Build-to-Buy and Option Structures

Option structure 

At Edwards, we’re a unique medical technology company. We’re very focused on patient-focused innovation, and we really target breakthrough innovations. These are innovations that are oftentimes new to the world. They change the practice of medicine in a meaningful way. Frequently, they extend life so our TAVR procedure does that.

And what goes along with that is this commitment that we’re going to be involved with the companies we invest in over their clinical journey. So it’s usually like, we’re going to start testing in animals. We’re going to go into patients.

This is a multi-year process and the way we think about where we make investments, we have a filter that serves us well. We start with:

• Is there a really big unmet patient need that needs to be addressed?
• Is there an opportunity to have a breakthrough innovation in that space? Not incremental, not something that improves patients lives a little bit, but a meaningful change.
• Is there a pathway to leadership?

At Edwards, we have number-one positions in 95% of the segments we’re in. We’re very interested in being the leader. And we like moving first because when you’re first in developing a segment, you get to shape how it develops, and you get to work with the regulatory bodies and governmental agencies. That’s a position we’re very comfortable in. Finally, it needs to be a segment where we can create value for Edwards and our stakeholders. 

But when you have that lens very focused on cardiovascular segments and you have this screen, what ends up happening is you go very early in your investments. 

We engage with companies when they’re very early in their clinical journey. We’re willing to talk to companies at every stage of their lifecycle. The way we engage with them, whether it’s in equity and debt, an option or just outright M&A, falls out of the opportunity and what our needs are and what the company’s needs are.

How it works

So what the option structure really is, it’s a way to work with companies where we are interested in building a relationship with them, helping them develop the type of company that we would like to acquire in the future, and solving some of their financing needs in the process.

It sits a little bit between just us making a straight equity or debt investment and M&A. We think of it as the best of both worlds as one way to think about it. It’s all about, we would approach a company and ask about what their clinical and development plan is.

They would say “we have this technology and it’s going to take three years to develop it. We have to do this kind of clinical path.” And we say, “in our experience, what you’re developing could have a lot of value for patients. How about we make your journey a little easier? We’ll invest in your company.” 

It could be a mix of what we call an option premium, which is an investment which is wholly non-dilutive to their cap table so it doesn’t dilute their investors and they like that. We could buy some equity. We could even put invertible debt or any mix, but we basically fund their development timelines.

Let's imagine our example. It's three years to a meaningful value inflection point. Maybe a readout of clinical data will fund the whole pathway. And we'll also put in place today a merger agreement. So we'll actually do all the negotiation of what the acquisition will look like and we'll set the purchase price today.

So as a leadership team for this company, there's a ton of benefits. We can talk through those, but they basically take a lot of that financing risk off the table because they know they're not going to be out trying to raise money constantly, which is what a lot of these founders have to do. They know that if they execute, they'll have created a business that, at least in theory, Edwards is interested in acquiring.

And there are a range of other benefits we can talk about too, but that's really what it is. And then, Edwards has the option, but usually not the obligation to acquire the company at that milestone point in the future, and we can decide we want to acquire it and bring it in house, or we can pass if we don't.

It's a really nice structure. It's been used in a lot of industries for a long time. I'd say going back to 2014 and 2015, it started getting used more frequently in med tech. And these days, a lot of the big med tech players are using these routinely.   

If you're sitting in the shoes of a CEO or the board of this company, and Edwards approaches you and is interested in doing that, you probably go through the questions:

• What do I get out of this? 
• Why is this a good structure for me?

And I would probably make a case that would go something like this:

First I already touched on it. Not perfectly. There's always the risk that we're going to agree on a budget and the budget's not going to be the right budget. But for the most part, you're not going to spend a ton of your waking hours thinking about calling investors, talking to VCs and saying, how can I get more money? Focus on execution. That's a big piece of it. 

I mentioned the fact that oftentimes the funding has a non-dilutive component, so it doesn't mess with your cap table investors like that. A really big benefit is that you're partnering with the strategic in the space. So when we talk about these deals, we say options with an alliance, and the alliance piece of it is that you're going to be able to get to know people within Edwards. Should we decide to do this? You can draw on our capabilities.

