Latest / AHF Podcast / From Idea to Market: Ep 11 - Built to Last or Built to Sell?
Transcript
- 0:22Joseph M. Schwab: Hello and welcome to the AHF Podcast.
- 0:24Joseph M. Schwab: I'm your host, Joe Schwab.
- 0:27Joseph M. Schwab: From Idea to Market is a series about how medical innovation actually happens, not as a straight line from inspiration to impact, but as a sequence of decisions that test clarity and discipline and purpose at every stage.
- 0:43Joseph M. Schwab: If you're just joining us, I highly recommend going back to the beginning of this series.
- 0:48Joseph M. Schwab: We are 11 episodes in, and each chapter builds directly on the one before it, and this one is no exception.
- 0:56Joseph M. Schwab: In episode 10, we explored what happens after a product reaches scale.
- 1:01Joseph M. Schwab: We learned that real-world use generates information that no development program can produce in advance.
- 1:09Joseph M. Schwab: That the reimbursement environment has become more constrained than at any recent point in history, and that the discipline to act on post-market feedback has to be built before you need it.
- 1:22Joseph M. Schwab: But there's a question that runs underneath all of that, one that the most experienced founders in this series had already answered before any of those pressures arrived.
- 1:34Joseph M. Schwab: Not what does the product need to become, but what does the company need to become, and who is it being built for?
- 1:43Joseph M. Schwab: Most founders don't address this explicitly at the start.
- 1:48Joseph M. Schwab: The immediate priorities of early-stage development leave little room for it.
- 1:53Joseph M. Schwab: But the structural choices made in those early stages, how the company is incorporated, how agreements are written, how equity is distributed, all reflect an implied answer.
- 2:05Joseph M. Schwab: And the founders who made that answer explicit were better positioned at every stage that followed.
- 2:27Joseph M. Schwab: In this episode, you're going to hear from people who have thought carefully about this question from different positions.
- 2:34Joseph M. Schwab: Founders who structured their companies with a specific destination in mind from the beginning, or leaders who have been on the other side of acquisition conversations and know what they're looking for, and people who have worked through the legal mechanics of how these transactions actually get structured.
- 2:54Joseph M. Schwab: Rather than introducing them one by one, we want you to first hear them in their own words
- 3:00Marie-Isabelle Batthyány: My name is Marie-Isabelle Batthyány I'm an board certified anesthesiologist specializing in orthopedic anesthesia and I'm also the founder and CEO of XRSynergies.
- 3:13Charles Lawrie: I'm Dr.
- 3:13Charles Lawrie: Charles Lawrie.
- 3:14Charles Lawrie: I'm the co-founder and chief medical officer of FIOS Health.
- 3:18Charles Lawrie: I'm also a high volume, anterior approach hip replacement and robotic knee surgeon in Miami, Florida, and, uh, current president of the Anterior Hip Foundation.
- 3:27Robert Cohen: My name is Robert Cohen and I am a mechanical engineer that have worked in the med tech industry for over four decades, and I presently am the Vice President of innovation and technology for the Orthopedic Group at Stryker.
- 3:42Emily Ast: Hi, I am Emily Ast.
- 3:43Emily Ast: I am an attorney and my own law firm Ast Physician Contracts.
- 3:47Emily Ast: I focus on contract review and negotiation for physicians, typically employment contracts and industry consulting agreements, as well as related shareholder agreements, ambulatory surgery center operating agreements, and those sorts of corporate documents.
- 4:03Joseph M. Schwab: Together, their stories help us understand that what a company ultimately becomes is not determined at the end of the journey.
- 4:12Joseph M. Schwab: It's determined by the decisions made throughout it To understand this stage, we reviewed our conversations looking for answers to three specific questions.
- 4:23Joseph M. Schwab: First, when does the question of what this company becomes actually enter the picture?
- 4:30Joseph M. Schwab: Second, how do endgame assumptions shape the daily decisions that build a company?
- 4:36Joseph M. Schwab: And third, what does a successful ownership transition actually require, and where does it go wrong?
- 4:44Joseph M. Schwab: This episode treats exit not as a finish line, but as a strategic design choice, one that begins far earlier than most people acknowledge.
