New Era — Build to Buys | LSI USA '25

Joe Mullings  0:05  
All right, as if anybody here needs an introduction, but let's run it down, just for the fun of it, Josh, let's start with you. First,

Josh Makower  0:12  
I'm Josh Makower. I'm the founder and director of the Stanford Biodesign program and serial entrepreneur and inventor.

Addie Harris  0:23  
I'm Addie Harris, serial entrepreneur. Worked in the biggies as well. Worked at J and J brought their velas, an orthopedic robotics division from from zero for myself up up to what it is today, and then in the last couple of years, since I left J and J have worked with a number of different companies and an advisory and board roles.

Ramin Mousavi  0:48  
I'm Ramin Mousavi. I lead the team at CathWorks, and we were the first company to present at the very first LSI. So it's really nice to see this thing have grown, you know, a little bit since the first one.

Andrew El Bardissi  1:01  
Andrew El Bardissi, I'm a partner at Deerfield management. We're a healthcare only investment firm. Manage about 15 billion touch all aspects of healthcare. I lead our life science tools and medical technology practice. 

Joe Mullings  1:13  
Great. So let's start out. I think words are important and definitions are important. And Addie, I'll start with you. We've heard the word build to buy, generally tossed out there a lot, and I like to call it a structure deal. But let's run around the panel real quick on your your definition of build to buy? Yeah,

Addie Harris  1:31  
so I was thinking about this earlier today. I think there's actually two definitions of build to buy. In my mind, at least, you have your pure innovation, build to buy, and then you have fill a gap in our portfolio that we can't do on our own, build to buy and to elaborate on those a little bit more. You know, two that I've done at some level of repeat in my career, is those pure innovations you're working with, like a university group and as a strategic as a VC fund, you're giving them money with a kind of loose umbrella over it, and saying, Hey, we want innovation in this area. We're going to give you money to do it. In exchange we get the IP and the know how if we want to do something with it. And I've done those very, very successfully to build out early innovation pipelines. The second one is, hey, we have this big gap in our portfolio. We've either trained our darnedest to fill it, and we can't we failed, or we recognize that we shouldn't even try. So let's go find somebody to build this exact product for us, and we'll acquire it when it reaches a certain stage of development.

Joe Mullings  2:39  
Anybody want to add to that, any nuances at all to addie's definition? If not, we could move back in Josh, you have something?

Josh Makower  2:46  
Oh, no, that's an interesting I never so it's sort of like a build to invest, that version, right? The first one, the first one, the first one, the first one build to invest, and then the build to buy is something, yeah, no. I mean, I have a, obviously, seen a lot of these models, so I have a lot of opinions, but I you know however you want it, but I agree that those are, those are the typical frameworks. Obviously there's partnerships, but those are not necessarily, necessarily going to be a buy at the end.

Addie Harris  3:18  
Yeah, and I think that's the key thing not to jump in, is the buy at the end, like, where I called both of those a build to buy is the person putting the money per the entity putting the money in is the one who gets the toys at the end of

Joe Mullings  3:33  
it, yeah. And so let's go on the flip side of that, because there's a new model that's come out, and the buy to build. And I think you can point to a little bit more of a PE Ajax model there. So let's, let's toss that out as a definition. I mean, you want to jump into that,

Ramin Mousavi  3:48  
yeah. I mean, I think the main difference is that in in that model buy to build, there's already something there, and for whatever reason, it's better to either take it out. I think the example you're talking about the cortex, one that happened with Ajax, that you say that asset maybe does better if you bring it, you know, and buy it, and then build it either back to what it was or to a whole new place, but going back to what you were saying. And I'm, you know, I'll let Andrew Wayne and this, when you think about the venture aspect of this, there are things you can do in a startup setting that is better than strategics, you know. Mostly I think about speed, you know, and you have different thresholds for risk taking. The challenge comes for investors at what risk, you know. So I think the model of built to buy de risks, I think for both sides. And in my mind, there are two things you're trying to de risk, either its revenue or some milestones that you want to do that. So I think that's where I see the bill to buy. But I'm curious to get your take, because, you know, you look at both short term and long term,