So let's imagine that you're a target and we want to do one of these build-to-buys. This is the type of business we want you to be in three years, and here are some milestones that we want you to hit. And if you hit these milestones, you're going to be a really attractive target for us. 

Oftentimes, we'll work with them to give them some guidance on those milestones. If it's something around setting up a quality system or a regulatory or manufacturing system, we can agree that you can draw on the capabilities we have inside of our company, which is super unique.

We view it in many ways as a partnership where we get to learn about the company. It's sort of a prolonged diligence for us because we have a strong relationship with them and they benefit from our expertise. And if everything goes well and the milestones are hit, and the opportunity is still what we thought it was going to be, there's a really nice but predetermined exit for those investors, and we've locked in a purchase price. The ultimate acquisition can become pretty mechanistic and just play out once you get to that future point. 

Exit cap

One feature of these transactions is that they are almost always very frequently capped. So we're agreeing today on what the value is. That can cut both ways. There are times where we may agree to a price that maybe is too high when we get to the option, but of course it's our right to walk away.

The company is agreeing and they get approval in most of the structures those shareholders will have and the board will have to agree to it to do this deal. Their degrees of freedom are much less to walk away from the deal. So if we get to our option period and we've agreed on a price and we want to exercise, by and large, we can always walk away. So the upside is capped, and that's one thing that they do have to think through and have to puzzle a little bit. 

The other thing that people think through in your shoes is: 

• What happens to me if Edwards doesn't exercise? 
• Am I stuck?
• Is the perception of the marketplace going to be that I'm not a valuable company?

And we work very hard to say that's not really the case. There could be different reasons why we don't exercise certainly. 

• Maybe the market opportunity isn't what we thought when we entered in this agreement and three years later the market's just never developed in a way we thought it was, then we're probably not going to exercise.
• We could have a change in strategy. So Edwards could decide that we don't want to go into this segment. 
• We could have a change in leadership. 
• The criteria that we agreed to for this build to buy were never achieved.

Each of those is a little different. But if the company delivers on the criteria that we agreed to, chances are they're going to have one amazing product and someone's going to want that product. And if we decide we're not going to go in that direction. We're going to do a different strategy, another strategic is going to want that business. And it's certainly going to be financeable, IPO-able. 

And by the way, we're still an investor in the company usually, so we want it to succeed as well. And there are all sorts of mechanisms that companies negotiate for in those circumstances to protect their downside. Oftentimes it's what you'd call a break investment.

So if you walk away, you have to give us a little bridge financing so we can go out and raise more money. We negotiate those types of things to protect in those downside scenarios where Edwards doesn't end up exercising the option. 

Drivers for the structure

There are a number of very strategic drivers. I kind of alluded to the fact that we want to go early. It would be excellent if Edwards had enough resources to innovate everywhere we want to innovate, but R&D teams necessarily have constraints, so we can't do everything.

This structure allows us to work with innovative companies at a very early stage, but preserve that optionality, which is very valuable, and pursue a lot of these breakthrough technologies, which are a ton of work and a very big commitment to develop. But we can do it, both with a mix of organic and inorganic.

To be clear, 80% of our investment at Edwards is still on the organic side. We're a primarily organic innovation company. Probably 20 percent-ish is inorganic, but we also spend a lot of money on innovation period. We spend 17% of sales on our R&D budget, which is crazy.

It's really awesome that we do that. It's a really big number. MedTech overall is about 10%, and a lot of big industrial companies, maybe 3% to 5%, but Edward's running at 17%. So you have to be committed to this kind of innovation. 

That's what we're trying to do. We're trying to get in early with them, and the way we think about it is you're trying to learn and you're trying to influence 'em. That's what's great about this option structure. You learn as they go and you influence the way they go. And it's a really nice thing for us.

We also love that you get a pre-negotiated deal. So imagine they succeed. This is a little bit of just the reality of it. If the company went on its own clinical journey and succeeded, it would probably be worth more than the price you lock in today. 

So it's like if they actually hit every milestone, did it by themselves, their valuation would probably be more than we're willing to lock in in our merger agreement today. So we get a bit of a fixed price now, they get the certainty, but they cap the upside. 

That's a little bit of the value that we see in it. And then there are other ancillary benefits that don't drive it, but you'll hear people talk about utilizing the balance sheet for R&D. These investments do sit on the balance sheet, so that's another benefit to the company, but it's not the driver of why we do it. 