- 4:54Joseph M. Schwab: This is chapter eleven: Built to Last or Built to Sell?
- 5:06Joseph M. Schwab: When a company is in its early stages, almost all of the attention is on the product.
- 5:11Joseph M. Schwab: Does it work?
- 5:12Joseph M. Schwab: Can it be proven?
- 5:13Joseph M. Schwab: Can it get cleared?
- 5:14Joseph M. Schwab: Those are the right questions for that stage.
- 5:18Joseph M. Schwab: But underneath all of them, a different question is being answered whether founders address it or not, not by formal decision, but by the structural choices being made along the way.
- 5:30Joseph M. Schwab: How the company is incorporated, how agreements with advisors and collaborators are written, how intellectual property is documented.
- 5:40Joseph M. Schwab: By the time an acquirer or strategic partner begins a formal evaluation, those strategic choices have already formed a picture of what the company was built to become.
- 5:51Joseph M. Schwab: So let's begin with the first question.
- 5:54Joseph M. Schwab: When does the question of what this company becomes actually enter the picture?
- 6:04Joseph M. Schwab: In twenty twenty-four, med tech M&A reached a record four hundred and seventy-four billion dollars in aggregate global transaction value.
- 6:15Joseph M. Schwab: That number reflects something important about how this industry works.
- 6:20Joseph M. Schwab: For many successful small med tech companies, the path to broad patient reach runs through a larger organization, one with existing sales infrastructure and regulatory depth and commercial scale.
- 6:33Joseph M. Schwab: Acquisition is not the only outcome, but it is the most common one, and that changes how experienced innovators think about structure.
- 6:43Joseph M. Schwab: When a large strategic acquires a med tech company, it's not just buying a cleared device.
- 6:49Joseph M. Schwab: It's buying a body of clinical evidence and a regulatory position and an intellectual property portfolio and existing customer relationships and a team with the technical knowledge to carry the product forward.
- 7:04Joseph M. Schwab: The value of each of those elements is shaped directly by how the company was built and managed during development.
- 7:11Joseph M. Schwab: A company structured for acquisition needs clean corporate governance, auditable financials, and a documented intellectual property.
- 7:22Joseph M. Schwab: A company structured for independent scale needs something different: a commercial infrastructure built to sustain long-term growth, an organizational depth that does not depend on the founding team being in every room.
- 7:38Joseph M. Schwab: Those are different companies built differently from the start, and the ones that try to serve both destinations at once tend to be less prepared for both.
- 7:51Joseph M. Schwab: Robert Cohen has evaluated potential acquisitions from inside one of the largest med tech organizations in the world.
- 7:58Joseph M. Schwab: He has also built companies that were acquired.
- 8:02Joseph M. Schwab: What he describes about how those conversations actually happen tells you exactly what an acquirer is looking for before anything else
- 8:12Robert Cohen: The big company should listen to the founders, their belief on why they developed the technology that a company was built around.
- 8:20Robert Cohen: Isolate the conversation to that.
- 8:22Robert Cohen: Then as you listen to that, you say, okay, do you support that?
- 8:26Robert Cohen: Is there enough evidence now, ego or not on technology?
- 8:31Robert Cohen: Is there enough evidence to support either with some fact-based findings or even anecdotal that offer proof points to support?
- 8:40Robert Cohen: The position the founders or inventors is taking.
- 8:43Robert Cohen: And then you can get into the other business, which is cost of goods, time to market, manufacturing, regulatory.
- 8:50Robert Cohen: But if you don't like that first cart, you're not going to the second part of the conversation, understanding the technology and asking founders, even with a big ego, stay true.
- 9:01Robert Cohen: You're passionate about this invention for a reason.
- 9:05Robert Cohen: You're passionate around this market segment.
- 9:07Robert Cohen: Learn to explain why, why it's a benefit to the clinician, why it's a benefit to the patient, why you believe this is a differentiator product.
- 9:18Robert Cohen: And just stop there.
- 9:19Robert Cohen: And if you take your passion and your ego and your energy and get a big company like Stryker to accept it, then the rest of the conversations are easier.
- 9:28Joseph M. Schwab: The order Robert describes is not a presentation preference.
- 9:32Joseph M. Schwab: It's how an experienced acquirer actually processes a new opportunity.