Andrew El Bardissi  4:51  
yeah, well, we should probably define some of the economic terms associated with Bill to buys, because I think that's very open tip. Basically it's from a strategic perspective, there's just a call option or some specified price around which you would transact if a certain milestone were achieved, but no obligation, and that's the important piece. Because from my perspective, I think these are terrible ideas, because at the end of the day, you should only sign up for a build to buy strategy as a company or as an investor. If you have no other options, no other funding options, because you're capping your upside, everything goes great. You have effectively taken an auction off the table that's going to maximize shareholder return, or if you are acquiring something from a major strategic that needs to be developed, there's some core asset value there. You can't build what you want to build without stripping those assets out and then building something upon it. In that situation, you probably have to give up something, and you probably have to give up an acquisition at some set terms in order to get you know some of that core technology. That's kind of how I think about it.

Joe Mullings  6:07  
Josh, question for you, and I want to run it by the panel. Classically, we've seen large strategics by revenue, and the panel earlier, with John Babbitt covered that really well, but the strategics also have been a little sort of hesitant. And I'd say, and I'll say, You guys won't it's been a little bit of an amateur hour on the bill to buy on some of the very, very large deals. And some of that goes down to governance, and some of that goes down to not having that core expertise in house and trying to boil the ocean by bringing in a technology. Let's call it a surgical robotic platform. Yeah. So what do you how do you view that? How would you give insight to the strategic and the bill to buy? Yeah?

Josh Makower  6:51  
I mean, I sort of agree. Build the buys. I don't know many that have actually consummated in the end. There have been a lot of them that have been put together, and to the extent that they are valuable, it's the build part, because they're providing financing and stuff. The The hope is that if, if they don't buy at the end, that the company isn't damaged and then has trouble raising money, and it becomes a really tough situation for the investors in the company. That's probably happens a lot, and I think the ultimate buy actually doesn't happen that much. So it, you know, there's, there's a rationale for it, right? It sounds right. Let's do this off balance sheet, R and D. Let's make an investment. Let's make this thing happen. But the reasons why these don't actually get to the finish line are multiple. It's always about people, and who are the champions and big companies, people turn over. So you wind up with different people, and they didn't necessarily choose this deal, and they inherit it, and they may not even like it. The company actually changed the strategy, you know, they, I can say, like when we did an investment with Johnson Johnson and to near track, they had a urology division, and they were all excited about it. It wasn't a bill to buy. It was a traditional equity investment, but we all believe that they were going to take it out early by the time, you know, we were sort of acquirable. They didn't have a urology division anymore, and they weren't sure it was a strategic bin anymore. So it was funny, but, but it was, it's just the way it goes. So I think you have to go in with your eyes open. And I think investors and you know, founders and you know, sort of company builders that get into these have to have to structure it so that there is an easy out, and the out is very friendly. That means no call back on any loans at the end. That means that perhaps they the company, even though it's no longer a strategic fit, is somewhat committed to continue to support the company so that VCs can feel comfortable that there's a foundation there. And I'd say, on the entrepreneurs and innovators part, don't do anything and don't start one of these unless you believe there's a market for it, because you very well might find yourself having to go out into the open market raise money from VCs at some stage, because your hopeful bill to buy actually didn't consummate. And

Joe Mullings  9:39  
Ramin, I want you to comment on this. I heard a number this morning to validate it. I guess from inception to FDA, PMA was 13 years, even if we're off 20% on that, picking a market and then picking a strategic, and then picking that strategic, still having that. Yeah, as a go to market, that's a that's throwing a hell of a dart. Yeah, that's

