Joe brings over a decade of medical device investment experience to the team. Since joining SightLine in 2005, Joe has been actively involved in sourcing and completing several secondary and primary transactions in a number of areas within the medical device industry.
SightLine Partners is one of the more interesting late-stage investors in medtech. The firm’s early secondary strategy has evolved into a “special situations” approach that enables it to partner with existing investors to ensure companies have the capital necessary for commercial execution. Managing Partner Joe Biller joined in 2005 and serves on the board of several companies. (The firm declines to identify its portfolio.) Prior to joining, Joe was a buy side investment analyst at Bremer Asset Management where he reported directly to the chief investment officer. Biller graduated summa cum laude from the University of Wisconsin-Eau Claire and holds the Chartered Financial Analyst (CFA) designation.
1:51 – Where does SightLine see opportunities in the “medical technologies” area?
2:40 – Does medtech need to get its mojo back? The state of medtech.
3:44 – “There has been a paradigm shift in our space.”
4:31 – What do medtech companies need to go public or be acquired?
5:36 – What is the origin and focus of SightLine?
7:52 – SightLine can also partner with an entire syndicate to keep the capital coming while avoiding a recap.
9:19 – How has SightLine evolved over the years?
9:51 – “We’re not a swing for the fences type of fund.”
11:38 – How does SightLine assess potential deals?
12:55 – “I’m sure some people don’t appreciate it when they feel like they’re going through a colonoscopy in the process.”
13:42 – “I’m sure at some point management is thinking, `Just give us the money already.’”
14:32 – Does your due diligence answers questions current investors already have?
15:12 – Is the list of quality late-stage companies getting shorter?
Tom Salemi: Hi, this is Tom Salemi with Healthegy TV. We are at the JP Morgan Conference, or a few blocks away from it in the Pickwick Hotel. And I’m here with Joe Biller from Sightline. And you have actually one of those golden tickets that –
Joe Biller: Yes.
TS: – many people aren’t able to get. So have you been inside those doors, or do you just wear that for status?
JB: Actually, I have been inside.
TS: Oh, good for you.
JB: I was feeling bad that I don’t spend enough time in there because most of the meetings are done actually outside. But it’s amazing, this conference every year grows more and more, and it’s great to see, ever since, you know, given the markets have been turbulent over the last five to ten years. And healthcare is still a very active space. Obviously, medtech where we’re in is not as active as biotech. That renaissance continues. But in healthcare IT, etc. But I’ve had a number of meetings so far, and very productive, and lots of people walking the streets.
TS: It’s true. The JP Morgan name is almost a misnomer. You’re describing this event, and you’re like, well, no one’s at JP Morgan, but everyone’s at JP Morgan at the same time. It’s kind of a Yogi Berra sort of thing. Let’s talk about SightLine. You do operate in a very interesting space. What is your focus on medtech? Is it exclusive? Your focus at SightLine. Is it exclusively medtech?
JB: Yeah, we call it medical products. So medical technologies or therapeutics within medical technology, and diagnostics to some extent. More focused on the therapeutics that are actually an implantable or something that is game-changing in certain sectors. So we look at it we’re subsector or industry agnostic within the medical products area. We like cardiovascular, we like ophthalmology, orthopedics. We’re really looking at, in a nutshell, to find great companies with great management teams, but combine them with creative financial structures.
TS: Let’s look at medtech for just a second, because you do have a unique perspective, because you look broadly at many companies. You’re not just looking for a deal; you’re looking at the entire universe to sort of try to find the right deal.
TS: Does medtech need to get its mojo back? I was going to ask how do we get our mojo back, but I don’t want to assume it’s gone. But what is the state of medtech from SlghtLine’s perspective?
JB: Well, I think there’s a lot of great late stage companies. That’s the world we operate within. And real quick, I’ll just define late – how we define late stage, because every investor may define it differently. We typically need an FDA approval. We have gone – we have invested in companies prior to FDA approval, but they’ve always had a CE Mark. So and the average revenue at date of investment is about 7 million across both of our most recent funds. So that’s typically the lens that we’re looking through. In terms of does medtech need to get its mojo back, I actually think its mojo has always been there; it’s just the market has changed in two – there’s a lot of things that have changed, and you could point at the FDA, etc.
JB: But I have been telling folks for the last few years there’s been a paradigm shift in our space, and what causes paradigm shifts is dramatic changes in systemic areas such as fundraising within the sectors. So are there new funds that are being raised on an actively – a number of funds every year that are being able to plow money into the medtech space? That’s come down considerably. In addition, the requirements for companies to achieve an exit that bears a return for its existing investors or new investors has gotten pushed out. More of the data suggests you need to build these companies rather than get an FDA approval and the sell on potential. Now that is happening. I mean you’ve seen the recent mitral valve companies.