- 9:36Joseph M. Schwab: The clinical case comes first.
- 9:39Joseph M. Schwab: If it holds up, the commercial and operational details become the mechanism for structuring the deal.
- 9:45Joseph M. Schwab: If it doesn't, those details don't matter.
- 9:49Joseph M. Schwab: That order also tells the acquirer something about how the company was built.
- 9:54Joseph M. Schwab: A founder who leads with clinical problems and the patient benefit before the market size or the financial projections is demonstrating that their decisions were grounded in clinical reality.
- 10:06Joseph M. Schwab: That predicts the quality of everything the diligence team will go looking for afterward.
- 10:13Joseph M. Schwab: For Marie-Isabelle Batthyány, the question of what her company would become was addressed early on, and it shaped how the company was structured from day one.
- 10:24Marie-Isabelle Batthyány: I structured XRS, uh, in a way that it's, it's fairly easy to take over and I also never made a secret out of that and, and implemented a Phantom Shares program for employees incorporating funds at a very early stage.
- 10:39Marie-Isabelle Batthyány: have a good quality and risk management from the beginning, uh, to, to not be surprised when somebody actually walks up to you and says, Hey, I would like to buy you.
- 10:50Joseph M. Schwab: The quality and risk management systems Marie references serve two purposes at once.
- 10:56Joseph M. Schwab: They satisfy regulatory requirements, and they satisfy the diligence process.
- 11:02Joseph M. Schwab: When those systems are built to a standard that reflects where the company is headed, diligence moves efficiently.
- 11:09Joseph M. Schwab: When they're built only to minimum compliance requirements and then need to be upgraded in the middle of a live active transaction, the upgrade takes time and money that a company in that position rarely has.
- 11:24Joseph M. Schwab: The phantom shares program she built for her employees also has a practical function.
- 11:30Joseph M. Schwab: It aligns the team's financial interest with the company's outcome.
- 11:35Joseph M. Schwab: And as we will see in part three, that alignment matters more than most founders anticipate when the deal finally arrives.
- 11:44Joseph M. Schwab: So here's the first answer.
- 11:46Joseph M. Schwab: The question of what a company becomes enters the picture at the moment the company is formed, whether founders address it or not.
- 11:54Joseph M. Schwab: The structural decisions made in those early stages all reflect an implied destination.
- 12:01Joseph M. Schwab: The founders who make that destination explicit and build toward it consistently are in a better position when the time comes.
- 12:10Joseph M. Schwab: The ones who do not tend to find that the cost of realignment is higher than the cost of clarity would have ever been Well, once a destination is clear, it gives everyday decisions a reference point they would not otherwise have.
- 12:27Joseph M. Schwab: How to incorporate, how to write a consulting agreement, how aggressively to build a sales team versus a clinical evidence base, how to structure royalty arrangements.
- 12:39Joseph M. Schwab: Each of those looks different depending on where the company is going.
- 12:43Joseph M. Schwab: And that brings us to the second question.
- 12:46Joseph M. Schwab: How do endgame assumptions shape the daily decisions that build a company?
- 12:57Joseph M. Schwab: In corporate strategy, there's a concept called path dependency.
- 13:02Joseph M. Schwab: Early decisions constrain future options, not because later alternatives become unavailable, but because reversing course has become expensive.
- 13:13Joseph M. Schwab: In med tech, this is especially relevant because the legal, financial, and regulatory structures built during development are difficult and time-consuming to change once commercial momentum has been established.
- 13:27Joseph M. Schwab: A company that incorporated as an LLC because it was simpler faces a conversion process if an institutional acquirer requires a C corporation structure, which they almost always do.
- 13:42Joseph M. Schwab: A company that signed broadly worded consulting agreements early on may find those agreements creating unexpected obligations during a deal negotiation.
- 13:52Joseph M. Schwab: A company whose quality management system was built to minimum compliance standards may need months of remediation before a transaction can close.
- 14:03Joseph M. Schwab: Each of those represents an early decision made without its eventual consequences in mind.
- 14:10Joseph M. Schwab: Robert Cohen learned that lesson on the first company he built.