Alignment with the strategy

When we think of the corporate development group and out of our group we do corporate venture capital. So we'll do VC investing, debt investing. We'll do these option deals and we'll do control transactions or M&A. 

We think our job is to literally support the company's corporate strategy. So very closely linked to what we're trying to do. And the nice thing about our strategy here is it's very focused. We're always clear on what we're trying to do. We go very deep in the areas that we go.

In past lives, I spent a lot of time looking at new spaces, white space M&A. In fact, I did white space M&A for a long time. We thought about what segments we should go and try to get into it. 3M did a lot of that.

It was like, we're in these segments. What segments should we be in that we're not? Of course at Edwards, we do ask ourselves those questions, but we have a strategy that's worked very well for us. This breakthrough, innovation-focused and driving for leadership. And so it's easy for me to say, what do we have that's emerging in the areas that address these patients?

Again, it starts with the patients and we just support that strategy. And so it naturally leads to these types of structures. And so the folks that are in cardiovascular, a lot of the players, Boston, Medtronic, and others, we all to some degree, race to find these early stage companies.

They're sometimes surprised. You'll get calls very early in their development cycle. They will have done 20 cases with patients, so they’ll ask why are you calling them? And we'll say, because you had done 20 patients, tell us how they went. We do the same thing. What signals are you seeing in the clinical data?

That's really cool because when you have that level of depth of knowledge behind us, we know that the innovation process is messy. So sometimes the company will say, yeah, we did a few patients, but gosh, half of them were pretty messy. We had some safety signals, we had some adverse events. So tell us about it. We're not scared of that. You don't get to where we are if you're scared of that kind of innovation.

Monitoring progress and milestones

It probably won't surprise you that that's one of the things that companies spend a lot of time thinking through and in the legal documents that govern these transactions. They're fairly extensive because you have various agreements that govern both the option investments and the way that's structured, purchase of equity and also the ultimate acquisition. 

All these documents get negotiated at the same time. So it's a lot of paper. We spend a lot of time trying to figure out what the relationship is because no one wants to be slowed down.

They want to benefit from our collaboration. But the worst thing they can do is have someone who's constantly looking over your shoulder. We may take a board seat, maybe board observers. It depends a little bit on the transaction. 

But remember, whether or not we have a direct board seat, whether we're a board observer, whether or not we have a formal alliance, meaning we're working with them on certain components and criteria of the build to buy, regardless there's a lot of connective tissue between us and the companies. 

They're independent still, and this is always that tension. As a CEO operator, you're trying to build a company that Edwards wants to buy, but you have to have an eye towards what happens if they don't buy it.

You have to have a company that could exist on its own too. I try to walk that line, and we try to make sure that what we ask for is reasonable. So we, at the very least, know what's going on in the company through at least an observer or some kind of function with the board.

But we also have the alliance team that can be working with them, getting feedback. And like I said, we're helping them. We're not controlling them. And so it's a bit of that walk that you have to do.

Moving fast

First of all, we think we move pretty fast, but that objection is not without merit. If we structure this in a way that we slow them down, we've completely deactivated the whole deal structure's value. It has completely ruined it. We're not interested in that. 

I think of it as: make us aware of the things that are going to impact the desirability of the acquisition. Remember, part of the build to buy component of it is we should agree in the beginning on what the criteria of success look like. So if you can set up a company that is capable of doing this, this, and this, it's super likely that we're going to exercise that option. 

So we want to be able to monitor the progress. We want to make sure that you're avoiding pitfalls, but we don't want to spend all the time and we don't want you to spend all your time doing PowerPoints for us because that's like the fear.

Every two months, you have to do all these data downloads and prepare presentations, and your team gets distracted on what they're doing. So we go to great lengths to not do that, but it gets negotiated and a lot of times the founders will say: “You're asking for this every quarter. Can I give you this data every quarter? But can we meet less frequently on these things?”

And we try to be very reasonable about that. It's that balance. It's knowing that your investment is being protected and we're moving in the right direction, but we're giving the company autonomy, letting 'em hit the right value inflection points and maintain the independence because they're still an independent company, but you're right, there's always going to be that tension there.

