Scientific instrument makers weigh the lure of outside money

Small makers of cutting-edge scientific instruments often enable important research advances. But before such firms can help scientists with their discoveries, they need to refine, build, and distribute their tools.

That takes money, and money always comes at a price. Start-ups and even more mature firms that successfully attract outside funds can take advantage of an investment firm’s business connections and make lots of money for everyone. But the loss of control that comes along with that money is not for everyone.

Just as in higher-profile spheres like biotech or software, the investment opportunities in instrumentation fall into three main categories.

Venture capitalists, those that invest in brand-new companies, expect what an entrepreneur would consider very high returns on their successful investments, explains Bruce Belliveau, a principal at Roman Arch Clean Energy Finance. They need big returns on their hits to make up for the many that go south for a variety of reasons, including difficulty in translating technology from lab to commercial product, failed business plans, and poor management.

Midstage investors, generally called private equity firms, have more “modest” expectations, says Belliveau, a chemical engineer who once worked for Dow. They expect about 30–35% returns on investments in firms that are close to proving their value.

And investors in late-stage start-ups, also private equity firms, often look for 20% returns, Belliveau says. These investors inject their cash when firms are starting to sell their wares.

Though Belliveau mostly works in the renewable energy sector, he is an informal adviser to Sean Race, who heads Xigo Nanotools, a 15-year-old company that makes nuclear magnetic resonance–based nanoparticle measurement devices. Xigo’s instruments assess critical particle attributes useful for drug, battery, and electronics developments.

“We’re profitable but small,” Race says. Xigo is about to merge with another company he is not ready to name in a transaction that will add “bulk and diversity to our product portfolio.” Race says Belliveau’s role is to “critique” and make recommendations on Xigo’s business strategy, but Race has mixed feelings about attracting a private equity investor.

Belliveau says well-connected private equity investors can offer “good, high-level guidance on governance and acquisitions.” They can also provide introductions to potential customers and help an instrument maker fine-tune its strategy.

Race isn’t so sure. “I’ve seen more than one instance in which a company languishes after a private equity investment,” he says. But he also acknowledges that the right investor might bring both capital and advice that will allow “everyone to make outstanding returns.”

The universe of private equity firms willing to make multimillion-dollar investments in scientific instrument makers is not large. Among them are SFW Capital Partners and Ampersand Capital Partners.

SFW, for instance, has a long and storied relationship with the scientific instrument industry. Just after the liquid chromatography specialist Waters Corporation spun off from Millipore in 1994 and before it went public in 1995, the firm received a significant investment from investors who went on to form SFW.

Earlier this year, Terrence Kelly, the former president of TA Instruments—the thermal analysis instrument division of Waters—joined SFW as an operating partner. He tells C&EN that he will be looking to invest in small, entrepreneurial instrument firms with $10 million–$200 million in annual revenue “and a lot of potential.” Funding for Kelly’s effort will come from a $350 million pool that SFW raised from investors including foundations, endowments, and family-operated investment offices.

Andrew Cialino, SFW’s head of business development, says SFW “has evaluated hundreds of businesses in the instrumentation sector” as it looks for investment opportunities. SFW brings both money and industry knowledge from operating partners such as Kelly who can help small firms build service and marketing organizations that will “take them to the next level,” Cialino says.

SFW can point to a good track record in the instrumentation field. For instance, in 2011, the firm bought the oil analysis firm Spectro Scientific for what industry sources said was $20 million. It bolstered Spectro operations with four acquisitions and then sold the firm in 2018 to the diversified manufacturer Ametek for $190 million.

Kelly hopes to do much the same. In time, he expects he will be able to build an instrumentation business that would complement and extend the business of a larger instrumentation firm.

Cialino admits that larger firms could buy the smaller companies that SFW targets, but he argues that a smaller company’s owners can benefit significantly from a private equity firm’s resources and experiences. Big organizations often don’t focus on or make the R&D investments needed to grow small divisions, Kelly says. “Smaller product lines tend to get lost or disappear inside a larger organization,” he adds.

At the benchtop mass spectrometer maker Advion, CEO David B. Patteson says he is convinced that private equity firms can help smaller companies develop and realize greater value for their businesses. As an operating partner at Ampersand, he is also a little biased.