JB: There was a run on those. But for the most part, the data suggests you need to get to a 30 to 40 million dollar run rate on average, whether to attract an IPO if the market’s there, or to sell the company. And the multiples for those companies are great, if you can get them, what I call turnkey assets. It’s accretive, growing at 30%, and it makes a difference to the top line. So I think there’s this window of companies of zero to 30 million in revenue, and I think there’s a lot of great technologies, a lot of good management teams. It’s just can you get them to an exit within, in our model, 3 to 4 years. That’s really what we’re looking for is to, after we make an investment, it’s like my partner Scott says. You have 36 months to exit, and next month it’s going to be 35. And that’s really what – we partner with the management teams, too. We really look to them and say, Hey, how can we help you? Because they’re very much of the same opinion. There’s no conflict there in terms of getting to an exit.
JB: It’s just how do you go about doing that, what milestones do you need to hit, and ultimately how do you finance to that event.
TS: Well, SightLine was born, took a great opportunity of becoming a secondary fund at a time when venture funds needed the help to either take some properties off their hands, or to help them restructure what they had. The market has changed. It hasn’t gotten better in a lot of ways, but it’s certainly different than it was when SightLine was started. How much of your strategy is still secondaries? And if it’s a smaller part, what else do you do, does SightLine do?
JB: Well, the classic secondary model is, the way most would define it, is providing liquidity to an existing investor. The secondary market, you know, you hear about Facebook shares trading. The way we define it is differently. And that’s really providing financial alternatives to existing investors within a capital structure. And initially, most of the transactions we were seeing or the opportunities we were seeing where a late stage company needed to raise money, and for whatever reason, an existing investor couldn’t participate going forward. They might have a change in strategy where we’re no longer doing medtech deals. It might be a strategic that made a minority investment and no longer has an interest in acquiring it. Think about it as a Venn diagram. You have financial players that may have an issue being able to put more money in, and others, maybe hedge funds or strategics that have strategic reasons why they no longer want to be in a deal. We can solve all of that. But what’s most important to us is actually to provide that investor with an alternative, rather than just not being able to put their capital anywhere.
JB: Especially when being faced with a pay to play. So where our strategy has evolved, we still do those classic secondary transactions, but we’re also doing more unique structures, which we think are very helpful to an investor that doesn’t want to walk away. They still want to be involved. And so we can become that financing source for them and really help partner with them to get their investment to an exit before having to just walk away. Now the management team loves that. They’re charged with just raising capital. So we come in, partner with that existing investor and help fill out that part of the syndicate.
TS: So you’re the dry powder. You help them with follow on –
JB: Exactly, yep. In addition to that, we also have some structures that we can partner with an entire syndicate. And rather than have to go the traditional route of raise X dollars at X price, can we think of a structure that may be more of a return off the top, or something that, if they’re within two to three years of an exit, can it be beneficial to the existing investors versus having to potentially face a recap, or do things that place a lot of risk on their return, which they’ve put all their blood, sweat and tears in over the last maybe 7 to 10 years. So we try to think very creatively and make it a win-win for all the parties around the table. I think the more people that have knowledge of our approach, it’s one, to be very transparent on the front end of how we can help, and if we can’t, we try to figure that out and not waste anyone’s time initially. If we can, and we like the company, we like the management team, then we really try to craft the strategy post deal of OK, how do we get this to an exit, how do we assure that we’re growing revenue year over year, how do we manage our cash burn? And whether it’s bring in resources internally, my partner Scott Ward is a fantastic operator that has 30 years of experience at Medtronic that he brings to the table. And we have a very strong financial skill set at SightLine that we can help companies raise money or consider various strategic options.
TS: Are these additional programs, were they part of a plan? Or as time passes, do you just continue to see opportunities here in the city?
JB: Yeah, honestly, I think it’s we’re always trying to think of when we see a situation, every deal is different. And we kind of step back and say, well, jeez, here’s a problem. You know, the company needs – is charged with raising X dollars. This is what their capital structure looks like. And we try to think outside the box and not necessarily say this is the only way you can finance this company. What we try to do – we’re not a swing for the fences type of fund. We’re – our motto is No Zeros. And so really strive for protecting principle for our investors. We underwrite deals to a minimum of a two and a half X to 3X return within 3 or 4 years, which translates into a 30 to 35% IRR. The important part of that, though, is that it’s a very tight standard deviation. We’re not trying to deviate from that. So it’s not – you look at some of the data, some funds are put together where maybe you put ten deals together, and eight of them are not so good, but two of them are 20 to 30X and the fund returns a 2 to 3X. Well, that’s just not our approach. Not that that’s the wrong approach, but it’s just we’re more of a special situations fund.
TS: It’s kind of a smaller private – almost a private equity sort of –
JB: Yeah, yeah.
TS: – don’t take the big risks, but not going to get the big reward.
JB: We try to protect ourselves with structure, but we think our creativity can lend itself to the company where they can view us as not only a strong financial partner, but strategically important, given our healthcare and medtech backgrounds.
TS: Do you do a straight equity investment in the company ever? Do you always work through the investors or through the syndicate?
JB: We do, once we have a secondary, more of that classic secondary. But the structures where might be a higher preference deal, we can work with the broader syndicate on how to structure something.
TS: So if you’re walking down the street and you bump into a guy who you found out is raising money, for you to get involved in that company you need to work through the existing syndicate.
