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How to prepare for M&A, your most likely exit avenue
Despite the plentiful headlines about mega billion-dollar M&A transactions, record IPOs and the rapid growth of SPACs, small deals will continue to be the most likely exit for the vast majority of tech startups. In the over 30 years I’ve worked on M&A at White & Case, Barclays and my current firm Ascento Capital, I have seen too many startups that are not prepared for an exit via a merger or sale. This article will provide specific recommendations on how to prepare your startup for M&A.
While it is good to strive for a billion-dollar-plus sale, a successful IPO or a SPAC deal, it is practical to prepare your startup for a smaller transaction.
Global M&A hit record highs in the second quarter with a total deal value of $1.5 trillion, but smaller transactions vastly outnumber mega billion-dollar deals. The U.S. saw a total of 16,672 deals in the year ended June 31, but only 583, or 3% of that number, were valued at more than a billion dollars (FactSet). The IPO market is healthy again, but M&A still represents 88% of exits: So far this year, there were 503 IPOs and 5,203 deals, according to the CB Insights Q2 2021 State of Venture Report. After the SEC announced in early April that it was considering new guidance on SPAC IPOs, the rate of new SPAC issuances fell by around 90%.
While it is good to strive for a billion-dollar-plus sale, a successful IPO or a SPAC deal, it is practical to prepare your startup for a smaller transaction.
Here are a few recommendations that will prepare your startup for an M&A exit:
Track M&A in your subsector
Set up an alert on Google News for M&A activity in your subsector. For example, if your startup is in the IoT subsector, search for “IoT acqui” and this will pick up news stories on acquisitions in the IoT space. Save the search so you can go to Google News on a regular basis. Also track your closest competitors on Google News, particularly to see who is selling their company.
Prepare a list of likely acquirers
Prepare a list of the companies or firms most likely to buy your startup. This list should include domestic and international companies, businesses in non-tech industries, private equity firms and their portfolio companies, as well as VC-backed companies. Track these likely acquirers on Google News as well.
Consider executing a parallel track
Consider approaching the top 10 likely acquirers when you are raising the next round of capital. If your startup gets M&A offers and VC term sheets at the same time, this will provide your board of directors choices on the path ahead. Knowing the M&A activity in your startup’s subsector and the 10 most likely acquirers will impress VCs and increase the chances of being funded.
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To sell or not to sell: Lessons from a bootstrapped CEO
The clock begins ticking on a startup the day the doors open. Regardless of a young company’s struggles or success, sooner or later the question of when, how or whether to sell the enterprise presents itself. It’s possibly the biggest question an entrepreneur will face.
For founders who self-funded (bootstrapped) their startup, a boardroom full of additional factors come into play. Some are the same as for investor-funded firms, but many are unique.
Put happiness at the center of the decision, and let your intuition — the instincts that made you the person you are today — be your guide.
After 18 years of bootstrapping a BI software firm into a business that now serves 28,000 companies and three million users in 75 countries, here’s what I’ve learned about myself, my company, about entrepreneurship and about when to grab for that brass ring.
Profitable or bust
Starting a software company 7,900 miles southwest of Silicon Valley requires some forethought and not a small amount of crazy. When we opened, it didn’t occur to us that one could have an idea and then go knock on someone’s door and ask for money.
Bootstrapping forced us to be a bit more creative about how we would go about building our company. In the early days, it was a distraction to growth, because we were doing other revenue-generating activities like consulting, development work, whatever we could find to keep ourselves afloat while we built Yellowfin. It meant we couldn’t be 100% focused on our idea.
However, it also meant we had to generate income from our new company from Day One — something funded companies don’t have to do. We never got into the mindset that it was okay to burn lots of cash and then cross our fingers and hope that it worked.
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The current narrative explaining why tech stocks are getting hammered
This morning the tech-heavy Nasdaq Composite index is off 2.34% after falling yesterday. Shares of Tesla are off more than 6% today, now mired in a bear-market correction after reaching new all-time highs earlier this year. Apple stock is worth $122.02 per share, down from its recent highs of more than $145.