But we have really good partners and folks that do this and teams that do this a lot. So we're pretty skilled at understanding that it's not in our interest to have the companies presenting to us all the time. All the effort that goes into an hour-long update can take weeks. And when we're innovating in this manner, that's valuable time.

Failed Startups

Sometimes the startup blows through all their money, and they don't get out to market. Not necessarily with the investments we’ve made, but it does happen with structures like this. There are a couple of things that we do. 

One, we do our best to stress test the budgets going into this. So again, I've made the point that the option premium, the investment we make in whatever form that additional investment comes in. Ideally it carries the company to that milestone or value inflection point where we're ready to make a decision. 

But let's imagine a couple different ways that could play out. Maybe the company has done their best and they just haven't delivered on the technology and the criteria that we agreed to. Well, they need more money. How does that look? 

Well, certainly it's going to be a negotiation. It's probably a negotiation for us. They come with us for help and bridge them, which depends on how long the bridge is. They may have to go to their existing investors and they might need a little more time. Would you put more money into the company to carry them? There are lots of different levers you could pull, but it's almost always negotiation. 

You could also imagine a scenario where, for whatever reason, the option holder, the strategic, just wants more time for a decision. You could also put more money into the company to see a little more of things, but that's a negotiation. It's changing the deal. 

And then, the company has the right to think if they want to do that or not, or if they want to extend the option further? But again, if you're partners with these companies and you're in it and you've been going on this journey together, you're pretty incented to find solutions there.

But if it's a complete bust, and hopefully we don't find ourselves in that situation and one does not find themselves in that situation very often, then you need to have hard decisions around whether you want to keep financing or not.

It depends on how successful the company has been, what the opportunity is and why we decided not to exercise.

What I like about these structures is if you just put in debt or equity, and that's still the lion share of probably what we do. We went back and if you go back to 2014 or 2015, we had made probably 24 investments in debt or equity in companies. This was recently pulled from the data. We said, let’s just put money in. Let's learn and let's stay close to these companies.

Option is the more formalized relationship. We've got a handful of these, probably seven or so, and then outright acquisition. This is like, we want full control today. We have enough conviction and probably six of those. 

Medtronics had similar numbers and a handful of these options deals. So it's not like we're doing 30, 40 of these, but we're doing them selectively and strategically for the right investments, and for the right opportunities where it makes sense and we want to go on this journey together.      

Risks

When we think about risks, it's very different from what I did before. So I'm thinking back on my time in both investment banking and working corporate development at 3M, we spent a ton of time on the synergy models, costs, sales, all that.

That was probably the lion share of where we spent our time deal modeling. I remember sessions when Jerry and I were working on those and we'd spent hours going through the details on the cost side and the sales synergy side. 

Much easier to capture the cost side than the sales side. I would say we spend less time doing that now, where we spend a lot of time on my transactions now are understanding the patient opportunity.

• We'll be digging through clinical and healthcare data.
• Understanding what's the incidence and prevalence of certain conditions
• What is the population of patients who could benefit?
• What are their alternatives? 
• How do those alternatives work? 

It's like the time I used to spend on cost, energy and sales energy is now understanding patient populations. It's just different and we have these really big multi-tap Excel models going through and figuring out what the opportunity is for patients to treat.

It's amazing. There's all these different classifications of patients and patients that respond to this and not that, and patients that have this co-morbidity in patients. Before you know it, they're just a hundred rows in Excel. Just to understand at a very granular level:

• Who are we going to be treating?
• What is their benefit going to be?

It's just different. There isn't a bunch of infrastructure to take out in a cost deal. Like it used to be really simple to go through and say, what's the redundant functions of this business? Here. it's maybe 10 people, maybe five people working on some. We don’t have control because we’re doing diligence like a venture capitalist at this point.

It was great but it was a change for me when I came to Edwards. It was energizing. It forced me to develop a whole new muscle because I thought of M&A as one thing. I thought of it as you got a company and it generates EBITDA, and we get to look at the cost structure and figure out where the value points are. 

How are we going to take their sales, run it through our channels where the leverage points and international and the matrix are?