Ramin Mousavi  10:05  
a lifetime. I mean, this is the how long the staff works, 10 years, you know, in year 11. And usually the successful ones, when and if they're successful, that's how long it takes. So to go back to what Josh said, Here's an analogy maybe everybody can relate to. You know, you've entered into an engagement that despite the size of the engagement wing, the wedding is down the road, and now you got to live with each other. And the more you get to know each other, the more you find things you don't like about each other. And that's just how it is, you know, to and usually the good deals, you know, to code Medtronic Kristi, so everybody has felt the pain when you did the deal. You have to be committed to see that. And the economics of it works that the more successful you are, the worse it feels. Because if you were in the open market, that will be a much better deal. So you have to really think this true, and it requires both parties to be committed, because that's what you're doing. You're building something, and one of the things that it is just the reality of the strategics. They're going to go through reorganizations and people change, and you know, divisions exist and they don't, and they come back, and you have to be able to better all of those. So I go back to what Andrew was saying, that the structure, the value of that to your investors, from a entrepreneur perspective has to be very well defined so you can weather through those things. Because, first of all, I agree, you know, I don't understand call options, because that just says, if you're pretty enough, you know, I mean, otherwise, I'm out, and that doesn't really work well. So if you do one that you can get out, you know? And this is a strategic not being being able to get out, you need to be in a well position, that you have alternatives, that you can continue on what you're built. I think that's the key things. But that 10 years, and I've heard twice today, you know, successful CEOs of strategics who said they make 10 year bets, you know, and they stick with it. Sometimes you got to go through that cycle. I think that's even ours. Is not a PMA, isn't, you know, 510, K and it took 10, you know, 10 years and two rounds, you know, to get to where we got.

Joe Mullings  12:06  
So now that we've established a bill to buy is sort of like a prenup. And you go into that prenup hoping everybody behaves well, but in case they don't, at least we have a contract in place that defines exit. Even today, some news came out about misbehavior in a deal. I don't know if anybody saw it on a chem image, deal with J and J, and you know, less than optimal behavior on the way out. As somebody who puts deals together, do you look at behavior in the contracts that are written, and then do you then have to double click on a box moving forward when a strategic may not operate in the best interest of the ecosystem.

Andrew El Bardissi  12:47  
Oh, that's that's a tough one. I mean, actually, think strategics are pretty good in terms of understanding their reputation and the impact of very poor behavior to their reputation. I mean, this is a long term business, you know, this is not an n of one where you try to get the best terms for a particular deal, or you get, you know, you get queued on a particular deal, and then, you know, maybe you save a few dollars here. I mean, that is there. There are not many investors. This ecosystem is so small, where that travels so quickly, and the impact of that is tremendous. And so if you acknowledge that people appreciate that, then most, most strategics actually behave quite well, and they stay very far away from the line of behaving poorly. It definitely happens, and the consequences of that are really terrible in the moment and then beyond for that particular strategic, yeah, but thankfully, we don't have to deal with that problem at scale.

Joe Mullings  13:57  
Addie, you're 

Addie Harris  13:57  
I was gonna say, Have you been inside a strategic lately? Because I have seen some, yeah, some not so great behavior. I think it often has to do with that leadership change. And then there's under investment. There's putting the wrong people in charge. There's people who are managing their career, not necessarily managing the project that they're they're working on. And you know, I think there's a lot of things when a company is acquired by a large strategic that have to be done so delicately and so carefully in order to get a big success. I mean, I've seen it firsthand where, you know, you had divisions that were incredibly small compared to some other divisions, and yet they were massively more successful, and it had all to do with with leadership, and that there was a very, very clear message. I was listening to your talk this morning on CEOs, and I think it is very much the same inside big strategics, your leader has to have a message that is 100 Clear, every single person that is working on a project or in a division needs to know, what is the thing I am doing, what is the goal of this organization? What am I doing every day to meet that goal? And I think more often than not, that's not the case.

Ramin Mousavi  15:16  
And I think you know, this is very interesting, what you're asking I saw the news are talking about, and this is probably where you end up having a very different experience if you are the CEO of the startup, versus your investors, because you looking at your deal. And you know, if you're lucky enough, the large enough investors who you know, have multiple, you know, portfolio companies, if they have that experience somewhere else, you're fighting this inertia that they are concerned about something you can really relate with to, because you're talking to the right Division at the moment. But they see the bigger picture, and they're like, at a macro I see a concern too, and that is a challenge, because, you know, you try to make sure that you have both side of that, but I'm very curious, because, I mean, you just by the virtue of what comes true by design. You in that earlier stage. This seems a little more abstract, you know, how do you deal with that? Like, how do you, what is the how does the experience you've had with the strategic dictates, the suggestions that you make up do this, work with this group or not do it with them? Yeah.