After a long period of time when it felt like tech stocks only went up, the recent correction is starting to feel material.
There are other ways to measure the selloff. Bessemer’s cloud index is off 4.5% today, after falling over 5% yesterday. And the now-infamous $ARKK, or ARK Innovation ETF that many investors have used as a proxy for growthy tech stocks, is off 6.6% today after falling 5.9% yesterday.
Hell, even bitcoin has taken a pounding in the last few days, after its recent, relentless rise.
What’s driving the rapid turnaround in the value of tech companies, tech-focused indices and tech-adjacents, like cryptocurrencies? Not merely one thing, of course, in an environment as complex as the world’s capital markets. But there is a rising narrative that you should consider.
Namely that the money-is-cheap-and-bond-yield-is-garbage-so-everyone-is-putting-money-into-stocks trade is losing steam. As some yields rise, bonds are become more attractive bets. And as COVID-19 vaccines roll out, some investors are pushing their stock-market bets into categories other than tech.
The result is that the landscape of value is shifting; the winds that were at the back of every tech company are receding, at least for now. If the changed weather persists until the very investment climate that tech stocks exist in reaches a new equilibrium, we could see the appetite for tech IPOs lessen, late-stage private valuations for startup shares dip, and more.
Here’s CNBC from earlier today on what’s changing:
Stocks dropped again on Tuesday as tech shares continued to tumble in the face of higher interest rates and a rotation into stocks more linked to the economic comeback.
Here’s The Wall Street Journal on the same theme, from yesterday:
The lift in yields largely reflects investor expectations of a strong economic recovery. However, the collateral damage could include higher borrowing costs for businesses, more options for investors who had seen few alternatives to stocks and less favorable valuation models for some hot technology shares, investors and analysts said.
And here’s Barrons from this morning, noting that what we’re seeing at home is not merely a U.S. issue:
While members of the NYSE FANG+ index including Tesla, Facebook and Apple have dropped sharply as the yield on the 10-year Treasury has climbed, the sector also is on the retreat overseas.
The market could snap back. Or not. It’s worth watching stocks for the next few days.
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How this startup built and exited to Twitter in 1,219 days
By the summer of 2016, Marie Outtier had spent eight years as a consultant advising media agencies and martech companies on marketing growth strategy.
Pierre-Jean “PJ” Camillieri started as a music software engineer before joining one of Apple’s consumer electronics divisions. Inspired by Siri, he left to start Timista, a smart lifestyle assistant.
When the two joined forces to co-found Aiden.ai, the combination was potent — one was a consummate marketer, the other, a specialist in machine learning. Their goal: create an AI-driven marketing analyst that offered actionable advice in real time.
Humans who manage ad campaigns must analyze vast amounts of numbers, but Outtier and Camillieri envisioned a tool that could make optimization recommendations in real time. Analytics are vast and unwieldy, so theirs was a no-brainer proposition with a market crying out for solutions.
The company’s first office was at Bloom Space in Gower Street, London. It was just a handful of hot desks and a nearby sofa shared with four other startups. That summer, they began in earnest to build the company. A few months later, they had a huge opportunity when the still 100% bootstrapped company was selected for Techcrunch Disrupt’s Startup Battlefield competition.
Interviewed by TechCrunch, they explained their proposition: Marketers wanted to know where a digital marketing campaign was getting the most traction: Twitter or Facebook. You might need to check several dashboards across multiple accounts, plus Google analytics to compile the data — and even if you conclude that one platform is outperforming the other, that might change next week as users shift attention to Instagram, potentially wasting 60% of ad spend.
Aiden was intended to feel like just another co-worker, relying on natural language processing to make the exchange feel chatty and comfortable. It queried data from multiple dashboards and quickly compiled it into flash charts, making it easy to find and digest.