And back in banking, nothing against my former colleagues in banking, but it was like an assumption. The synergy was just a percentage assumption. It was like, what's the sales acceleration? Put in X percent sales acceleration, cost, and X percent. Now it's very much like when you're going this early, you have to really believe in the opportunity.

And if you're, and we're not talking about capturing little shares. We're like, if we're the leader. In this really big opportunity, how does it change patient lives? It's just a different conversation and it's one that energizes us. It energizes the companies we invest in, and I think they respond to it and that's why they get excited.

And they say a lot of those people, that's what gets them going. They'd rather not spend all their time raising money and doing all that work that calling venture capitalists. They're like, let us focus on the innovation and if you can help us, great. And we're willing to go on that journey with you and partner with you.

They're the folks we want to work with. They're the ones for whom this structure makes a lot of sense. If it's someone who believes that they want to have a really big public company and they want to maximize their exit, and by the way, nothing wrong with that. There are folks for whom that's the right kind of business they're building. 

They want to probably just go on the traditional journey, raise VC money in subsequent rounds and do all that. Maybe an IPO, maybe an exit. But if you have a really cool breakthrough technology, it's focused and you want to work with us and we can help, that's where the natural fit is.

It’s very different. When I came here, I had to learn a whole new way of thinking about it. It's like I was more traditional later-stage M&A. And then I came here, and what's neat about this is that in many ways the benefits bridge traditional venture capital investing or traditional equity investing and later stage M&A, it's like the hybrid between the two.

Exercising the option

Traditionally, the way it works is, let's imagine that we've set milestone delivery points. So there's a time at which a milestone is achieved and the option begins to expire. There are different ways these can be structured. I’m going to try to generalize for simplicity. 

Sometimes the option is to live the entire time and we can exercise at any point. Sometimes the option becomes live. But let's just generalize a little bit. 

At some point the option has to begin expiring. One way this could work is you set a milestone and say let's imagine it's some clinical data from a pivotal trial, the big large trial that they're doing to get approval to market and sell this product. And we say, once you get the results of that trial and give us the results, and we have a window to decide.

So there is a diligence window that would open up and it's basically triggered off the time it takes for us to make a decision. So it could be 90 days, it could be a few months where we do final diligence and make our decision. And if not, there's some period of time and then the option would expire. Our right to buy would go away. 

You do get to do a confirmatory diligence of some kind. And again, everything's negotiated. There are times where the company says you shouldn't need that much time. They want a tight window. Other times, we always say we want time to process whatever it is that you've delivered to us, whether that's data or things.

Other times you just say, the trigger is approval and once the FDA approves the product, that's when we'll make our decision. It depends. And sometimes it's very early. Sometimes it could be like “we'll just see the results of an early feasibility study. But whatever it is, it has to be something where we have to get conviction that it's going to be efficacious and make a difference to patients. That's really what we have to get conviction around and whatever it is that gives us that, that's where you make the decision. 

But then, if we walk, the option has to expire. It can't just persist forever. Companies don't let us do that because then of course, their strategic value is diminished. So it's a finite instrument. There's a time at which it ceases to exist and there's risk for us in that because we pay money to acquire that. That option has value. 

If we don't exercise, there's a charge that goes along with that for us. So there is a downside risk for us. The risk is that the company doesn't develop a pro, doesn't meet the criteria we want, and then we have to just eat that investment and it expires worthless. So that money that we gave, that was non-dilutive, that didn't result in ownership of the company. There wasn't a return on that at that point.

We do a lot of diligence in the upfront too. So it isn't something where you say, the technology concept is kind of interesting, therefore let's just buy a bunch of options. Let's just option everything that's interesting out there. 

You can probably tell, given that the players in the space don't, we're very judicious about how we think about these. And so you do diligence going in, but you can't diligence everything like you would in the normal acquisition because it's not all there. 

The company probably doesn't have a built out HR department, for example. They don't have a giant manufacturing infrastructure, for example. So your diligence looks different, but you diligence the investments before you make them, and then you diligence again before you exercise the option. 

So we’re running a lot of the same components you would in a typical M&A deal and at least the confirmatory diligence. And it's done very similarly to what you typically see. So you'd have functional experts that do diligence for a living by function. They do these on a number of deals, and they go through and look at them in their respective areas. And report back on what they find.

