VC Exit Through M&A - Aleksey Krylov

1. VC EXIT: M&A 101
September 20, 2023
Tialma
www.tialma.com

2. Aleksey Krylov
• 20+ years of experience
• Tialma, Lead Consultant
• FTERA Advisors, Managing Director
• Last 6 years, strategic CFO for VC-
backed private/public companies with
focus on strategic transactions
(fundraising, M&A, JV)
• 12 years with 4 different family
offices: VC, LBO, structured and
distressed investing: 25 deals,
$500M+ invested
• Started career in investment banking
• MBA Columbia Business School,
BS Babson College
• aleksey@tialma.com
2

3. TOC
3
Arete Labs case study
Exit Options: M&A
BOD
LOI
Alternatives
Valuation

4. Disclaimer
4
The numbers presented in the deck and the model are not the
actual historical numbers nor they are projected numbers
reviewed or endorsed by the company
This exercise is for illustrative and educational purposes only
This is not a sale or solicitation to buy the company’s securities
or its services/products

5. Case Study: Arete Labs (AL) Business
At-home blood-testing with patient-centric data analysis
Focus on preventative care, early detection,& chronic disease monitoring
Subscription-driven business model
5

6. Case Study: Arete Labs
Feb 2020
Frank Far launches and invests
$50K (pre-seed, SAFE)
May 2020
$150K
SAFE (seed)
June 2021
$1M
Series A
Dec. 2022
$6M
Series B
September 2023
$50M
Purchase offer /M&A exit
6

7. ($5,000,000)
$0
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$35,000,000
2020A 2021A 2022A 2023E 2024P 2025P 2026P
Revenue
$40,000,000
Steady growth
EBITDA
AL Financial Snapshot
Historically profitable
Gross profit ~30% as – with
investments in cost-down,
can reach ~60%
Clean balance sheet/no
debt/no convertibles

8. Arete Labs M&A Offer
8
Frank had drinks last night with Peter, VP of BD for a strategic
buyer, Ripe Aid
They are interested in submitting an unsolicited offer to buy the
Arete Labs today for $50M
Frank has called a Board meeting later this afternoon
Should the Board sell the company?

9. Exit Options: M&A
TOC
9
Arete Labs case study
BOD
LOI
Alternatives
Valuation

10. Exit
IPO M&A
10
Merger
Strategic acquisition
Secondary sale (PE, block trade)
LBO/MBO
Rollup
“Going private”
Direct listing
Traditional underwritten IPO
Recap
Reverse merger
SPAC

11. IPO • Some securities are listed on an exchange
• Most commonly common stock
• Can be debt or other securities
• Automatic conversion
• Holders sell at will
• All prefs go into common
• Upside: The stock may run up further post-IPO
• Downside:
• Execution risk
• IPO flat or down
• Automatic conversion ONLY in qualified financing
events (e.g., size or valuation triggers)
11

12. TOC
12
Arete Labs case study
Exit Options: M&A
BOD
LOI
Alternatives
Valuation

13. M&A
• Acquiror (buyer) takes over control of the
Target (seller)
• More likely to be a private /non-transparent
process
• With VC-based companies, trigger
liquidation preferences
• Vesting of options for employee/execs/BOD
• Depending on the offer (cash vs. stock), locks
in the return 13

14. • Synergies /higher growth opportunities
• Corporate identity /mission
• Long-term perspective
• Access to resources
• Likely premium in the acquisition
• Integration challenges
• Loss of independence
• Inflexible deal terms
• Regulatory hurdle /clearance risk
14
Strategics Private Equity
• Financial & managerial expertise
• Capital
• Flexible deal structure
• Leverage may be available
• Focus on growth
• Short-term focus /limited horizon
• Likely loss of control
• Exit pressure
• Reorganization /cost cutting /layoffs

15. 15
Regulatory/
legal/
compliance/documentation
Diligence
Process
Financial: valuation
Operations:
Post-deal integration Others?
Structuring
M&A: Complex Ecosystem

16. Acquiror BOD
Lenders
Investors
i-bankers
Pubco:
arbs
Target Mgt
team
Legal /Special Counsel
Players

17. • Value of the seller
• What is intrinsic value?
• Discrete views on the value
• Valuation analyses*
• DCF
• Comps (trading, deals)
• LBO
• Premium <> Synergies
• Structuring
17
• Sum of parts
• Historical multiples
• Step-up
* Not an exhaustive list