Eventually, instead of managing 10 clients, marketing analysts would be able to manage 50 using dynamic predictions as well as visualizations. Aiden incorporated Outtier’s expertise into its algorithms so it could suggest how to tweak a Facebook campaign and anticipate what was going to happen.
Was appearing at Disrupt a significant moment? “It was a big deal for us,” says Outtier. “The exposure gave us ammunition to raise our first round. And being part of the Disrupt Battlefield alumni gave us many meaningful networking and PR opportunities.”
A few weeks later the company had raised a seed round of $750,000. But not without difficulty. By this time Outtier was in the latter stages of pregnancy. Raising money under these circumstances was difficult, but, she says, “it can be done. It’s tougher than ‘normal circumstances.’ It’s a bit like running a marathon, but with a fridge on your back.”
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Verizon’s BlueJeans acquisition is about more than the work-from-home trend
It would be easy to assume that Verizon’s purchase last week of video-conferencing tool BlueJeans was an opportunistic move to capitalize on the sudden shift to remote work, but the ball began rolling last June and has implications far beyond current work-from-home requirements.
The video-chat darling of the moment is Zoom, but BlueJeans is considered by many to be the enterprise tool of choice. The problem, it seems, is that it had grown as far as it could on its own and went looking for a larger partner to help it reach the next level.
BlueJeans started working with Verizon (which owns this publication) as an authorized reseller before the talks turned toward a deeper relationship that culminated in the acquisition. Assuming the deal passes regulatory scrutiny, Verizon will use its emerging 5G technology to produce much more advanced video-conferencing scenarios.
We spoke to the principals involved in this deal and several industry experts to get a sense of where this could lead. As with any large company buying a startup, outcomes are uncertain; sometimes the acquired company gets lost in the larger corporate bureaucracy, and sometimes additional resources will help grow the company much faster than it could have on its own.
What is BlueJeans?
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All the weird stuff that happens to you after you close your round
Matt Rodak is the founder and CEO of Fund That Flip, a market-leading residential real estate investment platform.
We just closed our $11 million Series A financing, and within 15 minutes of the news hitting the wire, the weirdness began. It turns out that once you announce to the world that you have money, everyone wants a piece. Some want to earn your business, some actually want your business, some want you to move your business, and others just want to straight-up steal your business.
These are the weird things that no one tells you will happen after you close your round that I’m hoping you will find helpful, insightful and maybe spare you a headache or two.
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Eventbrite’s IPO should encourage tech companies to get out while they still can
Eventbrite is having one hell of a debut on the New York Stock Exchange this morning.
Shares of the ticketing startup, founded back in 2006, have shot up over 50 percent in trading on the NYSE. After pricing its shares at $23 in its initial offering, investors have bid up the stock to a whopping $37, putting the company’s valuation at nearly $3 billion.
$EB prices $23, opens $36 pic.twitter.com/cYgCuqbmh8
—
(@hunterwalk) September 20, 2018
That’s well above where the ticketing company had hoped to be when it initially set terms for the public offering earlier this month.
The company started trading priced above its share price and nearly doubled its valuation. And if Eventbrite can do it, really almost any later-stage startup should be thinking about the public markets right now.
Performance for the San Francisco ticketing company has been… somewhat lackluster. As we noted when wrote about the company’s offering:
Eventbrite is not profitable and has been losing money since 2016. According to the documents, it posted losses of $40.4 million in 2016 and $38.5 million in 2017. In the first six months of 2018, the company has posted a net loss of $15.6 million. The company is making changes to make up for some of those losses — at the end of August, it announced a new pricing scheme for its customers using the “Essentials” package.
Its revenue is rising though, increasing from $133 million in 2016 to $201 million last year.
Since the beginning of the year tech public offerings have been on a tear. As The Wall Street Journal noted in July, 120 companies had raised $35.2 billion on U.S. exchanges at that point — the best showing for public markets since 2014 and the fourth busiest year since 1995, according to the financial data and analysis service Dealogic.
