Planning and Executing Your Exit as an Investor

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1:02I'm Kisan Patel and you're listening to M &A Science where we talk with deal professionals and learn valuable lessons from their experience this podcast focuses on stories, strategies and what actually happened during M &A deals

1:25hello M &A scientists Here at M &A Science, our goal is to continuously expand our understanding of M &A and use that knowledge to create top-notch training programs and resources. By visiting mascience.com, you'll find all the information you need to take your M &A skills to the next level. Get started by signing up for a free weekly newsletter to stay up to date on our latest courses, upcoming events, and expert interviews. Again, that's mascience.com. I'm your host, Kisan Patel, CEO and founder of M &A Science. Joining me today is Dr. Yrit Yaniv, founding partner and CEO at Almeida Ventures.

2:00Almeida Ventures is the first health tech-focused public R &D partnership. They invest on a global basis while focusing on medical devices, digital health, bioconvergence. Traded on the Tel Aviv Stock Exchange under AMDA. Today we're going to talk about how to plan and execute your exit as an investor. Dr. Yrit, how are you doing today? Very exciting. Well, thanks for taking the time. We're doing this live. So hopefully those listening enjoy the fidelity of this. I know it's a little extra effort. Give me feedback too, by the way. Can we kick things off with learning a bit about your background?

2:35Thank you for having me. My name is Eritianeev, as you said. I'm a physician in education. Spent most of my years in operation of medical device and the last 12 years as an investor in medical device and digital health. Three years ago, me and two of my partners decided to establish Almeda. Almeda Venture is, as you said, a public venture fund traded here in Tel Aviv Stock Exchange. And we are investing in medical device, digital health, and bioconversion. You got exposed to M &A as an investor. Absolutely. Spending 12 years in this field, I was taking a couple of companies through an M &A. One of them is a very successful one.

3:19We talked a little bit about this before, but this is pretty common in your industry. Yeah, that's true. Let's speak a little bit about medical device. When you start a medical device company, you spend many years on R &D, then clinical regulatory phase. And then you have to take the device to the market, which is a huge change for a small company. Because once you reach a commercialization stage, you have to grow. You have to bring many different people, salespeople, sales team. And sometimes it doesn't work to build up such a huge structure only for one product. And this is when we as investors are stepping in and try to be more active and look for partnership or actually acquisition in order to take this device into the market by the ends of the international companies, such as Medtronic, Boston Scientific, Edwards.

4:13They do have the sales force. They do have the capacity, the experience, the knowledge to bring such a device to the market. So it's much easier for them. For them, it's just an add-on. For a company, it is starting all over again with a lot of money and a lot of sometimes frustration. Yes, that gives a good sense of what the nature is and why it seems like M &A tends to be a pretty favorable exit event. When you do make investments, are you typically taking a minority position, majority? We take a minority equity in most of our investment, but at the same time, we do want to be active. So when you take a minority, usually you are not active.

4:59In order to overcome this, what we are usually doing, we are syndicating with others. So we bring much more money, not all from Almeda. And this allows us to take an active role in the company, like a board seat, sometimes even a chairman seat, which is very important for us, bringing our knowledge to the company. All right. So you're pretty active. You get involved in company, board seat, chair seat. In terms of time frame, when you would start thinking about an exit or when does that usually happen? It's a very good question because when we establish Almeda, that was one of the questions on the table.

5:39What would be the deliverable that the company need to have in order to create an M &A? We want to have an M &A as soon as possible. After a few days after we invest, we want to have our money back at a multiple. But this never happened. When we assess those points, we found out that in medical device, there are two main points for good M &A. One is after regulatory approval. Usually products that are disruptive and require a lot of clinical to be done, strategics and international company would like to acquire them after the PMA, after they get the regulatory approval. That the risk of the clinical has been mitigated.

6:23And sometimes the next point would be after market traction. So if we have a device that is improved Me Too, we will be required to take it to the market at least for one or two years and to show attraction by the physician for this specific improved device. So bottom line, I would say I'm looking at two points after regulatory approval for disruptive product and post initial sales for improved me to product. How do you get involved with the actual exit? I said before that usually we are taking an active role in the company, active on the board. When a company reaches one of those two stages, we start to speak with strategic.