- 14:15Joseph M. Schwab: He did it differently on the second
- 14:17Robert Cohen: when I started the second company, um, I just did it from a C corp from day one, which then it didn't cost that much money, had the discipline and we were just acting and behaving like that.
- 14:27Robert Cohen: And we're getting annual corporate audits.
- 14:29Robert Cohen: Uh, so when Mako surgical, which was a public company.
- 14:33Robert Cohen: Came and they wanted to acquire my company.
- 14:35Robert Cohen: That part of it was so easy.
- 14:38Robert Cohen: It was actually so easy.
- 14:39Robert Cohen: It didn't even rise to the issue.
- 14:42Robert Cohen: Of a, of a concern where other things on a punch list would have to get done prior to acquisition, and it made the shareholders easy, it made their board of directors easy.
- 14:50Robert Cohen: It just shows a discipline, um, uh, and a financial acumen that's expected nowadays because you can have the world's greatest product, but if financially, uh, your books aren't right, you have to go back and prove something.
- 15:03Robert Cohen: You can either extend the length of time, uh, for your acquisition.
- 15:08Robert Cohen: And put a lot of your own cash into it, which you may not have at that time, you know, versus doing it right, making it seamless, and you have a clo uh, earlier close, uh, timeframe.
- 15:20Joseph M. Schwab: And that closing timeline matters financially.
- 15:23Joseph M. Schwab: A deal that takes twelve months to close instead of six is twelve additional months of burn, twelve months of leadership attention diverted from operations, and twelve months during which the competitive environment can shift.
- 15:38Joseph M. Schwab: The discipline Robert describes removes friction from a process that already has plenty of it.
- 15:46Joseph M. Schwab: Endgame assumptions also shape how aggressively a company needs to build its commercial infrastructure, and the right answer depends entirely on where it's going.
- 15:55Joseph M. Schwab: A company building toward acquisition doesn't need the same commercial infrastructure as one building for independent scale.
- 16:03Joseph M. Schwab: It needs to demonstrate clinical utility at enough sites to make the adoption pathway credible to a strategic buyer.
- 16:11Joseph M. Schwab: That's a more focused strategy, but it only makes sense if the destination is clear from the beginning.
- 16:18Joseph M. Schwab: Emily Ast works with physicians on the legal side of those decisions.
- 16:23Joseph M. Schwab: She describes a shift in how deal structures are being written that reflects that kind of thinking
- 16:31Emily Ast: one thing that I do see evolving is that there's a lot of strategic acquisitions, joint ventures, mergers, Um, there's some smaller companies maybe developing and then selling to larger companies as opposed to bringing those to market themselves.
- 16:48Emily Ast: companies may be less willing, I think, to do these longer royalty stream contracts for product design in the future because they wanna have the flexibility and not be constrained if they wanna buy something external.
- 17:02Emily Ast: So I, I do see different structures, like some sort of flat rate payments or.
- 17:09Emily Ast: milestone payments, I guess you would call it instead of a straight royalty stream and just some more creativity
- 17:16Joseph M. Schwab: A company carrying long-term royalty obligations has future cash flows that are partially committed before an acquisition conversation begins.
- 17:25Joseph M. Schwab: An acquirer has to model those obligations and negotiate around them and potentially inherit them.
- 17:33Joseph M. Schwab: That adds complexity to a transaction and can affect the final valuation.
- 17:38Joseph M. Schwab: Milestone-based or flat rate structures are more simple, and they're time-limited, and they signal that a company was built with its future ownership in mind.
- 17:49Joseph M. Schwab: McKinsey's research on med tech M&A describes the most successful acquisition targets as companies built for what they call transferability.
- 17:59Joseph M. Schwab: Clean intellectual property, clear governance, financial records that hold up under scrutiny, and a team whose knowledge has been documented and can be retained.
- 18:11Joseph M. Schwab: These aren't properties that appear on their own at the end.
- 18:14Joseph M. Schwab: They are the result of consistent decisions made across the life of that company.
- 18:20Joseph M. Schwab: So here is our second answer.
- 18:22Joseph M. Schwab: End game assumptions give daily decisions a consistent reference point.
- 18:28Joseph M. Schwab: Corporate structure, agreement terms, commercial investment, and quality systems all look different depending on where the company is going.
