Friday, June 20, 2008

Alchemy among the design, engineering firms taking equity in startups

By Ryan McBride

A contract manufacturer north of Boston has recently grown a venture arm to help startups turn ideas into actual products, with an eye toward sharing the spoils of newly hatched firms once they mature.

Rather than invest venture dollars in startups, Alchemy Ventures LLC has gained equity shares of enterprises in return for product design, engineering and manufacturing services from founding contract manufacturer Baril Corp. in Haverhill.

Through the Alchemy group, Baril is among a growing number of Massachusetts companies — including STD Med Inc. of Stoughton and Natick-based Manifold Products LLC — to evolve from traditional product-development or contract manufacturing shops to firms able to form startups or take an equity stake in their customers.

“Alchemy’s goal is to develop the (startup’s) product far enough along so these entrepreneurs can get a qualified round of funding under much better terms than if they walked into a venture capital firm with an idea on a napkin,” said Dan Baril, chief executive of Baril Corp. and a founder of Alchemy.

In Baril’s case, the launch of Alchemy came after Baril Corp. helped former Wellesley Hills medical devices startup ClozeX Medical LLC develop and manufacture a wound-closure product. Baril negotiated with ClozeX founders to gain a small equity stake in the startup, which was sold for an unspecified sum to the health-care unit of technology powerhouse 3M Co. of St. Paul, Minn. 

Alchemy was formed in 2006, but the venture business went into high gear in early 2008 with Baril’s increased efforts to attract new deals. Thus far, Alchemy has applied its model to three groups of medical devices entrepreneurs in the process of forming startups and a fourth tech company focused on point-of-sale software and hardware for restaurants. Baril declined to specify the name and product focuses of the three medical devices startups in Alchemy’s portfolio, citing confidentiality agreements. Despite its stake in the restaurant tech startup e-meal LLC, Alchemy is primarily focused on working with medtech startups developing single-use, or disposable, devices, he said.

Industry insiders spoke favorably of Baril’s foray into the venture business. “If you are seeing deals (as a contract manufacturer) and you’re seeing deals early enough, why wouldn’t you want to make some investments in some of the good deals?” said Ronald Murphy, vice president of finance for STD Med, a contract medical device maker that was an early adopter of the spinout model, launching startup AngioLink Corp. to develop a novel vascular closure device in 1999. Minneapolis-based medical devices giant Medtronic Inc. acquired the startup in 2004 for $45 million. Since AngioLink, STD has formed medical devices startups Arthrosurface Inc., Spirus Medical Inc. and Cardiosolutions Inc.

As Alchemy and Baril plan to do, privately held STD (short for Stoughton Tool & Die) developed its startups’ initial products and attracted early-stage investors to fund the growth of each enterprise. STD last year revealed that it would sell a stake of its manufacturing business in part to raise money to increase its investment in developing in-house products. Murphy said no such deal has closed. 

In the electromechanical business, product-development firm Manifold seeks to acquire technologies outright and to tap angel investors to form startups. Manifold, founded in 2003, has already hatched three electronics firms in Massachusetts: OutSmart Power Systems LLC, Emo Labs Inc. and Newton Peripherals LLC.

At Baril Corp., the venture business has been more than three decades in the making. CEO Baril said the company, founded in 1972 by his father, Richard Baril, began by making tools for the packaging industry, and eight or nine years ago changed from tool-making to product manufacturing for aerospace and medical devices. 

Baril has attracted medical devices veterans to its board of advisors, including Hooks Johnston, a former senior executive at British medical devices firm Smith & Nephew PLC. Both Johnston and Baril serve on the steering committee of the Massachusetts Medical Devices Development Center (M2D2), a group sponsored by the University of Massachusetts, to aid new medtech entrepreneurs. 

Edward “Ned” Williams, a partner at VC firm Brook Venture Partners in Wakefield and a fellow M2D2 committee member, said Baril’s Alchemy could add value to medical devices startups. “If the prototyping is done and you’ve taken some of the development risk out of (the startup),” he said, “it’s definitely more valuable.”