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How emerging growth tech companies should prepare for M&A


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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

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How emerging growth tech companies should prepare for M&A

  1. 1. Financing  Environment  and  M&A  for  Tech  Startups  Chatham  and  Madison  Tech  Meetup  June  11,  2013 George Abrahamgeorge@rhodiumstrategies.com917.776.4757@skiinggeorge
  2. 2. Who  is  George  Abraham… Founder of Rhodium Strategies – advises emerginggrowth technology companies, their investors, andthe companies who buy them-----Strategic/M&A advice, business model generationworkshops, strategic consulting and independentvaluations-----Clients include emerging growth technologycompanies, VC funds & Global Fortune 100enterprises------Board member at Tekserve - $100m revenues, 200employees
  3. 3. Who  is  George  Abraham  (cont)… Founder of SAS Investors, an early stagetech transfer focused VC fundLed investments in Tacit Networks (sold to Packeteer for $78m);Textronics (sold to Adidas for $36m); Hydroglobe (sold toGraver Technologies) &Protonex (LSE: PTX.L; IPO valuedcompany at $110m)Managing Director at the tech i-Bank C.E.Unterberg Towbin; ran US privateplacements for VC backed companies.
  4. 4. Who  is  George  Abraham  (cont)… Selected Clients (present & past)Valuation Clients (100+ present & past)
  5. 5. First,  a  note  on  being  a  tech  entrepreneur
  6. 6. Current  Funding  Environment Venture  capital  activity  ‘sluggish’  and  continuing  to  decline  in  Q1  2013
  7. 7. VC  Deal  Flow  Trend Q1  2013:  $6.3  billion  across  753  deals,  worst  quarter  in  more  than  two  years
  8. 8. Where  is  the  money  going?
  9. 9. Are  you  going  to  IPO? PROBABLY NOTExit will come from a sale
  10. 10. M&A  is  the  way  to  go  –  but  still  a  small  percentage
  11. 11. VC  backed  M&A/IPO  2009-­‐‑13 Ratio  seems  steady  at  about  15%  -­‐‑  20%  of  VC  companies  financed  per  year
  12. 12. Exit  as  multiple  of  investment Less  than  media  would  have  you  believe
  13. 13. More  Stats  on  VC  Funding  and  Exits
  14. 14. Info  on  exits,  IPO  and  trends  in    deal  terms Best places to get this infoFenwick & West Venture Capital Surveywww.fenwick.comPrice Waterhouse MoneyTree Reportwww.pwcmoneytree.comPitchbook www.pitchbook.comNational Venture Capital
  15. 15. Lets  talk  about  M&A
  16. 16. Why  do  emerging  tech  companies  sell? Google comes knockingDo they even know you exist?Timing is perfect; sector is hotTough to time the marketShareholder fatigue; can’t raise moneyOften the case – worst scenario for a good exitCompetition is brutal; Business not growingfast enough; Hard to create channels of dist.Need a strong partnerBoard & Mgt plan 1 to 2 years ahead to sellSmart way to go
  17. 17. 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
  18. 18. M&A  Takes  A  Long  Time 6 MONTHS TO A YEAR – PLUS PREP TIME
  19. 19. How  to  Plan  for  M&A Cash in bank to ride out the processIt costs money to sell your company –accountants, lawyers, bankers, travel etc etcWho are the natural buyers?What other industries could benefit fromyour business?Build strategic relationships 6 months toa year before starting M&A processPull together a good team of advisors –early in the process
  20. 20. 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 assignmentagreements all signed and in one place?Etc etc etc…
  21. 21. Prepare  before  you  pitch Information memorandumPitch deckProjections (remember the earn-out…)Justification for expected valuationDiligence to support your pitch
  22. 22. Companies  are  Bought  –  Not  Sold Good exits happen when someone triesto buy your company rather than youtrying to sell your companyMost likely to happen when you have apre-existing relationship with the buyer
  23. 23. Help  the  acquirer  answer  a  key  question The Acquirer will want to know:How will buying this asset make myexisting business more valuable, andhow will I bring value to the asset I ambuying?In your pitch – answer this question!
  24. 24. Deal  Terms     Even if the deal isfor cash, younever get all thecash at closing!Earn outHoldback – 10% to 15%Employment agrmntNon-compete
  25. 25. Geiing  from  LOI  to  Closing DILIGENCEA highly invasive processThey will ask for shocking amounts ofinformationYou have to get it all to them – fastLEGAL DOCUMENTATIONTrees will die for your exitTempers will fray at times...
  26. 26. Almost  always  a  hiccup  right  before  closing Many things canderail closing at the11th hourMinority shareholdersLast minute diligenceissuesPersonality clashOut of control lawyersLoss of a key contractDispute aboutdistribution of proceeds
  27. 27. Summary Common mistake – notplanning and preparing forM&AGetting deals done is hard,time consuming, andrequires cash in the bankProper Prior Planning –helps drive exit valueThe M&A process is stressfuland will distract from yourcore business activitiesIf you are successful, timeat the beach will be wellearned
  28. 28. THANK  YOU!!! George AbrahamRhodium Strategiesgeorge@rhodiumstrategies.com917.776.4757@skiinggeorge