Global Themes

On Globalization & Venture Capital

The Hard & Sexy bit of Venture Capital

Over the last few months, I have been thinking a lot about venture-backed exits and M&A … Exits themselves are not rocket science…but executing one is, I think, a fine art…Not many are good at it and I am trying to figure out what makes a company (or an investor) better than others in engineering a valuable exit for itself (themselves). 

As I mulled on this, I came across several interesting posts in a random trawl of what fellow VC bloggers had to say on this topic. 

First, Ray Wu. Ray leads HP’s venture management organization and blogs on interesting venture and technology trends and start-ups. I came across this post on his blog – “Exit strategy for technology companies”. 

Ray mentions that: “Overall, the general ratio is 20:1, highly tilted towards M&A”. He reckons that SOX (and related costs) make it even harder these days for most start-ups to consider listing for an IPO – of course you could always list it on a foreign exchange such as AIM (see “NASDAQ, AIM and IPO…”). 

He says, “…If a company is structured for M&A exit, then it should be positioned correctly up front, be really careful with venture funding intake, stay narrowly on product/service focus and excel, and try to establish a defensible position through patents and customer base.” 

This is fine advice. Too often companies look at M&A as just another “exit” option – and sometimes as the “only” exit option. 

In the first case, they are rarely strategically positioned to precipitate an offer from a potential acquirer. Not only should start-ups be correctly positioned upfront (as Ray mentions above) they also need to be very active in seeking partnerships, OEM agreements, joint marketing programs and joint development opportunities with strategic partners and acquirers well before there is an “exit situation” – this rarely happens…and unsurprisingly, start-ups find it extremely “hard” to get noticed amidst the noise of a large corporate machine… 

This is so blindingly obvious once you say it that I wonder why investors don’t make this a matter of discussion at every Board meeting. 

In situations where start-ups are faced with an M&A as the only “exit-option”…it is usually too late and there is almost zero likelihood of salvaging any value from the investment. 

Next I came across Tali Aben’s blog. Tali recently wrote about a keynote interview that Russ Garland, editor of Editor, Venture Capital Analyst had with Sandeep Johari, HP’s Vice President of Strategy & Planning at the Enterprise Ventures Conference. 

In the interview, Sandeep had this to say in response to the question (from Tali’s blog): 

How does a company go about getting HP’s attention?”  

OEM is an excellent way to work. Businesses that OEM with multiple vendors create a co-dependency, which creates a reason for one of them to own the IP. What companies need to think about (is) – how can they form a partnership? How do you work with these larger vendors in a synergistic way? Engagement out in the field, where you partner with the sales force with no commercial agreement is very effective. Riding that larger elephant is a great business model.  Most companies don’t do that.  Most just want HP to take product and ship into their channel – that’s not a sustainable business model for HP. 
Larger companies are getting much smarter about it.  HP doesn’t like to OEM unless it really benefits them in some way.  In every deal, they extract additional value (equity position), having some rights of first refusal, first offer, etc. something that protects their interests as well. 

Then I stumbled across Seth Levin’s blog with this series of posts. Seth writes in an engaging style and there is a lot of good stuff on his blog….but my personal favourite on M&A was this post: “Getting Bought vs. Selling”. 

Some points that I felt were critical:

  • it’s much easier to have a company get bought than it is to sell… 
  • Getting bought means that someone comes to you.  Selling means you go to them.  The former results in a more motivated buyer, an easier (and faster) process for rounding up competitive bids and a higher price.  The latter is a pain in the ass…
  • …companies think too late in the game about their exit and as a result end up as sellers.  An ongoing conversation at companies should be the list of possible buyers and the right ways to get close to them. 
  • The right time to do this is when you don’t need an exit.  The wrong time is when you’re got 6 months of cash left and need an out.

As Seth said, it’s stating the obvious but certainly bears repetition. Seth also has a post on his blog by Daniel Benel (earlier with Lehman Brothers and currently a corporate development exec at Verint Systems) Daniel had this to say about acquisitions and M&A from an acquirer’s perspective (excerpts/ main points): “Below are three topics on my mind related to acquisitions from a corporate development perspective

  • The Hockey Stick Projections – Hockey Stick Financial Projections did not die with the bubble’s burst…It is more likely than not nowadays, when I receive a book from a banker selling a technology company, that the financial projections show jaw-dropping out-year growth. The most noted reason for the turbocharged numbers: The Market. The Market is hitting a “sweet spot,” or the company is in a sweet spot and the market is about to develop a sweet tooth. These saccharine solution sellers expect, of course, to be valued off of forward numbers. My common response to wild growth projections is to advise the company not to sell. If management of a selling company believes that they can accelerate growth dramatically over the next 12 months, why don’t they prove the business plan and come back to the merger market with a significantly higher value? At this point in a discussion some sellers choose to revise their outlook. Other sellers claim that the projections are based on “what the company can do on a pro forma basis,” that is, when combined with “your more significant resources.” (I’ll discuss that in the “We Don’t Pay for Synergies” section.)
  • We Don’t Pay For Synergies – Often stated as an acquisition truism, but not always true. In general, it is synergy that motivates an acquirer’s interest in a given target to begin with and not something for which a buyer is willing to pay extra…
  • Overboard Competitive Concerns – Acquisitions often occur between competitors. This is natural, particularly in early stage markets that are in a consolidation phase…Sellers must recognize early on that they will have to accept the risk of sharing sensitive competitive information with potential acquirers in order to get a deal done. Some data, though, may be deemed so sensitive that particular workarounds need be put in place in order to make diligence acceptable for both sides. Sometimes a two-stage approach to diligence (deferring highly sensitive material to when the deal feels more certain) can resolve concerns. Sometimes competitive concerns kill a transaction, or at least slow it down to a degree that momentum is lost, which is a topic to be discussed in a subsequent post entitled: “Don’t Lose Momentum.”

Finally, another one from Seth: “When should you sell your business 

I would be very interested to hear from readers on their experiences and take-aways…particularly from those who have been through a successful (or a not so successful) exit. 

I will also try and upload some interesting M&A statistics that I came across recently on what’s been happening in the tech acquirers’ universe..

October 6th, 2006 Posted by | Entrepreneurship, Venture Capital, What VCs really do | no comments

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