7:11We have routine calls with them. We meet them at least once a year during the JP Morgan. During these meetings, we pitch them about our portfolio. We get information from them what would be interested for them and when. And when the time is right, we call them. We say, OK, this company got FDA approval. let's start the discussion about what is the next step. Maybe you want to think about an M &A. In some companies, we involve an investment banker. We approach a couple of investment bankers. We do some kind of matching between the firm and the company. And then they take it to a process with all the strategic that they know that might be interested in such a device, such a technology.

7:59We have a few things to break down here. It sounds like you're actively meeting with strategics. You're going to the JPM healthcare conference, I take it. Yeah, that's right. Let's pick Edwards, for example, because Ben Haley was recently on the podcast. You would meet somebody typically in corporate development at the strategics? Yeah, that's right. Okay, and you just introduce yourself. Many of them know us. Us, I mean, me as Yurit, me as Almeida. So we approach them, we set a meeting. during the meeting, we introduce them our portfolio. Of course, we are trying to work on what fields they are in.

8:37So you took Edwards, for example. So Edwards is a very Valve-focused company. So we are not going to bring them urology product. We will bring all our structural heart portfolio and we'll start to discuss it with the team, with the BD team, sometimes with the specific department team. Then they may say, OK, this is of interest, but we would like to see more clinical data. This is of interest, but we would like to wait until you reach the market. This is the feedback that we are looking for. This kind of feedback we bring back to our companies and we say, OK, we have met the team of Edwards. They would like to see more clinical data.

9:19So let's focus now on clinical data. And once we have this clinical data, we can bring it back to their table. I see. So you're representing your portfolio and you would hone in on the companies that may be more relevant to the strategic and you're getting feedback in terms of, hey, if our primary goal is ultimately to exit through M &A, what is that going to look like for this company to build that appetite to do that? And then how do you work with the CEO of the company through this? Because I don't know. I'm trying to imagine myself if I got investors and they're doing all this and having conversations about M &A.

9:55First, we never do it alone. It's not, Erit is traveling all around and selling our portfolio. We do it hand-to-hand with the CEO, with the management, and they know what we are doing. They know that we are speaking. And actually, they ask us to do it. Think about a young CEO. Maybe it's his first time as a CEO, even if it is his second time as a CEO. He doesn't know all these people. He is new in the world. it would be easier for him that someone else has opened the door for him and say, look, this is my best company. This is my best CEO. Maybe you should listen to him. I'll give you a short one page summary, but I'm going to open the door for the CEO to give you a full management pitch.

10:39It's more like a quick dating between me and the strategic or the international. and the results of this quick dating is that the CEO will be in front of the strategic. I don't want to be in front of the strategic. I don't want to be the one that is tailoring the deal. At the end of the day, this is the responsibility of the CEO. But I want to be the matchmaker. And this is my responsibility as a board member or a chairman. I see. The matchmaking part. Exactly. Increase the options. I came today. There is a very large conference here in Israel today. Most of the day, what I did, I sat with either strategics or VC that we can syndicate or they can follow up investors after me.

11:27And we discussed portfolio like someone else will discuss his children. We discuss our children. So I bring up my portfolio to a colleague venture capitalist and he brings his portfolio. And then we say, OK, this is of interest. Maybe I want to listen more to this company. And he will say, this is of interest. Maybe you can introduce me to this company. Yep. Matchmaking. How do you manage all this? Honestly, I ask you because I personally struggle with this. You have so many conversations. You're working with different companies that have different goals for what they're trying to acquire. How do you keep track of all of that?

12:03I'm taking notes on, at the end of the day, usually, I go over all my meetings and then I say, okay, I have to send this to this and that to that. We are exchanging emails. So I know that I met you. So after the meeting, I will send you the full presentation and ask you to remind me which companies you would like to see. And third, this is our job. This is what I'm doing. At the end of the day, this is my walk. So I'm trying to keep it in my head. I'm just not very type A. I need to find an app or something to organize it better. That is a key part, really being able to maintain a lot of those relationships with these strategics, identify ones that could be good suitors, introduce them to the executive team.

12:47I would add one thing to that. I think it is very important to be also a very good listener. Sometimes they say something and if you are not listening very carefully, you can miss it. For example, you come with a technology that the company decided to take it for a specific indication. And the technology can fit to other indication as well or to other patient population. Maybe you change a little bit the definition of the patient population and then you reach a different market. And you come to those meetings and the strategic may say, if you would move the needle a little bit to that direction, it might be more interesting to us.

