sure that their children inside their fund have the ability to survive. There is a fight for new capital replacement, and having not made a new investment, if you ask a fund, very few have made a new investment in the last 12, 18, or 24 months. When you're outside of the market for that long, it's hard to know what fair market value is, and that's why we have these conversations about where valuation should be. You hear a long range, and you see some pretty onerous terms because when we are not practicing or playing the sport that we are here to do, it’s hard to come out and start well and play well. You have to start looking for other means. Unfortunately, I've been seeing a lot more distribution deals, which can jeopardize a competitive exit process. It may be helpful right now to get immediate revenue and see that growth, but you may not get credit for that revenue. I'm happy to be longer-winded on the ways that you can structure or evaluate those opportunities to help bring money in. Another credit card you can use is your customers, pulling their cash up forward and having them prepay, and maybe take less than what you would get otherwise to get that cash up front. Uniquely, I invested in a company called Boulder Surgical, a surgical sealer and stapler in the pediatric space. We were growing it to go after adult and sold exclusivity in robotics, and we were able to leverage tens of millions of dollars in non-dilutive funding that we were able to use in milestone payments and development payments, as well as royalties. We were able to monetize that royalty stream and preserve a huge market opportunity where a lot of potential buyers were still ready and willing to look at us and leverage that tens of millions of dollars in our return for equity preservation too. Where equity is very expensive right now, I would start looking at other market opportunities. You constantly hear us say you have to focus. Don't get distracted with all these other applications, but if you have that opportunity, rather than get distracted, why not monetize it and give exclusivity in veterinary or robotics or a field of use? In this particular organ, you can use this, and you can bring in $5, $10, in our case, tens of millions, and we still preserve the option to sell it, and later did for a lot of money. You have to get creative. Given the cost of capital and the time to talk to all of us and educate us and attract a new investor, time is your most limited resource. If you can kick the can to a better financing environment, get additional milestones, you preserve your equity as entrepreneurs and your shareholders, the common stock that often gets hammered at this point in time or jeopardized. So Michael...
Michael Wasserman 15:36
Can I just jump in and extrapolate a little bit on David's commentary, coming at it from a little bit of a different perspective? We're a new-ish fund, and not only having a fresh source of capital, which is a good problem to have, but also not having the anchor of an existing portfolio. One of the things we've certainly seen, and I'm sure all of us on the panel have seen it over the past 12, 24, even 36 months, is a lot of the early-stage companies that were financed in 2019 through 2021 did so at valuations that one would argue, from a median perspective, would be higher than expected. That puts an added feature...
Alexander Schmitz 16:22
Being too polite.
Michael Wasserman 16:24
I was talking about your portfolio.
Alexander Schmitz 16:27
There was a bubble. Everything was priced like it was a bubble, and it was overpriced. That was true across the board of the economy, not just in our little pug. I know you know that, but I just want to make the point.
Michael Wasserman 16:43
And that's when you get into the unfortunate intricacy, the dynamics around our partnerships, right? You do a deal at $50 million in 2019, and then you have to go back to your partners, forget about the management teams involved in this, and say, "Wow, yeah, the next round is going to be done at $25 million." What that's led to, and this is what David was alluding to, is a number of inside rounds because you're kicking the can down the road. Certainly from our experience, I'd be interested if others have seen the same. You can probably do that once, maybe twice, where you do the inside round and bridge it. Now we're getting to the point in the cycle where you have to go out for outside capital, and going out to outside capital, at this point in time, you certainly have fewer degrees of freedom when it comes to anchoring to valuation. So terms are onerous. We're certainly seeing management teams having much more of an eye towards the end game than, "I need a 25% increase," or "I need a 50% increase," or even "I need a flat valuation on my current round." I don't know if others agree or disagree.
Diana Saraceni 17:55
No, I think we should add that the recommendation is to face it as soon as possible in the process of raising. Going out with the same high valuation is just a way of killing any due diligence process. You don't even get to get a term sheet with the fair valuation, with the adjusted valuation. It just kills the process. Investors would just not even start saying, "This is far too expensive." Even if I like it and would look into it, I just won't go because a down round is something they won't like. There are minorities that can be sometimes blocking minorities that would look for additional ways of raising that capital, and then you don't even start looking into it. So having frank conversations with your investors is something to have as soon as possible to enable the process and open up the first conversation with new investors. Open up and say, "We had a round that was overpriced. Let's just face it, and we're open to readjust." Everyone around the table is so you can go for your due diligence and then set a price. I think it's a much better way.
