| As an M & A advisor, we regularly dialogue | | | | new developments in this rapidly changing field |
| with the top executives in the industry. We have | | | | through internal development alone. |
| to chuckle when I reach a decision maker with a | | | | Cisco seeks out investments in promising, small, |
| large HIT company and he says, "We have a | | | | technology companies and this approach has been |
| corporate policy that we do not buy companies." | | | | a key element in their market dominance. They |
| Does this guy read the industry publications? Did | | | | bring what we refer to as smart money to the |
| he miss the latest HIMSS Conference? Things on | | | | high tech entrepreneur. They purchase a minority |
| the first floor of the San Diego Convention | | | | stake in the early stage company with a call |
| Center were pretty much the same - the usual | | | | option on acquiring the remainder at a later date |
| suspects. The convention, however, had grown to | | | | with an agreed-upon valuation multiple. This |
| 1100 exhibitors and the overflow required almost | | | | structure is a brilliantly elegant method to |
| the entire second floor. | | | | dramatically enhance the risk reward profile of |
| That was fun. What energy. It kind of reminded | | | | new product introduction. Here is why: |
| me of the old dot com days. Lots of money, | | | | For the Entrepreneur: |
| talent, ideas, hope, energy, and potential | | | | 1. The involvement of Large HIT Investor - |
| successful businesses. This is the innovation | | | | resources, market presence, brand, distribution |
| environment in HIT and any large company that | | | | capability is a self fulfilling prophecy to your |
| feels it can keep pace with this force through | | | | product's success. The halo of the big secure |
| internal development efforts alone is headed | | | | company helps you cross the chasm to the |
| down the path of extinction. | | | | conservative majority institutional customer. |
| Almost everyone will agree that information | | | | 2. For the same level of dilution that an |
| technology will be a primary driver of controlling | | | | entrepreneur would get from a VC, angel investor |
| costs in the healthcare industry. There is, | | | | or private equity group, the entrepreneur gets |
| however, a huge paradox in this market. The | | | | the performance leverage of "smart money." See |
| institutional buyers of that technology are | | | | #1. |
| relatively conservative late adapters. This | | | | 3. The entrepreneur gets to grow his business |
| prevents the expected innovation and commercial | | | | with Large HIT Investor's support at a far more |
| success that should naturally follow the resources | | | | rapid pace than he could alone. He is more likely to |
| and passion of these HIMSS innovators. | | | | establish the critical mass needed for market |
| These entrepreneurs respond to a market need | | | | leadership within his industry's brief window of |
| and achieve encouraging initial success from the | | | | opportunity. |
| early adopters. They soon hit the wall and are not | | | | 4. He gets an exit strategy with an established |
| able to "cross the chasm" from a small group of | | | | valuation metric while the buyer/investor helps |
| early adaptors to general market acceptance | | | | him make his exit much more lucrative. |
| from the conservative majority. There is little | | | | 5. As an old Wharton professor used to ask, |
| economic value created when good technology is | | | | "What would you rather have, all of a grape or |
| in the control or a failing company and the | | | | part of a watermelon?" That sums it up pretty |
| technology never reaches broad acceptance. | | | | well. The involvement of Large HIT Investor gives |
| Most of the blockbuster new products are the | | | | the product a much better probability of growing |
| result of an entrepreneurial effort from an early | | | | significantly. The entrepreneur will own a |
| stage company bootstrapping its growth in a very | | | | meaningful portion of a far bigger asset. |
| cost conscious lean environment. Think of some | | | | For the Large HIT Investor: |
| of the new developments from PACS companies. | | | | 1. Create access to a large funnel of developing |
| The big companies, with all their seeming | | | | technology and products. |
| advantages have a very high internal cost | | | | 2. Creates a very nimble, market sensitive, |
| structure for new product introductions and the | | | | product development or R&D arm. |
| losses resulting from those failures are substantial. | | | | 3. Minor resource allocation to the autonomous |
| Don't get me wrong, there were hundreds of | | | | operator during his "skunk works" market proving |
| failures from the start-ups as well. However, the | | | | development stage. |
| failure for the edgy little start-up resulted in losses | | | | 4. Diversify their product development portfolio - |
| in the $1 - $5 million range. The same result from | | | | because this approach provides for a relatively |
| an industry giant were often in the $100 million to | | | | small investment in a greater number of |
| $250 million range. | | | | opportunities fueled by the entrepreneurial spirit, |
| For every IDX or eMerge there are literally | | | | they greatly improve the probability of creating a |
| hundreds of companies that either flame out or | | | | winner. |
| never reach a critical mass beyond a loyal early | | | | 5. By investing early and getting an equity position |
| adapter market. It seems like the mentality of | | | | in a small company and favorable valuation |
| these smaller business owners is, using the | | | | metrics on the call option, they pay a fraction of |
| example of the popular TV show, Deal or No | | | | the market price to what they would have to |
| Deal, to hold out for the $1 million briefcase. What | | | | pay if they acquired the company once the |
| about that logical contestant that objectively | | | | product had proven successful. |
| weighs the facts and the odds and cashes out for | | | | These successful transactions can benefit the |
| $280,000? | | | | small entrepreneurial firm looking for the "smart |
| As we contemplated the dynamics of this | | | | money" investment with the appropriate growth |
| market, we were drawn to a merger and | | | | partner. At the same time benefitting the large |
| acquisition model that is used in the networking | | | | industry player looking to enhance their new |
| technology market by Cisco Systems. We believe | | | | product strategy with this creative approach. This |
| that model could also be applied to great | | | | model has successfully served the technology |
| advantage in the Healthcare Information | | | | industry through periods of outstanding growth |
| Technology industry. The giant networking | | | | and market value creation. Many of the same |
| company, is a serial acquirer of companies. They | | | | dynamics are present in the Healthcare |
| do a tremendous amount of R&D and | | | | Information Technology industry and these same |
| organic product development. They recognize, | | | | transaction structures can be similarly employed |
| however, that they cannot possibly capture all the | | | | to create value. |