Developing a new product or business in the healthcare space is rife with complexity. Whether it be creating a new medical device, an innovative pharmaceutical, or a digital health business, healthcare entrepreneurs must identify a valuable opportunity, assemble a dedicated and talented team, potentially invest years and abundant resources in R&D – all of which may occur before seeking FDA approval, finding manufacturing partners, or even knowing whether you have a viable product for the market. Given these challenges, the last thing on a CEO’s mind when raising capital or finding partners to navigate these complexities may be how to defend the company if one of these partnerships goes sideways. But what happens if one of these partnerships does go awry? If a partner, having learned the secrets of a company’s technology determines to take that knowledge for itself? (Last week, F. Nicholas Franano, MD, a radiologist and chief executive officer at two cardiovascular medical device companies, Flow Forward Medical and Metactive Medical discussed how companies can best protect themselves when entering these partnerships.) Or if a competitor takes action to derail the company? (here is an in-depth article about a company in that position). Is all of the work of the talented and dedicated people that helped drive the initial success of the company lost?
Unfortunately, these situations arise all too frequently. Emerging companies can find themselves vulnerable to partners or other parties with bad intentions due to a disparity in resources. While venture capital and private equity funds are well equipped to support a growing healthcare company as it deals with business risk, they are less well equipped to do so in the face of a legal threat. The reasons, which I have described in some depth here and here, include:
- Difficulty assessing the prospect of success in a litigation
- The risk relative to the reward may not align with their target investments
- A successful litigation does not increase a company’s revenue or EBITDA and therefore may not help the investor successfully exit the company
There is, however, a viable path to defend the business and the value that is has created. Distressed venture finance and litigation finance are relatively new financial products that can help otherwise vulnerable businesses protect themselves. Companies, such as Lake Whillans, that provide these products can help businesses threatened by the unscrupulous actions of a partner or competitor in a number of ways:
- Lead a fresh capital raise and/or buy-out existing investors that no longer see the viability of the company
- Provide non-recourse funding that can be used for legal fees and expenses in connection with any necessary litigation
- Monetize a portion of the legal claim to provide for operational expenses that the company can use continue to grow the business
Lake Whillans often works with venture capital and private equity firms in situations where a portfolio company is in trouble. Unlike venture capital and private equity, litigation funding/distressed venture funding companies focus on helping businesses navigate legal threats, and have an investment model aligned with the returns that might be generated from shepherding a company to a successful outcome.