Bill Little 19:16
David, you mentioned field of use as an option to generate non-dilutive financing. Alex, what about other types of non-dilutive options? Maybe grants? Can you comment? How do you guys look at that as investors? What comments would you have for folks in the audience looking to raise?
Alexander Schmitz 19:39
I think grants and truly non-dilutive funding, which I would not consider to include venture debt, and I'll comment on that in a second, but I think venture debt is a legitimate source of funding. I just think to characterize it as non-dilutive is misleading. True non-dilutive funding, government grants, research grants, many of which are available at the regional and national level across Europe, can be great, especially at the early stages of a company’s formation. The amounts that are available tend to be on the smaller side, so that can only take you so far. But the less dilution you can take, obviously the better in terms of preserving founder ownership. More importantly, it's just great to get non-recourse money if you can, right? It's hard, and it will be part of an overall financing strategy. You can't completely fund a company on grant money, but it can be very helpful. In the U.S., there's probably less of it. It's really more for foundational research, NIH stuff, which doesn't really help, I think, for most of what this community is working on. But in Europe, there's quite a bit, and then there's also sort of the next level, which is state-sponsored funds that have a mandate to invest in the local ecosystem, where their bar, from a financial return perspective, might be different than a pure financial sponsor. I think those are obviously avenues worth pursuing.
Bill Little 21:09
It's interesting. My next meeting after this, I serve on the board of a Swiss-based company as an independent. We have a board meeting today, and we have a term sheet from a Portuguese firm that is essentially giving us a grant for domiciling in Portugal, and we're doing that today. So it's exactly, yeah, it's non-dilutive financing, and it's a great group. We're thrilled about it, and it's the lead topic at our board meeting today. So it's very real, and it's very timely that it happens to be in Portugal.
Unknown Speaker 21:42
One more source that we haven't talked about is obviously geographic distribution rights.
Bill Little 21:47
I was going to ask David about that in my notes. Thank you for correcting me. Particularly, you know, China rights is one thing that we see a ton of. Can you comment on your thoughts on that?
David Kereiakes 21:59
Yeah, I don't have anything. We're actually looking at a company right now that took $20 to $25 million from a Chinese medical device manufacturer for rights. I was describing it to one of my colleagues earlier this week. It's like a free round, right? They got $25 million, which is functionally a Series B financing for a lot of companies. Now, obviously, the devil is in the details of what those distribution rights entail and what the implications are, particularly how strategics—and if we have any strategic M&A folks in the room, we do—would certainly be an interesting perspective.
Bill Little 22:47
I think one of my colleagues is in the audience. There's a structural heart company that we really like. They're on the front edge of needing, you know, $100 million. They've given off their China rights to a large China multinational and are currently trying to raise a bunch of money, and that entanglement is challenging. Yes, it absolutely came with some non-dilutive financing for geographic rights, but it's something to keep in mind on the back end that it can complicate things too. If you sort of follow the first rule of, you know, number one, do not run out of money, regional rights are better than a revamped cap table.
Alexander Schmitz 23:32
There are some, I mean, I'm sure folks in the audience are familiar with them, but there are a couple of specialty advisory firms that are focused exclusively on helping venture-backed med tech companies monetize non-European, U.S. geographies—China, India. We're seeing inbound inquiries for some of our companies as that emerges as a large medical device market. If there are strategics that want to chime in here, please do. But I think whereas five years ago, in the run-up to the crash or the correction, there was a lot of reluctance to give away China rights because a lot of strategics were looking at trying to go direct into China because of the geopolitical situation, I think there's much more acceptance of a well-structured China licensing or distribution deal that doesn't impact the rest of the hungry.
David Kereiakes 24:29
But I think the geographic distribution is a little more risky, and I'd be a little more reluctant to do that versus, say, field of use. Yeah, field of use because you've got stocking orders, then it will have an impact on your margin selling through them. It's the same application, right? Anytime a strategic is looking at you, they want to see that they can pick up your solution, drop it into their sales force, and have success with it. If another big distributor can't in a particular market, you have to explain why. If it's a different field of use, different specialty, it's a whole story that you can tell about that, but then the inventory, the cost to move that over and sell through to them, that's a hit on your margin in cash too. Unless you can get an upfront payment for that exclusivity, which can help drive that, it's hard to see that being a good option longer term.