13:26And you have to listen. I'm not saying that you have to do whatever they say because you don't know if they will acquire you at the end. But you have to listen and you have to take this information back home and digest it and decide if you want to move to that direction or not. But if you are not listening and if you always continue on your way and not look around, you may miss the target. And there are some companies that I saw that they decided their way and that's it. 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 strategic are looking for something else.

14:06Unfortunately, we left with them and we had either to shut them down or to sell only the IP. And this is bad. This is bad for the VC. This is bad for the economy. And this is bad for the macro economy in Israel. Building a network is the key to finding the right buyer. Can you tell me more about your approach? Are there any things that you specifically look for that are good signs of a potential buyer? Of networking? Yeah, just through your approach networking and what are maybe good indicators? I don't have, sorry, a way to define it or to identify it, I would say. What I'm trying to do is to build up, okay, I have a list of strategic that I have to work with.

14:47And then within this strategic, who was the best contact for me as Irit, with whom I could manage to have a discussion, open discussion. I can learn from him. He can learn from me. He listened to me. I listened to him. At the end of the day, I'm open to any discussion because you don't know which door that you open, you will get something. I always say, don't close any door, just open doors. You don't know what is next. But for long-term relationship, I would say I try to keep it with the people that I feel that there is a chemistry between us. And I'm not only giving, but he's taking, I'm giving, I'm taking, he's giving.

15:28What does that entail? What are some of the key things you do to maintain those relationships over long-term? So we are trying to set regular calls with them. We do attend specific meetings that we know that we will meet. I mentioned the JP Healthcare Conference in San Francisco. There are at least two very large conferences in Israel that many foreigners are coming and visiting. We send some information outside about our fund, kind of newsletter information, updates, and so on. And we are getting updates and newsletters from others. This is the way we are keeping relationships. Okay. The catch-up calls, attending the same events, cracking them down when you attend those events, and then being able to share information.

16:14If you have some report you published or specific updates, you share that with this group as well. Yeah, that's right. Good approaches. Holiday gifts? Anything else? We are getting the same. All the large VCs are sending newsletter, quarterly newsletter. Another way of keeping relationship is during board meetings. When we sit around the boardroom, we meet some of our colleagues because if I invested in one company, usually there are other VCs that invest in that company. We come together to a specific board meeting. So either there is a dinner before or a dinner after or during the board meeting, there is enough time to maintain relationships, speak a little bit, not on that specific company, but on other companies.

17:00This is another perspective why you want to have other VCs around the table, because this is a specific deal that you did with this specific VC, but you may do another deal with that VC because of that relationship. You know each other, you know how he acts during the board. And by the way, it's another way of how to do intel about VCs. Because if I'm sitting on a board and there is another VC that sits there and I see how this specific VC behaves, sometimes I say, okay, I don't like this and I'm not going to be with this specific VC on another deal. Because I don't think he's behaving like the way I behave, the same ethical codes and so on.

17:45When it comes to exit planning, do you ever have disagreements with other board members? What does that look like? What are some do's and don'ts around it? It's a good question. The answer is yes. Because sometimes you have some VCs that would like to take, they have enough money, and they would like to invest another tranche and take the company to another stage and maybe do a larger exit in two years from now. And other VCs are small, and they would like to do an exit just now because they need the money, because they need a successful story or whatever. There is always a debate about when is the right time to do an exit, or most of the time there is a debate.

18:25How you make a decision? It's a tough question. We usually use a lot of knowledge from investment bankers because they have data that they can present to us, comparison data. Okay, 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 into here? How much risk does we 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. Do hold periods come in play? The different VC firms, which most of them operate out of a structured fund, would have like a specific hold period.

19:05And that would vary because now you're dealing with multiple rounds and so forth. Does that come in play at all? Yes, yes, yes. The investors 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 then stuck 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 would like to see an exit within the lifespan of a fund. So yes, it counts very strongly. And this is why you have this different opinion on the board that at the end of the day, someone has to take a decision.

19:51And I said, usually it's debating and one convincing the other. But at the end of the day, there is the articles and the one that invested the last one has more power on the rest. So you have to look on the articles and understand who is controlling this company or this specific decision in order to do that exit. In terms of who controls the board and then who controls the exit decision, does that vary quite a bit? Because could you have a certain person that has that sphere of influence on the board and they can drive a lot of exit decisions? Or do you see it go back to the executive team? They're driving it.