18. 18
Acquiror
BOD
Shareholder
approval?
Financing in
place?
Regulatory
approvals?
Due diligence Target
BOD
Friendly
Hostile
Fiduciary
duties/liabilities
Target
shareholders
Proxy and
shareholder
vote
Tender offer,
then
acquisition
Public vs. Private
Acquiror vs. Target

19. 3D Chess: Regulatory/Legal/Compliance
Securities laws (federal)
State corporate laws (e.g., Delaware)
Exchange rules (e.g., Nasdaq 20%)
Common /case law
IRS regulation/taxation
HSR (anti-trust)
Other gov reviews: CFIUS + industry-specific
19
Hart-Scott-Rodino Committee on Foreign Investment in the United States

20. TOC
20
Arete Labs case study
Exit Options: M&A
BOD
LOI
Alternatives
Valuation

21. Directors Have
Fiduciary Duties
Photo by Alexander Grey on Unsplash

22. Review and assess the
offer
Respond to it (silence
is a response)
Document the process
and resolutions (if any)

23. $50,000,000
Photo by Alexander Grey on Unsplash

24. Does the BOD need advisors?
24
•Legal
•Banker
•Consulting/accounting/technical
(less common)
Director’s Personal Liability Management

25. The format of the offer dictates the
response…
• “Let’s meet” – no specifics
• LOI/T
erm Sheet (non-binding):
some items are clear (e.g., price,
time, process)
• Firm committed offer: yay/nay
response
25

26. TOC
26
Arete Labs case study
Exit Options: M&A
BOD
LOI
Alternatives
Valuation

27. LOI
• Dividends
• Debt
• BOD
• Operations
• Conditions to close
• Governing law
• Other provisions
27
• Structure
• Deal value
• Earnout (?)
• Agreements
• Timeline

28. Assessing the quality of the offer?
• Structure: Cash vs. stock
• Contingencies
• Valuation
28

29. TOC
29
Arete Labs case study
Exit Options: M&A
BOD
LOI
Alternatives
Valuation

30. Alternatives
• Do nothing
• Another buyer (strategic) /term
sheet
• Another buyer /investor
(private equity)
• IPO (S-1/S-4)
30
Can BOD quickly generate any?

31. Exit ???
($5,000,000)
$35,000,000
$30,000,000
$25,000,000
$20,000,000
$15,000,000
$10,000,000
$5,000,000
$0
2020A 2021A 2022A 2023E 2024P 2025P 2026P
Revenue EBITDA
Launch +
$50K
Seed
$150K
Series A
$1M
Series B
$6M

32. Preparedness for alternatives
• Business Plan /Strategy
• Pitch
• Historical financials (audited)
• Projections
• Compliance (IP, regulatory, etc.)
• Data room
IPO
32
Recap
PE/VC
fundraising
M&A

33. TOC
33
Arete Labs case study
Exit Options: M&A
BOD
LOI
Alternatives
Valuation

34. 34
Opening Offer
$50,000,000
2022 2023 2024
Revenue
Rev multiple
$12,803,000
3.9x
$17,667,800
2.8x
$22,304,400
2.2x
EBITDA/CF @30%
CF multiple
$3,737,050
13.4x
$5,439,730
9.2x
$7,062,540
7.1x
EBITDA/CF @50% $6,401,500 $8,833,900 $11,152,200
CF multiple 7.8x 5.7x 4.5x

35. 35
Source: https://finviz.com as of September 19, 2023

36. 36
Unreasonable ask?
1)Ask for margins credit (synergies)
2)Ask for market multiples (15x – 20x CF)
$80,000,000 –
$150,000,000

37. Valuation Football Field
37
$114
$98
$82
$186
$159
CFC 50% EBITDA x 15 $133
$148
$127
$106
$234
$201
$167
$0 $50 $100 $150 $200 $250
Not an unreasonable counter or
valuation ask
CFC 30% EBITDA x 21
CFC 30% EBITDA x 18
CFC 30% EBITDA x 15
CFC 50% EBITDA x 21
CFC 50% EBITDA x 18
Current offer