Bill Little 25:30
Diana, I want to shift gears a little bit and have you maybe give us your thoughts on the team required to raise money versus the team required to run the company versus the team required to get a successful exit. How do you think about that as an investor?
Diana Saraceni 25:54
I think, well, team is just one team, right, per company. The level of expertise and vision will trigger both operational skill execution as well as more strategic and raising money alongside. But the earlier the company is, the more these are really separate skills in my view. At early stages, specifically the A round and B round that we lead, there's a lot to plan for, and there's a lot to execute as well, but the planning part is all about figuring out how it's going to look like, right? Thinking of when a product is in development, how reimbursement will look like, how market access in general, or how different markets would look like. How is Europe? There's a lot to learn, a lot to envisage, and that requires a lot of vision and planning. While at the same time, of course, you have to run the company. At that stage, you probably have a small team. You don't have many resources, and you have to make progress. You really have to carefully think of the funding strategy—what will be the steps, what will you sell to investors at each point, and which amount to raise each time, given market conditions and the differences among investors you talk to. We mentioned some non-dilutive sources of funding. We haven't mentioned the great effort that the EIB is making in Europe. That's huge. I think the number is $3.5 billion deployed through the EIC program into European countries in the last three years in deep tech in general, half of which is health tech. They have another $6.5 billion available in the interim until 2027 for grants and equity to come alongside the investors. I fully agree that venture debt is not the first choice for companies, but the EIB venture loan is very interesting. It's an exception because it can springboard that exit. Going back to management, the EIB and EIC are completely different kinds of investors to manage. You have local investors asking for the company to relocate, and you have to enter into that logic. You have strategics, and you have the Chinese investor you want to deal with and see if you or Indian investors are now very active as well. You want to see if you give out rights. All of that requires a lot of work and vision, and trying to find the good fit. This is a really different mindset than just executing on a plan.
Bill Little 29:05
Thank you. Today is arguably one of the more important days in the last couple of years for capital markets. For those that don't know, the U.S. Federal Reserve is going to meet, widely expected to cut interest rates. Maybe it's a quarter of a point, maybe it's half a point. In any case, we are about to see a reversal of two years, two and a half years of increasing rates. I look at today as a watershed moment that will arguably impact the next several years of the environment. With that as context, I want each of you to comment on two things: your macro outlook for med tech, and you can be brief on that, but maybe more importantly, your own fund and where you think your risk tolerance is today and where you think it's going over the next short period. So risk tolerance for you personally, on top of the macro environment. Maybe David, I'll start with you with that.
David Kereiakes 30:09
Okay, all right, so the two questions just direction. I think things are getting better, as hard as that feels, but I don't think they could have gotten worse. We haven't really talked about it, but it was a correction. It was a recession. It was a deep cut, even into bone. I think it was damaging for our innovative ecosystem. The correction has been over, and we see that on the software and digital health side too, where we had tech investors coming in—pure tech that didn't have healthcare background or experience—and didn't appreciate the longer sales cycles and the smaller markets that we operate in in healthcare and just how slow decisions are made. You can't just rush in and break things in healthcare. We have an even deeper correction on the software and digital health side, which to me, I could not be more excited about the environment that we are in right now and where we are headed. I'm putting my life savings and everything I have into the market right now. I'm all in because the upside is tremendous. I think we've seen a lack of M&A, and that is the engine for innovation in the U.S. R&D for large companies will continue to have a career because, no offense to the angels in the room, but those BD, big companies have a hard time innovating, right? They're reliant on us to drive that innovation and growth. There's a backlog and a need. Moving ahead, we are coming into a great exit environment. If you can find any capital and do that math on the cost—not just the cost of the capital, but the time needed to raise that and the distraction—because you'll be measured, your exit will be measured in how you perform year over year and whether you hit plan and what you say you're going to do. If you can survive, I think you've got an unbelievable opportunity. Med tech has just been bumping along; it has a dip more recently, but it's consistent. There’s a need, and it's not going anywhere. I think I hit your two questions, at least in...
Bill Little 32:27
Alex, Endeavour Vision, are you guys ready to act, ready to be more bullish, or are you still looking backwards, thinking, "Wow, that hurt"?
