Finance and Credit Professional

I attended the new Venture Fair at the Himss Conference and applaud the organizers for launching this new event. In spite of its maiden voyage, it was very well organized, well attended and very effective. In fact, the biggest difficulty was the weather not co-operating and the morning session had a majority of entrepreneurial presenters compared with qualified investors. By Mid Afternoon, with late arrivals, however, the ratio of investor to presenter was approximately one-to-one.

I am looking forward to attending this event at next year's conference and anticipate that the word will get out and attendance will triple.

If there were a disappointment, it was that only Eclipsys had a representative attending and all of the other major HIT vendors were absent. Part of that may have been because this was a brand new event. At the very least, the big guys should want to keep their finger on the pulse of the up and coming technologies. Some useful platforms were presented including a patient smart card, biometric security and a voluntary patient reported health record.

In spite of the passion and creativity of this group of entrepreneurs, half of them will not be around in two years. The major hospitals are not early adapters. The implementation of new technology can often be way more costly and difficult than originally anticipated and results are not guaranteed. Combine that technology risk with the "small company risk" and the sales environment is not very welcoming.

Like the entrepreneurs in the room, I too want to have a positive impact on the healthcare system, but our firm is a little investment-banking firm. So I am going to apply my passion and creativity to propose a new financial paradigm that is designed to accelerate the introduction of game changing technologies. I call this our Hybrid M&A Model. It is designed to provide the entrepreneur the capital to develop his or her technology toward commercial success. This new model invites the big HIT players in as venture investors.

They would acquire a minority equity interest in promising companies with a call option exercisable at some future date at a predetermined, contractually negotiated valuation metric. Now for the hard part. They then take the role as a supporter of their investment and tell the entrepreneur to press on as an entrepreneur. The spirit, passion, and energy of the entrepreneur remain in tact. More importantly, the efficiency of the start-up remains in tact. Translation - very low overhead compared to a comparable product launch with a large company's infrastructure.

The advantages to the large company are that they create a very low cost and efficient R&D platform. They dramatically reduce their financial risk of major product development failures. They also spread their risk over a portfolio of promising technologies. If they do exercise their call option, they have actually helped the seller make his/her company more expensive. However, it is likely that their pre-negotiated valuation metric will allow them to complete the acquisition at below current market value.

The entrepreneur is able to secure much needed funding to help develop his/her vision. More importantly, however, is the backing of the major HIT vendor largely removes the "small company risk" component for the risk adverse hospital decision makers. This alone will accelerate the adoption of new technologies so they can reach the scale necessary for commercial success.

Some very smart and successful companies like Cisco Systems have deployed similar models with great success. They recognize they do not have a monopoly on all the great new developments in their industry so they cast their net over a broad territory through this type of creative equity investment.

About The Author :

Dave Kauppi is a business broker and President of MidMarket Capital. We help healthcare business owners with all aspects of Mergers and Acquisitions.

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