- 18:36Joseph M. Schwab: The founders who get this right aren't the ones who prioritized exit over the clinical work.
- 18:42Joseph M. Schwab: They're the ones who understood that structural discipline and clinical mission aren't in conflict.
- 18:49Joseph M. Schwab: One protects the other.
- 18:52Joseph M. Schwab: Well, once a deal closes, the practical mechanics of building the company give way to a different set of questions.
- 18:59Joseph M. Schwab: How does the knowledge held by the team that built the product move to the organization that now owns it?
- 19:05Joseph M. Schwab: What happens to the clinical intent that drove the original design once it's inside a large commercial organization?
- 19:14Joseph M. Schwab: And what does the acquirer actually have to do to make that transition work?
- 19:20Joseph M. Schwab: Well, that brings us to our third question.
- 19:23Joseph M. Schwab: What does a successful ownership transition require, and where does it go wrong?
- 19:34Joseph M. Schwab: Studies of med tech M&A consistently find that a significant share of acquisitions underperform their projected synergies.
- 19:41Joseph M. Schwab: The reasons cited most often are not financial or regulatory, they're organizational: loss of key personnel or failure to transfer technical knowledge and friction between the acquiring organization's standard processes and the clinical specificity of what it just bought.
- 20:02Joseph M. Schwab: These outcomes are predictable, and the acquirers who avoid them address the conditions that cause them before the deal closes.
- 20:11Joseph M. Schwab: Here's the core challenge.
- 20:13Joseph M. Schwab: A small med tech company operates with a team that holds deep knowledge about a product.
- 20:20Joseph M. Schwab: Why specific design choices were made, how the surgical technique was developed and refined through clinical experience, which patient populations the evidence actually supports, where the performance boundaries are.
- 20:35Joseph M. Schwab: That knowledge is rarely fully captured in documentation.
- 20:39Joseph M. Schwab: It lives in the people who built the product.
- 20:43Joseph M. Schwab: Research from CB Insights found that thirty-six percent of acquired startup founders leave within six months of a deal closing.
- 20:53Joseph M. Schwab: When those people leave, the knowledge doesn't necessarily stay behind.
- 20:59Joseph M. Schwab: It might leave with them, and what the acquirer paid for starts to operate without the context that made it work.
- 21:08Joseph M. Schwab: Robert Cohen describes what genuine attention to this problem looks like from inside an organization that has made retention a priority
- 21:19Robert Cohen: A lot of that past couple Stryker acquisitions, small company and big, very big.
- 21:23Robert Cohen: We look at the technical talent and we want the technical talent and we want the technical talent to stay with the product.
- 21:28Robert Cohen: We've done very, very good and I'm very proud of Stryker for this.
- 21:31Robert Cohen: Very, very good at retention of technical talent, which is not easy, and they stay true to the product and those are the people that know the product and big companies have to learn.
- 21:40Joseph M. Schwab: Big companies have to learn.
- 21:42Joseph M. Schwab: That is the operating reality of any post-acquisition integration.
- 21:47Joseph M. Schwab: The acquiring organization doesn't already understand the product at the level of the clinical specificity the founding team does.
- 21:56Joseph M. Schwab: The people who built it know where the edge cases are, How to train surgeons on the technique, which complications to watch for, how to interpret the outcomes data in context.
- 22:07Joseph M. Schwab: Retaining those people isn't just a human resources decision, it is a product quality decision.
- 22:15Joseph M. Schwab: Yale researchers studying organizational identity documented what they call institutional drift, a pattern where accumulated decisions that each seem reasonable in isolation pull an organization away from what it was originally built to be.
- 22:34Joseph M. Schwab: In med tech, that drift can show up clinically.
- 22:38Joseph M. Schwab: A second-generation product designed for a broader patient population than the evidence supports, or a training program simplified to reduce delivery costs to the point where it no longer produces the surgical outcomes the original data showed.
- 22:54Joseph M. Schwab: These aren't failures of intent.
- 22:57Joseph M. Schwab: They're what happens when a product gets absorbed into a standard organizational process that wasn't built for its specific clinical logic.
- 23:08Joseph M. Schwab: The way to address this is to structure the integration so that the people who understand that clinical logic stay involved long enough to transfer it.