Alexander Schmitz 32:38
No, I think we see a lot of opportunity. From the macro perspective, you mentioned interest rate cuts; that's going to have a huge impact. The big question in my mind is what the stock market is going to do because what's been weird from a traditional economic cycle perspective is that the real economy has had inflation but has had pretty full employment. The stock market remains at all-time highs. It's a little weird. It feels like the whole soft landing has worked out, but there's always, I think, still this waiting for the other shoe to drop, and there’s a lot of geopolitical risk. Things, as many of you saw this morning waking up, have gotten even less stable in the Middle East as of this morning's pager situation. There are some things that could have an impact on the macro climate that aren't related to the general economic cycle, but it does feel like we're turning the corner with M&A activity rebounding across the board. More specifically, within med tech, there have been a lot of big and small transactions in the last 12 months, and that's encouraging to see. There are a couple of companies looking to go public in the coming days and weeks, and obviously, that'll be a bellwether for what we'll see as a crop of 2025 med tech IPOs, and that sort of resets the cycle. The best time from an investor perspective to deploy capital is kind of at the bottom of the cycle. It's always hard to time it, and this one is tricky because just as the public equity markets have remained high because of that sort of internal financing round phenomenon that we talked about at the beginning of the panel, private company valuations have remained higher than you would normally see in this kind of correction. So the full risk on like everything is now reset, repriced, and we can make a really nice return really quickly. I'm not entirely there yet, but I think there are a lot of attractive entry points in the current environment. I think we're going to see people put money to work. The big question, and Michael alluded to this on the pre-call, is from the fund point of view. This conference often talks about how hard it is to raise money as a startup. It's hard to raise money full stop. It's hard for investors to raise money because we have investors that are managing billions and trillions of dollars, and they're saying, "Hey, I can put it in treasuries at 6% and go to the beach and relax because I know I'm going to get a guaranteed return. Why would I give it to Wasserman? Because he could screw it up." In a lower interest rate environment, the potential to get a 3, 4, 5x return on your money is a lot more attractive, even though it carries risk. There are a whole bunch of factors that I think are going to come together here in the next 6 to 12 months that should restart the cycle. I'm hoping that we have another decade ahead of us and pretty exciting times in med tech.
Unknown Speaker 35:59
Yeah, I think if I can, Bill...
Alexander Schmitz 36:08
Alex makes a great point.
Unknown Speaker 36:10
But Ruby is right twice a day. We have to remember that we, too, are out there begging for money all the time, and the flows into general partners, into investment partners—whether it's public or on the private side—are an important driver of our ability to deploy capital. I think all of us recognize the challenges that have been there for healthcare, med tech in particular, funds trying to raise capital in this environment. I do think that things look like they will be changing for that, which will have a trickle-down effect on the folks out here in the room. Many of us, in fact, I think all of us on the stage have been investing for long enough to have gone through these cycles before. You know, 2008, 2009—this is not the first time we've been through this. 2001 as well. I was an operator in 2001 and remember how difficult it was to raise capital. Look, I have been woefully unsuccessful in timing markets in the past. I think we're all here in the audience and on this stage because we are bullish on the state of medical devices innovation and the opportunity it presents in the overall environment. So on all of us, the challenge is to continue to invest, to continue to put money to work, to continue to innovate and build these companies. We can't determine when the public markets will be supportive of them, and we certainly can't determine when the strategics will be willing to buy good companies. You finance them appropriately, you create value, and ultimately, they will be successful.
Bill Little 37:53
I'm going to give you the last word here, Diana. What does the future look like for the folks in this audience that are trying to raise money?
Diana Saraceni 38:02
Well, let's try to leave the floor with a little bit of optimism because the numbers for the first half of the year were better than last year. That has to be said. There's more money going into med tech, so that's good. We are positive about the IPO market providing some kind of exit, possibly starting next year, maybe, and a number of earlier stage exit opportunities eventually also true. M&A is becoming a little bit more exciting. So let's say, be creative. Look at different sources of funding, as we mentioned several times in the panel. It's not the worst of times you can go through, and adapt—that's probably the best word.
Bill Little 38:53
Thank you. I'd like to thank the entire panel. This was great and informative for me. I'm going to ask each of you to stick around a little bit. We didn't take Q&A from the audience, but if you could just stick around if anybody wants to interact directly or ask Diana for money, she's got it. The future looks bright. Thanks, everybody.
