Stories| Exit Planning for a VC backed company
This is the fourth in a series of posts exploring M&A for VC backed companies by Abhinaya Konduru, M25 & Nicole Bentz, Flyover Capital.
Post 1 : Why & What? ; Post 2: Acquirers ; Post 3: Checklist
Previously, Nicole talked about why exit planning matters, types of exit paths, types of acquirers, and why companies get acquired. I went through a checklist of item that founders should keep in mind at various stages. In this post, I will tell some stories about M&A activity that founders shared with me.
PE firm consolidating competitors
Company: Midwest, raised a seed round, 2 years since their launch
A PE firm reached out to the company saying they are interested in learning more about them and that they are looking to buy all competitors in their space. The Company and the PE firm agreed to start their conversations.
The PE firm asked for a lot of data that included details of their top customer names, amount etc., The founder was fearful that they could use their data against them or a competitor. It’s because the founder knew that the PE firm was talking to all of their competitors.
The founder didn’t want to let go of the control that they had on their data if things didn’t work out in the end. Even if an NDA is signed they wouldn’t have a way to track if the other acquired company uses it. So the founder negotiated to release the data according to phases. The founder came up with the phase plan to which the PE firm agreed to.
During phase one, they would share their data without the customer’s names and used percentages to communicate various amounts of data.
Note: If they are not budging, then consider if they are engaging only to get data or if they are serious about conversations.
Once the founder completed phase one, it was clear that the PE firm was not a fit for them. This was because the PE firms didn’t value growth as much as a VC firm did.
Once the acquisition offer was off the table, the founder still wanted to maintain the relationship. They would see/meet each other at various industry events and have coffee catch ups once in awhile.
Learnings:
- When opportunities like this present themselves, it’s important to still maintain focus on business.
- Assessing an M&A opportunity is critical. Use your existing investor network to gain some insights in the seriousness of the opportunity.
- Protect the data that is being shared. Share details in phases.
A Merger with a competitor
Company 1: Midwest, raised a seed round, 5 years since their launch
Company 2: West Coast, raised a seed round, 7 years since their launch
Company 1 and Company 2 merged together after working together and sharing similar customer base. Before the merger both founders got together often to share their learnings and best practices together. Both founders met through a mutual connection in the industry.
Over the years, both of their customers asked if they worked with the other company. Originally, the companies started talking about repurchasing agreements but ultimately saw the opportunity to grow vertices and pursued merging as an option.
They also saw the market mature and wanted to focus on building a strong product and tech. They brought this idea back to their investors to get feedback. Then pursued to come up with terms which was “more of an art than science.” Both companies went through a 3rd party valuator to figure out the valuation that their lawyers recommended.
After going back and forth with lawyers, they both went back to their investors once they had the numbers and how the cap tables would merge together.
Once the merger was done, they brought everyone together. Overall, the team is getting along well and saw an increase in sales which exceed the numbers that they set together.
Learnings:
- Structures of ownership (founders and investors) are not designed for easy collaboration. They are designed to protect more than anything.
- The more everyone gets together on the business before the lawyers are helpful.
- A checklist of everything before is really helpful but hard to put it together.
- Make sure there is enough runway in place before pursuing M&A. A lot of mergers don’t end up going through.
If you want to share your story, email (firstname at m25vc dot com) or dm me.In the next post, I will tell two more stories from founders who shared about their M&A activity.