Josh Makower  16:17  
I mean, you know, it's funny, there's a one of the founders of any ages passed away, Dick kramlich, and one of the quotes that was in his sort of obituary, which I really believe is true. This is not a money business, it's a people business, and I really do believe that. And if there are people that you know, that you've worked with, that you trust, that you wanna, that that's like the through line that really makes these all work. You know, it's not, it's not, you know, it's, it could be with investors or strategics, but it doesn't. That's not the differentiators. It's actually people. And so I think where you have developed a relationship that you trust now, the hope is that they are there, because when they change, that's when everything happens. But in general, I would just say for for myself and with, you know our you know our fellows, and you know the general by design, you know innovator community stuff. I love strategics, being in the deal, because it's sort of validation, and it actually helps them raise money, especially if they don't really have any, you know, rights. It's just an investment, but it's a signal. Hey, this is important to us. We want to stay close to it. And that's very powerful. And I think everyone knows here it's really hard to raise money. So having strategic in a deal, I actually think is very, very helpful. And then there are some strategics who can actually be really helpful with development. You know, I've had great experiences with Johnson Johnson, you know, opening up scientists and conversations and opportunity that I never really even thought we would get access to, in some cases. So it's been, there's some real examples of really good stuff. I think that the in you know that the the issue with sort of the classic bill to buy in an early stage is it's so early people don't know. And over that time, and it also takes a long time, so over that time, people change, and the strategies change, and that's what's a challenge, I would say, though, and I'm curious about your experience. You know, along this lines, I think when there's a bill to buy, that sort of happens late in the in a company's process where, sort of like, Hey, we're going to make a big investment here. It's going to be predicated on you finishing your pivotal well, and this kind of stuff that feels more locked in. And I think there's a higher probability of success. I don't know if you really call that build to buy as much they're still building, but it's not as early. And I think those are those are much more successful in terms of ultimately consummating.

Andrew El Bardissi  18:51  
I just think there's a very easy solve for this dynamic, which is certainty. Yeah, if you provide certainty that a company will get acquired when certain things are achieved, then everyone's interests are aligned. It can be through a call option or a put option, but it's certainty. The second you're capping your upside, but you still have 100% downside, you are taking a tremendous amount of risk, and you're taking all of those risks that Josh just outlined on your shoulder, and you have no control over that. Yeah, and so if, if, if we're gonna, you know, at least for me to actually enter into bill to buy, align the interest, create certainty around what needs to be done in order for a particular company to be sold. And actually, in that particular situation, everyone's working together collaboratively because they know where it's going to end up eventually, if one party can't agree to that type of structure, then you're better off just raising cap. At all achieving those objectives and seeing what the market will bear for a particular company. Yeah,

Ramin Mousavi  20:04  
and I want to come back, because you had something to say, but to just build on that and use the word Trust, well, just use us as an example, you know, because we all know that end of 2122 23 and even beginning of 24 was really, really tough time to raise money, because we were able to do our deal the way we did, and has certainty in it in three years where everybody was basically struggling to raise money. We had the capital. We have a line, and we had, you know, the team was just focused on what to do. And it's a lot easier for us to deal with the venture investors who on a board and say, Hey, that is working. Do more of them versus, you go to the large company structure. But we knew we were working towards the same goal. This is not to say it's easy. You know, the best analogy is the speed build on Titanic. You know, whenever you're stuck, you know, small company in startups, but if you have that certainty, I think that also helps with the trust, because you're more aligned. You had an example. I didn't

Addie Harris  20:59  
want to, oh, I was going to say, of the, you know, I've done four different build to buys. Two that are done have been very successful. I think your couple of things, of your successful build to buys, largely, you don't hear about them. They're very quiet. They're incredibly structured. There's a certain amount that has been de risked. They still could be a very, very early phase company, but some part of it is significantly de risked. It may be that the technology is already well known. It just needs to be put into a specification and done. It could be that the team is de risked. Whatever it is there's a level of de risking that has happened. And then I would say all of those pieces of governance, of milestones, of exactly what the acquisition is. What is going to trigger the acquisition that it isn't that one party is going to come at a certain point and acquire it's you hit this milestone, and acquisition will happen in X days, and if the acquiring party decides to pull out, well, everything basically has been left on the they're basically just walking away without any of the things that they have invested money in. And I think that is what makes the most successful bill to die, Bill to buys, because it forces both parties to come to the table with absolutely the best behavior