38. Consideration
COH
Fees
$150,000,000
$9,000,000
($2,000,000)
$157,000,000
$ (9,366,904.11)
Series B Pref
$147,633,096
($1,181,260)
Series A Pref
$146,451,835.62
$ (3,246,810.22)
$ (68,183,016.85)
$ (54,085,684.38)
$ (16,234,047.15)
($4,702,276)
Series SAFE Preferred
Common stock
Preferred B as converted
Preferred A as converted
Options
Consideration
COH
Fees
$80,000,000
$9,000,000
($2,000,000)
$87,000,000
$ (9,366,904.11)
Series B Pref
$77,633,096
($1,181,260)
Series A Pref
$ 76,451,835.62
Series SAFE Preferred $
Common stock $
Preferred B as converte $
Preferred A as converte $
(1,694,923.11)
(35,593,386.55)
(28,234,196.13)
(8,474,613.51)
Options ($2,454,716)
Stakeholder Waterfall
38
Consideration
COH
Fees
$50,000,000
$9,000,000
($2,000,000)
$57,000,000
(9,366,904.11)
Series B Pref $
$47,633,096
($1,181,260)
Series A Pref
$ 46,451,835.62
Series SAFE Preferred
Common stock
Preferred B as converted
Preferred A as converted
Options
$ (1,029,828.64)
$ (21,626,402.13)
$ (17,154,986.89)
$ (5,149,141.95)
($1,491,476)
$ (0.00)
Available
$50,000,000
$80,000,000
$150,000,000

39. Stakeholder Returns
39
2/15/2020
(50,000) $
9/20/2023
18,155,169
Founder
IRR
ROI
$
415%
363.10x
5/15/2020
(150,000) $
9/20/2023
772,371
SAFE Investors
IRR
ROI
$
63%
5.15x
6/15/2021
$ (1,000,000) $
9/20/2023
6,330,402
Series A Investors
IRR
ROI
126%
6.33x
12/15/2022
$ (6,000,000) $
9/20/2023
26,521,891
Series B Investors
IRR
ROI
599%
4.42x
$50,000,000
2/15/2020
(50,000) $
9/20/2023
29,880,327
Founder
IRR
ROI
$
491%
597.61x
5/15/2020
(150,000) $
9/20/2023
1,271,192
SAFE Investors
IRR
ROI
$
89%
8.47x
6/15/2021
$ (1,000,000) $
9/20/2023
9,655,874
Series A Investors
IRR
ROI
172%
9.66x
12/15/2022
$ (6,000,000) $
9/20/2023
37,601,100
Series B Investors
IRR
ROI
1003%
6.27x
$80,000,000
2/15/2020
(50,000) $
9/20/2023
57,239,027
Founder
IRR
ROI
$
608%
1144.78x
5/15/2020
(150,000) $
9/20/2023
2,435,108
SAFE Investors
IRR
ROI
$
130%
16.23x
6/15/2021
$ (1,000,000) $
9/20/2023
17,415,307
Series A Investors
IRR
ROI
253%
17.42x
12/15/2022
$ (6,000,000) $
9/20/2023
63,452,588
Series B Investors
IRR
ROI
2088%
10.58x
$150,000,000

40. Path Forward?

41. What Should the Board Do?
• Reject offer?
• Engage in negotiation to improve offer?
• Explore alternatives (other acquiror? IPO?)
41

42. Scaling Initiatives
• Sales & marketing
• Cost down initiatives
• Product line expansion
• R&D, proprietary products
• Geographic reach
• M&A
• AI
42
These uses of cash
creates “drag”on
profitability, sometime
over the long term
Quick and steady turn to profitability is unusual,
especially for high-growth potential businesses

43. An Opinion
• Untapped potential for the business
• No time to scale
• Incentives for some stakeholders to take the $ while others may prefer to
stay in
• Benefit from longer track record of execution
• Approach to negotiation:
• “Go shop”:
• Seek alternative bids from strategics
• Seek private equity partner and structure a partial sale through a secondary and
possibly new capital investment
• Of strategic, aggressive valuation ask (e.g., $150M) but flexible on timing
/terms (e.g., $70M cash upfront, earnout $50M in 2024, $30M in 2025)
43

44. M&A EXIT
September 20, 2023
Tialma
www.tialma.com
Aleksey Krylov
https:/
/
alekseykrylov.com