How emerging growth tech companies should prepare for M&A
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Financing Environment and M&A for Tech Startups Chatham and Madison Tech Meetup June 11, 2013 George Abraham [email protected] 917.776.4757 @skiinggeorge
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An overview of the M&A process for VC backed tech companies and how to prepare for an eventual sale of the company. The presentation was given to the joint Chatham and Madison NJ Tech Meetup on June 11, 2013
Transcript of How emerging growth tech companies should prepare for M&A
Financing Environment and M&A for Tech Startups Chatham and Madison Tech Meetup
June 11, 2013
George Abraham [email protected]
917.776.4757 @skiinggeorge
Who is George Abraham… Founder of Rhodium Strategies – advises emerging growth technology companies, their investors, and
the companies who buy them -----
Strategic/M&A advice, business model generation workshops, strategic consulting and independent
valuations -----
Clients include emerging growth technology companies, VC funds & Global Fortune 100
enterprises ------
Board member at Tekserve - $100m revenues, 200 employees
Who is George Abraham (cont)… Founder of SAS Investors, an early stage tech transfer focused VC fund
Led investments in Tacit Networks (sold to Packeteer for $78m); Textronics (sold to Adidas for $36m); Hydroglobe (sold to Graver Technologies) &Protonex (LSE: PTX.L; IPO valued
company at $110m)
Managing Director at the tech i-Bank C.E. Unterberg Towbin; ran US private placements for VC backed companies.
Who is George Abraham (cont)… Selected Clients (present & past)
Valuation Clients (100+ present & past)
First, a note on being a tech entrepreneur
Current Funding Environment
Venture capital activity ‘sluggish’ and continuing to decline in Q1 2013
VC Deal Flow Trend
Q1 2013: $6.3 billion across 753 deals, worst quarter in more than two years
Where is the money going?
Are you going to IPO?
PROBABLY NOT Exit will come from a sale
M&A is the way to go – but still a small percentage
VC backed M&A/IPO 2009-‐‑13
Ratio seems steady at about 15% -‐‑ 20% of VC companies financed per year
Exit as multiple of investment
Less than media would have you believe
More Stats on VC Funding and Exits
Info on exits, IPO and trends in deal terms
Best places to get this info
Fenwick & West Venture Capital Survey www.fenwick.com
Price Waterhouse MoneyTree Report
www.pwcmoneytree.com
Pitchbook www.pitchbook.com
National Venture Capital Association www.nvca.org
Lets talk about M&A
Why do emerging tech companies sell?
Google comes knocking Do they even know you exist?
Timing is perfect; sector is hot Tough to time the market
Shareholder fatigue; can’t raise money Often the case – worst scenario for a good exit
Competition is brutal; Business not growing fast enough; Hard to create channels of dist.
Need a strong partner Board & Mgt plan 1 to 2 years ahead to sell
Smart way to go
If you don’t properly plan for M&A *Run short of cash before closing *Desperate negotiations *Panic among
management team *Tough to hire a banker *Don’t have proper relationships with
buyers
M&A Takes A Long Time
6 MONTHS TO A YEAR – PLUS PREP TIME
How to Plan for M&A Cash in bank to ride out the process
It costs money to sell your company – accountants, lawyers, bankers, travel etc etc
Who are the natural buyers? What other industries could benefit from your business? Build strategic relationships 6 months to a year before starting M&A process Pull together a good team of advisors – early in the process
Is your house in order?
Books & Records up to date? All Shareholder authorizations and Board Minutes?
Equity incentive options issued and papered? Employment agreements, invention assignment
agreements all signed and in one place? Etc etc etc…
Prepare before you pitch Information memorandum Pitch deck Projections (remember the earn-out…) Justification for expected valuation Diligence to support your pitch
Companies are Bought – Not Sold
Good exits happen when someone tries to buy your company rather than you trying to sell your company
Most likely to happen when you have a pre-existing relationship with the buyer
Help the acquirer answer a key question
The Acquirer will want to know: How will buying this asset make my
existing business more valuable, and how will I bring value to the asset I am
buying?
In your pitch – answer this question!
Deal Terms Even if the deal is
for cash, you never get all the cash at closing!
Earn out Holdback – 10% to 15% Employment agrmnt Non-compete
Geiing from LOI to Closing
DILIGENCE A highly invasive process They will ask for shocking amounts of information You have to get it all to them – fast
LEGAL DOCUMENTATION Trees will die for your exit
Tempers will fray at times...
Almost always a hiccup right before closing
Many things can derail closing at the
11th hour Minority shareholders Last minute diligence issues Personality clash Out of control lawyers Loss of a key contract Dispute about distribution of proceeds
Summary Common mistake – not planning and preparing for M&A Getting deals done is hard, time consuming, and requires cash in the bank Proper Prior Planning – helps drive exit value The M&A process is stressful and will distract from your core business activities If you are successful, time at the beach will be well earned
