Medtech Entrepreneur’s Speedy Exits Buck Industry Trends - Wall Street Journal

Article originally appeared on the Wall Street Journal.

Duke Rohlen readies medical-device startups for sale in four years, far faster than industry norms

By 

Brian Gormley

Aug. 12, 2019 7:00 am ET

Entrepreneur Duke Rohlen has sold four medical-device startups, each time providing quick returns to investors and defying the longer payoff periods that have saddled other venture-capital bets in the industry.

Each time, Mr. Rohlen has taken these startups to acquisition within four years of his taking the helm, about twice as fast as is normal in the industry. Most recently, EPIX Therapeutics Inc., which he purchased in 2015, was acquired by Medtronic PLC in January for more than $300 million.

Consolidation among top medtech companies and tepid public-market interest in new medtech offerings have forced many device startups to travel a long road to success, a trend that has driven some venture firms away from the sector.

Through an execution strategy that emphasizes business models before technology, Mr. Rohlen is producing returns well within the 10-year horizons that venture investors seek. That has many flocking to his latest startup, Ajax Health Inc., which pursues a strategy different from his previous companies that zeroed in on specific medical sectors.

Menlo Park, Calif.-based Ajax is an operating company that invests in and takes leadership roles in startups across a variety of medtech fields.

KKR & Co. founded and provided funding to Ajax, with Aisling Capital also joining the initial financing. HealthQuest Capital, which earlier this year led a $100 million investment in Ajax that also included Aisling Capital and Polaris Partners, is now set to lead another $100 million financing round for the company, HealthQuest Managing Partner Garheng Kong said.

Investors are betting Mr. Rohlen can continue defying trends toward long holding periods for backers of medtech startups. The median time to mergers-and-acquisitions liquidity for venture-backed device makers last year was 8.63 years, up from 8.4 years in 2017, according to VentureSource, a data provider owned by WSJ Pro publisher Dow Jones & Co.

“We don’t believe in a marathon,” Mr. Rohlen said. “We believe in sprinting.”

Mr. Rohlen took an unorthodox path to the medtech industry. Mr. Rohlen, 51, planned to attend law school after he graduated from Stanford University, but a chance meeting with a friend in 1991 turned him into an entrepreneur. Maurice Werdegar, who studied at Stanford’s business school, asked him to help start a restaurant business. With little enthusiasm for law school, Mr. Rohlen dropped his plans and joined him.

In 1992, they formed Blue Chalk Cafe Corp., which opened its first restaurant in Palo Alto, Calif., in 1993, and served organic southern-style food. With Mr. Werdegar as chief executive and Mr. Rohlen as president, they opened eight California restaurants and grew the company to $20 million in sales before hiring a more-experienced restaurateur as chief executive in 1999 and departing from the company.

Mr. Rohlen worked long hours leading sales, marketing and expansion efforts while also bussing tables, greeting guests and helping in the kitchen as needed—always with a smile, Mr. Werdegar said.

“Nothing was ever beneath him,” said Mr. Werdegar, now CEO of investment firm Western Technology Investment. “Whatever was needed, he would do.”

Following Blue Chalk, Mr. Rohlen entered Harvard Business School with an eye toward moving into health care. In his second year there, he attended classes in Boston on Mondays, Tuesdays and Wednesdays and flew the red eye to California on Wednesday nights to work the rest of the week at Redwood City-based medtech startup LuMend Inc.

In 2003, he joined Redwood City-based FoxHollow Technologies Inc. and became president in 2004, the year the company went public.

FoxHollow, whose device cleared plaque from arteries in the legs, was acquired by ev3 Inc. in 2007 for $780 million.

In 2009, Mr. Rohlen co-founded CV Ingenuity Corp., which devised a method of coating balloons used to prop open blood vessels with a drug that keeps them from reclogging. Covidien PLC in 2013 paid about $300 million to acquire CVI, which had raised $30 million in venture capital from investors such as Western Technology, BioStar Capital and New Enterprise Associates.

In 2013, Mr. Rohlen co-founded Spirox Inc., which created a treatment for nasal obstructions and raised about $40 million in venture capital before being acquired by Entellus Medical Inc. in 2017 for about $200 million. Stryker Corp. snapped up Entellus last year for $662 million.

Mr. Rohlen says he won’t tackle a project unless he can see a strategy for generating returns within 48 months. To accomplish this, he searches for technologies that can be developed enough to interest acquirers within that timeline. Most entrepreneurs take the opposite tack, focusing first on the technology and later on identifying applications and potential buyers, he said.

In CV Ingenuity’s case, for example, he decided to save time and money by applying the drug coating to another device-maker’s balloon—one from Covidien—rather than developing the balloon at his company. Having identified Covidien from the start as CVI’s most likely buyer, he courted the corporation early on and encouraged executives to view his startup as a strategic play.

For device startups, four years is long enough to build value but short enough for employees to maintain their passion, Mr. Rohlen said.

Investors say focus is a hallmark of the management style of Mr. Rohlen, a father of five who says he swims five times a week.

Startup board meetings typically last four hours or more, but Mr. Rohlen can cover a full swath of opportunities in two or three, said HealthQuest’s Dr. Kong, who also backed Spirox. Because Mr. Rohlen’s companies execute well, board members typically spend the meeting discussing strategy rather than troubleshooting, he said.

Mr. Rohlen’s latest venture, Ajax, is a platform that enables him to work with a wider array of startups that could benefit from an injection of cash and industry expertise. Through their investments in Ajax, Ajax’s investors gain ownership in the company’s portfolio holdings.

Ajax’s first portfolio company was EPIX, which Mr. Rohlen repositioned with a new technology to help cardiologists treat heart-rhythm disorders, leading to the Medtronic sale.

Ajax recently financed two more startups: Cortica Inc., a provider of treatments for children with autism and other neurodevelopmental conditions; and Ablacon Inc., which has developed a mapping system to guide the treatment of the heart-rhythm condition atrial fibrillation.

Ajax will face its share of challenges as it tries to sustain the pace of selling startups within 48 months, but Mr. Rohlen said he is confident in the processes he and his team have established.

“This is a tough place to make money in. Health care is expensive,” Mr. Rohlen said. “I feel very strongly the approach I have taken over the last 15 years works. We’re just trying to do what we do really well.”

Randy Scott