"How ‘ya gonna keep ’em down on the farm after they’ve seen Paree?"
Is Facebook really worth two Medtronics (NYSE:MDT)?
If rumors are true, and the social networking juggernaut does indeed come out of its initial public offering with a valuation in the neighborhood of between $75 billion and $100 billion, the total value of Facebook will double that of the largest pure-play medical device maker on the planet, which sports a rather paltry market capitalization by comparison of about $42 billion as of close of market today.
But while Facebook’s filing for an initial public offering puts a cherry on top of one of the most famous venture capital successes in recent history, does a fairy tale ending (or beginning, truthfully) change anything about how investors look at industries such as medical devices? Further, could the mega-success of Facebook lead to some siphoning away of med-tech investment dollars?
Paul LaViolette, a partner at SV LifeSciences and former Boston Scientific (NYSE:BSX) bigwig told MassDevice that the premise is less ridiculous than it sounds.
"On the one hand, if you’re a venture investor, you can’t just flip a switch from being a life sciences investor to a consumer applications or social media investor," he told us. "That’s not possible."
However, the fund managers at the giant pension funds, which ultimately bankroll VCs, definitely take note of massive successes like Facebook, LaViolette said.
Those investors, bound only by the need to keep their large stockpiles of cash growing (and easily accessible), are agnostic about where the returns come from.
Some of those investors may decide that their investment dollars would be better spent investing in venture funds that focus on industries that encompass entities such as the Facebooks of the world, which generally produce quicker cash-outs, something the medical device industry cannot promise with towering barriers to entry, onerous (if not obstructive) regulation and long runways to market, LaViolette told us. However, it’s worth noting that for every Facebook, there are hundreds of spectacular failures in the high tech and social media world.
Still, it would be a mistake to think that even a blockbuster like Facebook could change the landscape dramatically in terms of health care investment, he said.
"When I look at life science investment, what I see is demographics. As health care gets to be 18%, 19% GDP there’s a lot of passion and a lot of need in that market. People are more willing to pay for [health care] than they will be willing to pay for a new app on the iPhone.," he said. "Health care is still protected and highly desirable. It’s still the average person’s number 1 concern in life."
Still, there are some signs that VC investment in the medical device industry may be slipping. While investors ponied up bigger bucks in the 4th quarter of 2011, overall deal flow contracted along with seed round funding for new medical devices, a sign that life science investors are looking to hedge their bets, according to Matthew Jenusaitis, the president of OCTAne, a non-profit organization dedicated to preserving the technology eco-system in Orange County, California.
"The VC’s are switching stages, not sectors," he told us. "The values just aren’t appreciating in the early stages. You’ll see a company valued at $20 million in the A round, still being valued at $20 million in the B round and maybe it gets up to $25 million by the C-round. Investors are saying, ‘I can invest later than the early stage and take less risk’. It’s getting harder to raise the early rounds and people are getting more selective."
But Jenusaitis, who has deep connections to the medical device industry himself, doesn’t think it’s because VCs are having their heads turned by sexier technologies.
Still, if there is a lesson in the Facebook IPO, it’s a broader one about the economy, LaViolette said.
"In this economy things are more linked than you might think," he said. "People are looking for signs of optimism and the positive news with [Facebook’s IPO] is that it’s a big story with big numbers and people are optimistic about the effect. Maybe that stimulates some tailwind."
However, he added there’s another side to that effect too.
"The downside is that if there’s a huge IPO and people are writing checks to buy stock at a huge value, that price has to be sustained or grow…If you create this much hype then it’s very easy to disappoint and then we all pay the price on the next IPO."