So that's kind of the confirmatory looks. There's just much less of it before you make an option investment or a build to buy option, because not all of that's built out yet. So you put a fair amount of money at risk based on the conviction you have from being so focused in the space and knowing what might work.

Why deals don’t push through

There's probably a handful of reasons why we don’t end up doing the M&A deal that I can think of. One of them is probably the most obvious: through these build-to-buys, you usually agree on the criteria you want to see the company develop. 

Whatever it is, we’d say we want the company to look like this. We want to have this manufacturing capability. By the time we exercise, we want it to have this clinical impact. If they don't develop a technology that looks like that, we may not exercise. The market could never develop. 

There are technologies that are really interesting. So let's imagine that it's a new, disruptive, breakthrough technology, but it has competitors in the market already. Maybe that market is just not ever developing. It wasn't as impactful as we thought it would be. 

So we just say, it doesn't make sense. There can be a range of strategic reasons. We might make the decision that for whatever reason, we're not going to play in a certain segment anymore.

And the last one, people often ask us. We hear a lot from founders about this. I know that you are convicted, meaning, I know that this leadership team at Edwards really believes in this strategy. But what if you're not in your roles when you go to exercise the option? 

And why this matters is sometimes these are long-term agreements. It could be 3, 4, 5 years out before we're going to exercise the option. So it's a long journey. What happens if the C-suite turns over and the new people in those seats don't care about this deal or they don't care about it? 

So they're like, yeah, I get it. I believe you, you can look me in the eyes and tell me you think this is really amazing, but how do I get comfort that the next administration will? So what we try to tell them is, again, if you have your North star and that's patient-focused innovation, making a difference to these patients in this particular population, whoever is occupying the roles in Edwards is likely to feel pretty similarly.

So it could come on both sides. They could have a change in leadership or they don't deliver their right what you expected, or they go in a different direction. We try to protect against that. We have all kinds of things in the agreements that say: “If you set off to be a company that's going to develop something really interesting for mitral valve repair replacement, you can't take all our money and decide that actually you want to develop an ice cream company in Austin.

I'm joking, but there's a lot of protection there. But you negotiate over what the protections are and the degrees of freedom. And we negotiate around how much the money goes to certain things versus other things. Because again, we do want our money to go to developing the technology we want.

But you're right, they can take it. In a very practical way, they can squander it. In efforts to advance my hypothetical example, a mitral replacement product. They could still squander it, not invest it wisely. But once they have the money, they have the money.

And then there's factors on our end where we may change our appetite for that segment or just general strategy. It can happen. In our case, we are very clear on what our strategy is. So when we enter into these, we thoroughly vetted it. 

But certainly that's the case. And I know that if we looked at the universe of option deals that have been done, it's absolutely certain that companies changed their strategy and didn't exercise these.

If we go through all this and don't ultimately exercise our option to acquire the company, it’s not a total wash. It depends a bit on how it’s structured. If you give some money that's non-dilutive to acquire the option, you have to give consideration for the option. The option has value. So you're paying money for that option. If it expires worthless, and we don't do anything, there's a charge you'd have to take. 

You reacted earlier, you went wow that you can throw out all that money and get nothing out of it if you don't exercise. Well, the portion of the money tied to the option, yes. Because the option had value along the way. That would just expire and you take a charge for it. 

If a component of your investment was in equity or maybe convertible debt that would convert into the next financing or a subsequent IPO, then we still have something for our investment.

These get structured in different ways. Sometimes there's a piece that's option premium, that's the part that is tied to the option to buy the option. There's a convertible debt component. Maybe there's an equity investment. It just depends on the individual needs. Other times as well, you can bring in a venture capital partner.

So imagine a really long development timeline. So let's pick for example, like four or five years to get to that value inflection point. Maybe the amount of capital that we need to raise is sufficient that we will want to go approach a venture capital firm or a private equity firm that would consider these types of investments and say, would you like to come invest alongside us?

And they get interested in that because for similar but different reasons than maybe the company does. The return is relatively fixed so they can look at it and say if everything goes according to plan, I can put in this much money and I'll get this return in this many years.

We partner with a venture capital firm. So then you have like a three-way negotiation where it's us partnering with a venture capital fund to put a big investment into the company that finances them through their development timeline. So we get to partner with the VCs. 