We’ve noted before that it’s a bit mind-boggling that investors and their portfolio companies wouldn’t be taking more advantage of these heady times. Nothing lasts forever (not even cold November rain) and certainly not markets that have been this bullish for this long.
Some of the reasoning is likely thanks to a market that’s still awash in private equity, sovereign wealth and late-stage dollars. SoftBank has hundreds of billions to invest; private equity firms are beginning to look at growth-stage companies the way that I look at banana cream pies from Cassell’s; and venture firms are beefing up big time to keep up with the Joneses (or in this case, the Blackstoneses).
However, the fun is certainly going to come to an end, and likely sooner rather than later. Early-stage investors are beginning to dole out their advice on lowering cash burn (something that happens every time they see the beginning of the end of the beginning of the end).
Low burn rates have gone out of fashion, but I expect we’ll be reminded very quickly at the beginning of the next downturn why they’re so valuable for early-stage startups.
— Sam Altman (@sama) September 19, 2018
With that in mind, later-stage companies should be looking for the exit signs wherever they can find them. Right now, that’s an IPO window that seems to be wide open.
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Zendesk expands into CRM with Base acquisition
Zendesk has mostly confined itself to customer service scenarios, but it seems that’s not enough anymore. If you want to truly know the customer behind the interaction, you need a customer system of record to go with the customer service component. To fill that need, Zendesk announced it was acquiring Base, a startup that has raised over $50 million.
The companies did not share the purchase price, but Zendesk did report that the acquisition should not have a significant impact on revenue.
While Base might not be as well known as Salesforce, Microsoft or Oracle in the CRM game, it has created a sophisticated sales force automation platform, complete with its own artificial intelligence underpinnings. CEO Uzi Shmilovici claimed his company’s AI could compete with its more well-heeled competitors when it was released in 2016 to provide salespeople with meaningful prescriptive advice on how to be more successful.
Zendesk CEO Mikkel Svane certainly sees the value of adding a company like Base to his platform. “We want to do for sales what Zendesk has already done for customer service: give salespeople tools built around them and the customers they serve,” he said in a statement.
If the core of customer data includes customer service, CRM and marketing, Base gives Zendesk one more of those missing components, says Brent Leary, owner at CRM Essentials, a firm that keeps close watch on this market.
“Zendesk has a great position in customer service, but now to strengthen their position with midmarket/enterprise customers looking for integrated platforms, Base adds a strong mobile sales force automation piece to their puzzle,” Leary told TechCrunch.
As he points out, we have seen HubSpot make a similar move with HubSpot Apps, while SugarCRM, which was recently sold to Accel-KKR, could be shopping too, with its new owner’s deeper pockets. “This is almost like a CRM enterprise software Hunger Games going on,” he joked. But he indicates that we should be expecting more consolidation here as these companies try to acquire missing pieces of their platforms to offer more complete solutions.
Matt Price, who previously had the title of senior vice president for product portfolio at Zendesk will lead the Base team moving forward.
Base was founded in 2009 and boasts more than 5,000 customers. It’s worth pointing out that Base was already available for sale in the company app marketplace, so there was some overlap here, but the company intends to try to move existing customers to Base, of course.
Zendesk has indicated it will continue to support all Base customers. In addition, Base’s 125 employees have been invited to join Zendesk, so there will be no blood-letting here.
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There’s no shame in a $100M startup
The era of unicorn startups has created a distorted view of entrepreneurial success. All the talk about billion-dollar exits has inflated the numbers that define a win. Starting and selling a company for $100 million dollars is an outlier event in terms of pure entrepreneurial probability, but such outcomes are viewed as well short of success in many corners of today’s startup world. Read More
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The enterprise strikes back
You might have missed it amidst Snap’s noisy consumer debut, but enterprise-facing IPOs put points on the board during the first quarter of 2017, even more than their consumer-focused siblings. In fact, the group may be set to dominate the year’s offerings. For startups working to sell to large corporations, their investors and their tens of thousands of employees, it’s… Read More
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