Many in investing circles remark that an under-used area of corporate venturing investment is the spin-out, to drive innovation from non-core areas that are over-looked, or cannot be given sufficient attention, by the parent corporate.
One of the biggest reasons for this, is the length of time such projects can take to come to fruition, because the deals are often early stage.
So it was interesting to see last week that GE Healthcare had stepped up involvement with Israel-based ultrasound technology company InSightec, with technology GE had spun off 13 years ago. It has done so, not only by deploying $27.6m as part of a $30m C funding round, but also by putting Tom Gentile, chief executive of GE Healthcare Systems, as its chairman, and with Jim Davis, an 11 year-veteran of the US-based conglomerate, joining as chief executive.
InSightec was founded in 1999 when GE Healthcare (then GE Medical Systems) transferred technology to the company.
According to Gentile, through the deal GE has upped its stake in the company from “mid teens” to “high 30s” percent, Gentile said.
The fact GE has been so able to up its involvement significantly in a spin-out company founded13 years ago, arguably illustrates the potential attraction of allowing assets a free rein outside the corporate, and if they can show signs of nearing success, the corporate can subsequently step up involvement.
Gentile added: “There has been a lot of activity in the last six months. We talked with InSightec to recapitalise the company to focus on a few things and bring in a different kind of management. Jackob Vortman [InSightec’s founder], who is an unbelievable scientist, will stay on as president.”
The company secured the GE investment after receiving US Food and Drug Administration [FDA] approval for its MRI-guided ultrasound for treatment of painful bone metastases last month and it has previously secured FDA approval for the treatment of uterine fibroids, while other treatments it is seeking full regulatory approval for include that of Parkinson’s.
Gentile said: “The issue the company had, is it had made tremendous progress and very big milestones, yet to get those things to a new level it needed more capital. Now was the right time to make investment as we wanted to get to the next level and change the way it was going to market under a different kind of leadership.”
Interestingly the company may have been able to continue on its trajectory with less involvement from GE, yet allowing the US-based company to step up its holding will likely see it perform more strongly, if GE is right in its investment thesis. Gentile said the company had been generating revenue and some quarters had had positive cashflow, and could have “more than supported itself on a cashflow basis” but the extra investment, was worthwhile to take the company to the “next level”.
If the InSightec deal ends up being a stellar exit a few years from now, it would surely make an interesting case study for how spin-offs can successfully create value for their parent corporate, while minimising risk of the parent as it sees how the technological roll out pans out.