----The Case Report of Conor Medsystems 2010-12-20
Corporate Finance team assignment 1 Parisa khatabakhsh 8004019769 Amanda kolobaric 881020-3920 Can Zhao 8701239231 Jin Zhang 880812F340
“…I think valuation is critical, but I’d also say that a deal should never go on just valuation alone. The quality of an investor, their understanding of the technology and space, and their support of the company over multiple financings are all just as important.” -Frank Litvack, Chairman and CEO of Conor Medsystems
Technique priority vs. Risk-control priority Mitigating principal-agent conflicts in start-ups are vital for the company’s future success. The conflict is so universal that it can be reflected from the technology choice, the team structure and financing decomposition of the start-ups. In our case, the entrepreneurs in Conor Medsystems, face multiple trade-offs (tech, team and financing), that each of them can be considered as the “tension” between technique priority (technocrats) and risk-control priority (financial-crats). The results of these trade-offs are ultimately depended on the balance of the tech-financial power struggle. The principal-agent conflicts, according to corporate finance theory, usually happen when entrepreneur make decisions that is in their personal interests rather than in the interest of outsider investors. The self-serving decisions include: First, entrepreneur has intrinsic passion and personal gratification; Second, outside investors pursue the low-risk, low value path rather than high-risk, high-value path; Third, the entrepreneur may have strong personal incentives to continue the project even though it is a losing proposition (see Ogden, et al., 2003). In our case, Litvack and other entrepreneur of Conor Medsystems insist on completing all medical trails with the most cutting-edge technology, which may bring much higher value in the future and also indicate comparable risk. VCs, however, insist on staging finance, considering the possible failures since the investment is large. The truth probably lies between the two extremes. On one hand, Litvack may have self-serving interests or intrinsic irrational passion, especially given his good record of past venture, which may make him overconfidence; on the other, Litvack and other entrepreneur may be more familiar with the industry and have better understanding of the technology nature, so that they may have better judgment on timing the maximum value point of the startups than others.
The conflicts then can be divided to three dimensions, tech, team and financing, which are also the core issues of high-tech start-ups like Conor (See Table 1). If we look at them one by one, each single dimension provides the evidence of the conflicts. We can model the conflicts as a dynamic optimization problem. The dimensions can be defined as “Variables” for example. In addition, their dynamic relationship can be defined as “Constraints”. Actually, given two of the three variables, the last one will be decided. For instance, if we choose one particular technology and team structure, there must be an optimal financing portfolio; or given the initial value of financing source and team profile, we will end up in choosing one particular technology. The dynamic start-up value optimization problem can be solved given variables and constraints. However, if we only have one variable decided, the other two are free unknowns, then we can’t reach a particular optimization solution, the conflicts or “tension” will occur. For example, if we only have team decided, the tech-finance combination is unclear, there must be a trade-off. Technology Technology is the fundamental power of venture developments. Understanding technology is tough, evaluating it is even tougher. On one hand, it has rather random results and unexpected effects, especially for medical industry which require highly security; on the other, it...