All of us that look at these types of deals consider those structures as well. And there are various reasons why bringing those partners makes sense. Sometimes they add a lot of value. Sometimes those VCs have operating partners that are really good at this, and you want their expertise. There's a range of reasons why it can make sense to do that.

Innovation

No one said this stuff was simple, but you've been doing this a long time. The reason we love doing M&A is it's constantly challenging. It's like you can spend your whole career in these areas and you're constantly learning new stuff. 

And when you think you know it, there's innovation in the way things get structured and the way risk is allocated, all that. These have been around for a while in the last eight years or so. It feels like they're picking up in terms of med tech, utilizing them in a way that is just.

What’s driving us to this is definitely both innovation in the way we’re structuring deals and the market competitive. What you're queuing on, which I think is true, is if there's a bit of a race to form relationships with these truly innovative companies, it necessarily forces you to engage earlier.

And so if all you did was just acquire early stage technologies, you'd probably have a lot of write offs. And if all you do is invest and then go on a long journey, then you potentially miss the relationship to help guide influence where the company goes. 

So, you're right, we get the early engagement with them, you get the influence, you give them some benefits. And we preserve that optionality, which I think is very valuable.

Approaching a company for the buy to build option structure

You see all different levels of sophistication and these startups and a lot of times, founders may be very clinically minded, but less familiar with all the deal options that are out there. A lot of them go to Healthcare conferences now, and I'm hearing more from the podiums about these types of structures, which is why I think it's a good topic for us to be talking about. 

They're getting more used to hearing about them, but a lot of times it's just about listening to them and hearing them describe the technology and see if it’s something that feels very strategic to us and they’re aligned with our direction, and explaining to them the options that exist. 

It makes sense for some technologies, we may say to them that we want to go on the journey with them and learn, and it's more about staying close. There are others that feel to us to be so on strategic targets, and also demonstrating something already that we see that looks unique. Something whether it's an early patient experience, whether it's something in animal data or just a novel, unique way to treat a condition. 

And in that case, we may say we want to form that, we want to learn, but we want to influence meaningfully. And that's where you go and say:

• Would you be open to something like that?
• Are you familiar with these types of structures? 

Sometimes they're not. Increasingly they are, but you have a candid conversation that's not dissimilar to the one we're having right now, where a lot of the questions that you're asking are the exact ones that we get. And if you're honest with the companies, they'll also tell you if it's right for them.

And sometimes the investor base, not all, but many of the companies that you'd be considering for these types of investments have some pretty sophisticated VCs in the cap table frequently already, who have experience with these. So the founder may go to their board members, go to their VCs and say, “Hey, Edwards is interested in a deal like this.”

And they're going to have their view of it too. Some have had successful exits through these types of arrangements. Others may have a different view, so you have to incorporate that a little bit as well. But, there's a moment where you have to think about, as a founder. 

One of my colleagues I work with in corporate development always says it this way. I don't know if his numbers are right, but he said 80 to 90% of these really amazing breakthrough technologies will fail. And I don't mean 89% of the investments we make, I mean just people pursuing this type of innovation. It has a very low success rate because the challenges we're trying to solve are so hard.

So if you look at that as a founder, this is going to be a long journey. You have to be really committed to it, and if you had the opportunity to de-risk that process by working with someone like Edwards who goes through this, all we do is this type of really long committed innovation to de-risk it and then also allow you to focus. That's what gets them excited. 

They definitely give up the uncapped potential of a giant IPO and all that, but sometimes it's worth it given the journey they're going to go on, given the risk that's inherent in this type of work. 

Now you're going to see build to buy everywhere. Now that we've had this conversation, you'll start to be seeing more of these and maybe they'll pop up in other industries. 

This does not always get announced. So one of the features of them is that when you make these investments, you don't necessarily have to announce them publicly. If you want to make an acquisition, but a lot of times these happen and they're just running in the background and companies are doing this, and that's great.

It's all about focus. Let people focus on innovation. Don't get distracted. Don't get distracted about doing too much in the public sphere around we're backed by this company. It's like all that just invites attention from competitors, and invites other intentions you may or may not want. So it's an elegant solution, but again, it's one tool, one lever we have and we can structure lots of different things.