Friday, May 13, 2005
Start-up M&A
The Dealmaker Forum Sports Highlights:
Business Models
Business Models
- Open Source is gaining a lot of traction - vertically focused software showing good profitability (e.g., MedSource); of greater concern - how do you tackle outsourcing, IP, and valuation issues
- Installed vs. subscription licensing - pay-as-you-go vendors are also offering a combination of perpetual and term licensing; software as a service is gaining more and more traction
- Foreign players are influencing U.S. product development and business models - based on end-user/consumer usage
- Developing products feature to feature (CISCO, Sony)
- Outsourcing - new employment models
- New Internet (advertising, social software), e.g., Google, Adworks
- Where venture dollars are going (consensus): Open Source software, wireless, digital media, and consumer-facing technologies; other areas (no consensus): VOIP, on-line business services, Internet 3.0, analytics/business intelligence, enablers for on-demand computing
- Areas to avoid: security, enterprise software; digital media is probably on the cusp of being over-invested
- Do more for less: If a start-up might have commanded $35 million in total funding three years ago, VCs expect them to do it for $20 million today
- Companies that get funding: An experienced, hungry, and patient management team, clear market opportunity, defensible IP, a capital-efficient model, and an unrelenting focus (from CEO on down) on getting the sale
- Minimize expansion risks
- Partner with start-ups before you buy
- Test - prove that a market exists
- Weigh ROI to accurately gauge market value
- Minimize internal threats
- Is there internal enthusiasm for the growth initiative?
- Is it sustained by more than one department?
- Look at your market niche and how you can grow to fend off competition and provide complete services, e.g., Adobe and Macromedia
- Balance short-term vs. long-term growth: making quarterly goals vs. growing a product over time
- Don't...
- ... run your company without contemplation of a sale
- ... sell from weakness, not from strength
- ... be piggy: don't expect to double the initial bid
- ... tip your toes in the M&A pond: be in or be out
- Issues that make buyers walk away from a deal: the buyer's lack of comfort that may not stem from anything as dramatic as fraud or misrepresentation, but from a feeling that the seller's processes are not solid
- Valuation
- Sellers tend to use public market comparables or deal comparables: they are easily obtained and tend to increase the valuation
- Buyers prefer to use multi-year discounted cash flow (DCF) analyses
- Structuring deals
- Buyers do small deals for cash, not for shares; if they want IP or a team, they will structure the deal as an asset purchase
- If they are buying an ongoing entity with revenues and customers, they will do a stock purchase
- Unanimity that earnouts don't work and inevitably lead to bad blood and disagreements