Joe Mullings  22:11  
so on the technology, and I'm glad you brought up the robotics. And Josh, I'm going to want your insight on this too. Some of the bill to buys have been technology that is not in the natural DNA of a device manufacturer. A lot of device manufacturers, the big strategics, do not have a digital excellence in house. And so when you have a built by and Josh, you brought up people, I want your thoughts on this, the retention issue when you build a catheter, a stent, 90% of the R D money is before you go to commercial, to the market, right? If you're building a digital platform, I'd say 50% of the R and D money is still yet to come in the ongoing development once you launch. But if you're not retaining the people who got their payout on the bill to buy, yeah, is enough thought given to that in that transition?

Josh Makower  23:02  
Well, you're talking about the challenges of integration now. I mean, and there are some really good examples of great integrations, and then there are those that aren't, and the ones that aren't able to retain the key talent, those are not going to succeed. So it has to be, there have to be some incentives provided to make sure your team comes with it, because it isn't just the technology. It never, never, ever is. There's always something that needs to be fixed. And I'll just say, like the you know, to your point, there are some examples of probably more successful build device that are shorter term, yes, where, where the the step is is much more foreseeable, much shorter term. People are less likely to transfer over strategies or less likely to change, and the the objective is clearer. But I have also seen situations that seem shorter term, and then they get there, and it's like, maybe do the pivotal now, but then we'll do it. And so it does, you know, the milestone you can get kicked down the road, and it's like, well, what do you do? Do you make another deal? And yes, you do, but you're sort of captive, you know, at that point. But if people transfer in an integration is fundamental. And I would say that I've seen lots of examples of good ones and bad ones, and where they can keep the team motivated, independently, incentivize the team and create really outsized incentives for that group that sort of break with tradition of the bigger company, and they really are willing to do it. Those are the ones that are actually the most successful

Joe Mullings  24:45  
Patty as you've transitioned your teams on the bill to buy. What are the dynamics that you had seen happen? And do the really elite thinkers want to go to corporate?

Addie Harris  24:54  
Yeah. So, I mean, it's something you have to think about so deeply that integration. Question piece, I would say, is almost as important as, kind of all of the sexy bits that come with building out a build to buy deal and and it usually is not thought about. It's an afterthought that, oh, we're going to do some integration. I think you have to think through. I've always in these situations. It's like go through org charts, who is each person, what is their skill set, what motivates them, what are our chances of keeping them? And then who are we going to put in charge to make sure that that that is done, that we are able to retain all of that talent, that they feel valued, that there are those incentives that are outsized. I mean, you know, when, when I was doing the the ortho taxi integration. And I think, I think there's only three people off that, three or four people off of that team that have actually left to the state. This is, you know, seven years later. And I think a big piece of it is because we really understood, what are each of the players on those teams, on that team, what are, what's their value? What are the incentives should we are going to put into place that, by the way, were painful later on when we had to pay like promised. What you guys, okay, guess what? They're there and then, and then making sure you retain some of that culture that for them was so valuable in that startup, because startup culture and big corporate strategic culture, and I've lived both, is just vastly different,

Ramin Mousavi  26:26  
and you don't know what you don't know. I think this is part of and it's applicable to where the competency may be new that are being robotic. You know, we use software. You know, it's very different than doing widgets, and people have different incentives. You know, the thing about software is that you can iterate it very quickly. So making sure that, and you're right, if it's new, it's even hard to have been anticipated. So being able to raise the flag and say, maybe your traditional integrations, even if you were successful in some historical things, may not work, because these people are motivated by pace of what they do, you know. So having that in place, in addition to money there everybody, like economics is one, because, you know, there's mindset having been on the other side of this with the strategic sometimes you think you can only solve you can solve everything with money, with talent. Actually, you can't, you know, because highly coveted talents are not going to be left alone. You know, they will find something. And I've learned that at least in what we do, speed is as important. They can get bored. You know, if they get bored, you don't want to do it. 

Joe Mullings  27:28  
It's over, it's over, and so are we. We're right at time. Please. Audience, thank you. 

Josh Makower  27:35  
Thank you.