- 23:18Joseph M. Schwab: Retention agreements that extend past the close.
- 23:22Joseph M. Schwab: Clinical founders embedded in product development and training functions with real authority over clinical decisions, not just advisory roles, and an acquirer who is genuinely willing to learn before applying its standard processes to something that was built on a different set of clinical assumptions.
- 23:43Joseph M. Schwab: For founders building toward a sale, that is practical information.
- 23:49Joseph M. Schwab: The terms negotiated before the deal closes determine how much influence the clinical team retains during integration, and those terms are easier to negotiate from a position of structural readiness, which is exactly what this episode has been building towards.
- 24:08Joseph M. Schwab: Charles Lawrie is direct about where his company is headed, and that clarity has shaped every decision about what he needs to build and what he doesn't
- 24:18Charles Lawrie: reality is we wanna sell this to someone, right?
- 24:21Charles Lawrie: Like, I have no intention of like really getting this heavily commercialized and tons of users and things like everyone needs one of these now, we're hoping to convince someone people would use it and then.
- 24:34Charles Lawrie: Sell it to'em.
- 24:35Joseph M. Schwab: That is a specific commercial strategy.
- 24:38Joseph M. Schwab: The clinical validation is Charles' contribution.
- 24:41Joseph M. Schwab: The commercial scaling belongs to an organization that already has the infrastructure for it.
- 24:46Joseph M. Schwab: Getting clear on that division early on is what allows the transition to be structured so both sides get what they came for.
- 24:55Joseph M. Schwab: So here's our third answer.
- 24:57Joseph M. Schwab: A successful ownership transition requires treating the technical and clinical knowledge held by the founding team as an asset that has to be actively transferred, not assumed.
- 25:10Joseph M. Schwab: That means retention structures designed before the deal closes, integration planning that keeps clinical founders involved in product and training decisions long enough to transfer the relevant knowledge, and an acquirer who understands that what they bought isn't just a device, but a set of clinical decisions embedded in that device, and that those decisions need to be understood before they can be built upon Let's step back and answer the three questions we set out to explore.
- 25:51Joseph M. Schwab: In part one, we learned that the question of what a company becomes is already being answered from the moment the company is formed.
- 25:59Joseph M. Schwab: The structural decisions made in the early stages, corporate form, documentation standards, equity design, all reflect an implied destination.
- 26:09Joseph M. Schwab: The founders who make that destination explicit are better positioned when the time comes.
- 26:15Joseph M. Schwab: The ones who don't tend to find the cost of realignment is higher than the cost of clarity.
- 26:22Joseph M. Schwab: In part two, we learned that end game assumptions give daily decisions a reference point they would otherwise lack.
- 26:32Joseph M. Schwab: Corporate structure, agreement terms, commercial investment, and quality systems all look different depending on where the company is going.
- 26:41Joseph M. Schwab: Structural discipline and clinical mission aren't in conflict.
- 26:46Joseph M. Schwab: One protects the other.
- 26:48Joseph M. Schwab: And in part three, we learned that a successful ownership transition requires treating the people who built the product as carriers of essential clinical knowledge, not simply as employees whose contracts transfer with the company.
- 27:05Joseph M. Schwab: Retention structures, integration planning, and a shared understanding between acquirer and founder of what needs to survive the transition are what determine whether the product performs the same way after the deal as it did before.
- 27:22Joseph M. Schwab: And if there's one thing to carry forward from this episode, it's this: the company's destination and the product's clinical mission aren't separate questions.
- 27:34Joseph M. Schwab: The founders who navigate the end game well are the ones who built both in the same direction from the very beginning.
- 27:47Joseph M. Schwab: Well, over 11 episodes, we have followed the full arc of medical innovation from the moment a problem becomes impossible to ignore all the way through to the decisions that determine what a company ultimately becomes.
- 28:04Joseph M. Schwab: But there is one question we haven't asked yet directly, one that belongs not to any single stage, but to the people who lived through all of them.
- 28:17Joseph M. Schwab: Looking back, what do they wish they had known from the start?
- 28:22Joseph M. Schwab: What do they want the next generation of innovators to carry forward?
- 28:27Joseph M. Schwab: And what does it actually mean to take responsibility for an idea that could change how medicine is practiced?