JB: No, we can work though the CEO. And if they’re raising 10 to 15 million dollars, what we tell folks is let us take a look at it. There might be a structure that we don’t need to work through an existing investor. Really, what we don’t do is plain vanilla venture 1X straight preferred deals. That’s really what we –
TS: What is your due diligence like? I hear tale of your due diligence. It was very data heavy, you know, you guys are famous for looking at everything. Do you examine opportunities differently? Might it be a product that – obviously you want it to be medically beneficial. But the real opportunity for you you see is more in the numbers than in the product itself or in the disease space.
JB: No, I think it’s both. But we are a very data intense shop. And I think we pride ourselves on that. I think the stage that we’re investing in, you know, I’ve had difficult conversations with CEOs where they tell me their plan and I say, Well, what if you only do 50% of that? And I tell them not to change their expenses in that plan, and they look at me like I’m crazy, like why would I ever run my business that way. And I say, Well, because I’ve seen it before run that way. And it’s our job – we have a fiduciary duty to our limited partners to understand all the different risks. And a lot of that is execution risk. So how we mitigate that is by partnering with strong management teams, and we assess that during our diligence process. I actually – if that’s what you’re hearing, I take pride in that.
TS: No, that is what I’m hearing.
JB: And I’m sure some people don’t appreciate when they feel like they’re going through a colonoscopy during the process.
TS: I was going through that image of my own head as well.
JB: But what I think is important is that we on the front end, we try not to waste people’s time.
JB: We try to talk about the structures that we think could be beneficial either to the company or to its existing investors. And if those don’t make sense, we say, Listen, probably not something for us right now. Why don’t you check back with us in 12 months or 18 months? If it is something, then we send our due diligence request, we go meet with the company, and then we start really diving in on that operating plan. And is almost working our way backwards: is this something that the strategics want to buy? Why is that? And we interview bankers, we interview strategics. And at times I’m sure the management team is like just give us the fricking money already. But you know, I think it’s important to, given some of the – how do I say this? The LP community is looking at medtech and they’re scratching their heads a little bit. And so if we’re highly selective on the deals, and I think this is also part of the medtech getting its mojo back, it’s just being very selective of opportunities and not trying to race the money out the door, just being very responsible about where we put our capital.
TS: I think you’re in a great position to create a lot of ill will, but I never hear of that from you. No one ever accuses you of circling up above for – over a company that might be having some problems. So it must be the approach your doing. I think the data must answer questions that the investors themselves have. And they get to see some outside validation.
JB: Yeah. And actually, we’re closing a deal this week, and the CEO, we’ve become friends after 6 months of diligence. And he says, I’ve never been through something like this before. But he goes, You know what? I feel like we actually can use a lot of this to our benefit. And we’re going to share our diligence package with him. We already have shared a lot of the information. And I think he feels like he’s more prepared now for future financings when either a strategic might come in and look under the hood – he feels he’s more prepared for those kind of tough questions and data requests.
TS: Final question. and you’ve got a unique perspective on this. We talked earlier about medtech and about the difficulty more in the early stages. You’ve no doubt have an Excel spreadsheet somewhere with a list of all these later stage companies that would be possible. Is that list getting shorter because if no one’s making the companies –
JB: Great question. Yeah. I think that’s something we’re not seeing right now our deal flow has never been better. And I think part of that is we’ve expanded the types of structures that we can work with companies and its existing investors with. That’s one part of it. The other part of it is I think early stage companies, the ones that are being launched, are being much more mindful about their milestones, their cash burn, and they’re getting to milestones much faster than they did five to ten years ago. So I’ve been at SightLine for close to eleven years, and I’m seeing as – we have an open door policy at SightLine to help early stage entrepreneurs out, just –
TS: I’ve heard that, too.
JB: – think creatively about how to – we’re not going – we’re very clear, like listen, this doesn’t fit our strategy, but we’d love to help you out, think through the milestones. And I think people at that stage are getting – it’s very difficult and very challenging. It’s not for the faint of heart. But I think they’re getting good advice on how to be very careful with how much money they’re spending, how much burn they’re bringing on. They’re using technology to their advantage. They’re going to strategics earlier. They’re going and they’re whittling down that group of VCs that is actually putting early stage capital to work. So will that list shrink down? You know, your guess is as good as mine. I think it’s easy to look at the data and say, Hey, X amount of series A’s are going down. But I think the data we most recently looked at is the series A financings are actually not going down as much as you’d think. And so our deal flow is as strong as it’s ever been, and so we’re pretty – we’re excited about the future for medtech. I think a lot of people look at it as –
TS: I agree.
JB: – a difficult period. But I think more investors are becoming more and more creative on how to finance these companies. And the strategics need it. They’re growing, for the most part, at zero to 5%. They’ve been through some big changes. There’s been a lot of big acquisitions in medtech lately. But as that kind of starts to get digested, I’m very optimistic that the cash balances they have and the need for outsourced R&D is always going to be there.
TS: That sounds like a good plan to me.
TS: Thanks for taking the time today. You can leave the badge on the table before you go.