Planning for a Tech Exit
Venture Atlanta is the premier technology conference in Georgia that connects our entrepreneurs with the capital they need to grow their businesses. Companies who have presented at Georgia venture conferences have raised well over $1 BILLION. This guest post by Christian Devlin provides valuable insight from one of the panels on planning for a tech exit.
On the first day of Venture Atlanta this week, I had the pleasure of co-hosting the 2nd annual tech panel with King & Spalding during which I co-moderated a panel discussion entitled “Planning for a Tech Exit” with the acclaimed Silicon Valley tech attorney, Judy O’Brien. Our all-star panel included two venture capitalists from Silicon Valley, who traveled from the West Coast to participate in our event, two CEO’s who have built and exited tech companies here in Atlanta, and two M&A advisors, one of whom is based in the Valley.
As I did with my post, “Raising Venture Capital on the West Coast”, for the Atlanta Tech Village last year, I’m going to share with you some of my key takeaways from this fantastic discussion.
Bob Ghoorah, Managing Director of Columbus Nova Technology Partners (Portfolio companies include Rhapsody, Zoomdata, and 42Floors):
VC's are looking for white space in the market when investing in a Series A, and are willing to pay up in early stages if they really want to be in a business. At the growth stage, they're more focused on financial metrics
Be thoughtful in raising capital and valuations, always planning for the next round to be an up round. This impacts the kind of investor you bring it at various stages.
Lisa Lambert, Vice President & Managing Director of Intel Capital (has invested in and managed exits from VMware (IPO), MySQL (acquired by Sun), Endeca (acquired by Oracle), and many more):
On the importance of strategic partnerships: strategic partnerships are often incredibly important and worth fostering. Pre-existing business relationships/partnerships precede the M&A process in many cases. In fact, many of Lisa’s acquisitions occurred via pre-existing strategic relationships.
On why companies like Intel are active venture investors: strategics have a lot of cash on the balance sheets and need to put it to work to grow.
Misalignment of shareholder interest can become an issue. Early investors want a liquidity event while later investors may want to stay in. Management needs to understand the different interests of its investors.
Mike Cote, GM of Dell SecureWorks (Grew and led SecureWorks to an exit to Dell in 2011, now runs SecureWorks as a business unit within Dell):
On how to find success as a growing tech company: employees, clients, shareholders have to be taken care of along the way. Line up the right investors with where you want to take the business. Some are focused on financials, others are focused on growth (not profit).
Cash flow is huge. There is a perception that once you hit 5 million, you're a real company. At 5-10M in revenue, you should have a defined process in place.
Paul Judge, Chairman of Pindrop Security, Co-Founder of Tech Square Labs (has built and exited multiple tech companies in Atlanta):
A lot of people in Atlanta build to be an acquisition target, while they should build to be a stand alone company. Focus on building a billion dollar company but give your company a chance to hit a home-run by stealing one base at a time.
On when to sell a company, companies in a particular space are often acquired in waves. When you see your competitors being acquired, don’t wait until the end. The last companies standing are often acquired for less than capital in.
Tricia Salinero, Managing Director & Co-Lead of Software and Internet Services at Woodside Capital Partners (has completed nearly 70 technology mergers and acquisitions valued at over $4B over 20 years):
Tech acquirers look at core IP, distribution channels, and talent within the company; what acquirers focus on differs at every company (team, tech, financial, etc.)
Smaller deals are the bulk of the transactions, and many don’t get announced publicly.
Across the tech industry, Google has been the top acquirer for the past 5 years. Yahoo has done more deals in the past few years; in many cases, purchasing talent. VC funds of strategics have invested more actively recently (in terms of numbers of deals) than private VCs.
Companies are often valued more highly before they have revenue than afterwards because once they have $5-10 million of revenue, they are valued using financial metrics. Before they have revenue, valuations are in the eye of the beholder.
Bob Casey, Managing Director & Head of Software & Systems at Suntrust Robinson Humphrey (focuses on enterprise software and has executed $20B+ of domestic cross-border transactions for founder-owned / sponsor-backed companies):
On what acquirers are looking for in acquisition targets: Acquirers are looking for solid companies. Build your company as if it’s never going to be sold. Put another way, build a company to be bought, not sold. If you build a company that fills a gap for a strategic, you are a target.
On what’s driving the market? All strategics are looking for growth. The top 10 software and systems control the cash and they need to put that cash to work.
So, what are your take-aways from this? Here are mine:
Focus on building a company that can grow and prosper on its own, instead of trying to build a company with the primary goal of selling it
Build and foster strategic relationships and partnerships. Relationships with respected companies bring credibility.
When starting a company, look for white space in the market
Ensure that you choose your investors carefully - having aligned goals can be critical to your growth
I’d like to leave you with a few insights thst Judy O’Brien stressed to all the entrepreneurs in the room….be thoughtful when you raise capital. If you operate leanly in the early days, raising money as you achieve major milestones (and therefore at higher valuations), you and your investors will all do better in an exit. Also, be thoughtful about the timing of a sale and don’t loose sight of the impact of dilution. You, your team and early investors may make more money by selling at a lower price early than building a company and selling at a higher number later, and you will avoid a lot of risk (but may miss some of the fun of building a company). Selling companies can be tricky. Be sure you have experienced advisers at all levels (board, bankers, lawyers, accountants) throughout the process.
For more on this topic, reach out to Christian Devlin on LinkedIn and Twitter (@cdev20) and read his blog TheTechReal.com. You can also reach out to Judy and her team at King & Spalding (Bill Roche in Atlanta and Matt Stewart or Laura Bushnell in Silicon Valley).