20:32Who's ultimately it's a final say? Finance A are the shareholders. And within the shareholders, there will be some groups that will have more power than the other, depends on the articles. But then it varies. So I'll give you an example. We step into one of our investments. As the last investor, as Sirius D, I think it was, we said, OK, we want to control when is the exit. So the majority of Sirius D shareholders will control this specific timing. And then came a very early investor and they said, look, we invested. And if you control the timing, we may get nothing because you can decide on an exit at 50 million dollars.

21:17You will get all your money back and we will get zero because of the waterfall. So we said, OK, but we need to come up to an agreement. What would be the solution? And they said, OK, what we would like to say is the following. and we agreed at the end, up to$1 million, we have the power. When you take a decision, you need our vote as a shareholder in order to make a decision on an exit below$100 million. Because as long as it's below$100 million, the chances that we as an early investor will get something is very low. So we want to be involved in that decision. Once it is above$100 million, it's fine.

21:58You can decide. We are okay because we will get our money back. And that was the solution. So it varies, depends on the life of a company, how strong are the parties, how dynamic is the discussion at the end of the day. It is interesting. Yeah, you got a lot of variables. Teach me, how do you convince people? I can tell you're a good negotiator. I am. Yeah, what do you do to leverage that? First, I'm trying to look from the other side. So I'm trying to understand what is really important to the other side. Once I realize or identify the most important point to the other side, I'm trying to give it a lot of attention to that point.

22:40And then I can take the other point to my benefit. And 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. To another one, it is to get more money because it needs to do something else. You have to realize what are the needs and then the cake is large enough. As we said before, there are many ways to cut the cake. This is what we need to do. So we have to look at term sheet or articles or SPA, whatever you do in order to make the agreement. There's so many terms that you can always negotiate between the terms.

23:22And 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, 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 him or where, and then build up the right agreement. Listen first. Listen first. We spoke about listening. Yeah, this is my big theme for today. I always listen. Some people think I'm quiet because the first time they see me is usually I'm not speaking a lot about myself and so on. But it is because I'm trying to learn first who is in the room, what are the incentives, what is going on, what is the politics behind the people.

24:09And then you feel much more comfortable to speak and to interact and build up relationships, especially long term relationships. But you have to understand the other side. Yeah, I think there's a lot of psychology at play because then they don't get defensive or have the cards up. That's true. You don't want to reach a negotiation place with a lot of emotion. You want to reach there with good feeling. And then you can build up first a good agreement, a strong agreement, and something that you can rely on. I always say the agreement is in place to avoid places where we are going to fight in the future.

24:52Because me and you can agree easily, but we would like to cover all the places where this agreement will occur in the future. Usually, 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 is, on the future. That perspective is different for each person. The bankers. You mentioned the bankers as an information resource, which, yes, they compile a lot of data, the nature of what they do. But how do you decide when and where to engage with the banker? Because you just mentioned networking all these strategics, and if you're doing all that, then why would you need to hire the banker?

25:37We don't need a banker all the time. So we speak with strategic, And sometimes we engage one strategic to give us an offer or to start to discuss an offer. And when you want to shop around, I prefer to shop around with a banker as a third party and not myself, because I'm usually involved in this specific call or talk. And the banker can do shopping around for a better deal or a similar deal or to understand if we can get something better from this specific deal. So this is one opportunity when I use a banker to shop around when I have a deal on the table. In my head, I'm thinking long game versus short game.

26:15Long game, networking with strategics directly, being very opportunistic about those relationships and what they can turn into. And the short game is let's put a timeline and let the bank run a process and have them. We have a company now that we know we are going to get a term sheet soon from one strategic because they are around the company for a couple of months. And we estimate that if everything works well, we will get a term sheet from them. But we want to understand the market dynamics. So we are going to engage a banker in order for him to go around and look, OK, maybe you mentioned Edwards.

26:51Maybe Edwards is the right partner or maybe someone else is the right partner because he gives more money, because he provides more capabilities to this company. So before we sign with one strategic or a specific deal, we would like to understand the landscape. And in order to do that, we will use a banker. Wouldn't you fear that would put the deal at risk? Because if I was looking to buy one-year-oport goes, and all of a sudden you're telling me you're going to hire a banker and shop around. It will not harm the deal because everyone knows that this is the way the industry is acting. It will harm the deal if I sign an exclusivity or I sign a term sheet, and then I do it.