Confessions of a Corporate Dealmaker

The IPO Market is Right Where it Should Be

Catching up on my reading of some of the trade rags I get yielded this yesterday -

From the head of a venture industry trade association:

For the IPO market to improve, we need relief from certain hurdles associated with the Sarbanes-Oxley Act, but we also need an investing public that is bullish on technology.

SOX is not the problem, companies going public too early, missing their numbers and going belly-up was the problem (unless you want to blame the investing public for having long memories).  Looking at the multiples of leading public tech and bio-tech companies compared to other sectors, I would say that the public is pretty darn bullish.

NOTE TO VENTURE CAPITAL AND INVESTMENT BANKING INDUSTRIES: 1999 IS OVER, AND IT AIN'T COMING BACK.  THE IPO MARKET IS RIGHT WHERE IT SHOULD BE.  REMEMBER THESE NUMBERS: 400/90/10 (400 EXITS PER YEAR, 90% M&A, 10% IPO).

Here's another headline from an industry trade rag (guess I won't be speaking at their conference this year):

Despite a decline in startup financings by venture capital firms [in 2005]... alongside the dearth of exit opportunities, venture capital partners in Silicon Valley remain bullish ... in 2006 ....

Wait a minute, the industry numbers show stability for both venture deals and total venture capital invested for the last four years - about 3,000 deals raising approx. $20 billion per year.  In addition, over the last five years the venture exits (IPO and M&A) have been about the same, around 400 a year (ah, but you remembered that).

Look, if you're a venture-backed entrepreneur don't waste your time thinking, considering or worrying about going public, it will probably never happen to your company.  Spend your time and effort preparing your company for an acquisition.

Are You In This Thing?

If you read my last two posts you might have noticed the marriage of two interesting data points for 2005:

1. Median amount raised by venture-backed companies prior to liquidity = $23 million
2. Median time between initial venture financing and acquisition = 5.4 years

The median amount raised has been steadily and rapidly increasing, while 5.4 years in the longest period in a decade.

So, if you're an entrepreneur are you ready to raise $25 million in funding and run your company for six years?  Make sure you do your math on liquidation preferences and acquisition multiples before you answer.

Will the IPO Market Come Back?

People ask me this all the time.  I guess because my world straddles institutional investors and venture-backed companies.  I will say the that the II's are indifferent while entrepreneurs and VCs tend to be scared, upset, concerned, confused, etc.  I say the IPO market is back and right were it should be.

If you stop listening to the stories, rhetoric, rumors and Chicken Littles and begin looking at the facts, I think you will see why.

I took the VentureOne and PWCMoneyTree final numbers for 2005, and put them together Download venture_one_2005_liquidity.pdf .  I consider the sale of a company and a IPO to be the same thing, an exit (liquidity event).  An IPO is not a financing event like its brothers follow-on and secondary offerings, it is the transfer of ownership just like a M&A transaction.  Therefore, the data tells us we've had about the same number of exits for the last five years - about 400 and close to that in 1998.  Over time what has changed has been the ratios and the valuations of those exits, but what hasn't changed is the number of exits.  When the IPO market is down the M&A market picks up the slack.  Granted we've had some years when the number of exits and IPOs have dramatically increased, but that's not the norm.

Unfortunately, a lot of entrepreneurs and some VCs I talk to like to hope or believe that 1999 was what the norm should be.  That's nice, but it's not.  Historically the data says it's not and probably won't be in the future.  It is most likely that in the future, just like in the past, only about 10% of exits will be IPOs.  So the IPO market is back to it's normal state of being.

Smart companies realize this and manage, structure and position themselves to be bought not go public.

Buried At The Back

I finally got time to review the VentureOne liquidity data from 2005.  An interesting data point in the accompanying press release (dated 1/3/06) is the very last sentence (which is the only thing to appear on the last page (page 4)).  The press really picked-up on the release, but I haven't heard anyone talk about this:

The median time between initial equity financing and acquisition in 2005 was 5.4 years - the longest period in more than a decade, and almost a year longer than acquired companies in 2004.

For those of you keeping score at home, 2004 was 4.6 years and 2003 was 3.6 years.  Now I'm not a big fan of the use of median for data like this, as I think mean might have been more meaningful (sorry!).  I think V1 should show both (anyone at VentureOne reading?).

Anyone want to speculate why the increase and what it means?

Why Am I Here?

Let me take a minute to explain the purpose and reason for this blog.

First of all, when I see a lot of people making the same mistakes over and over, it motivates me to do something about it.  I really don't like to teach, but I love watching people learn and change because of my experiences (good and bad), and I guess my Midwestern upbringing taught me that it's just good to help out.  Look, the game has changed - the playing field and the rules are different, as an entrepreneur, you need to look at how you are doing things if you want to win!

In addition, I also really enjoy M&A, not just doing deals like a lot of people, but seeing deals work.  I believe acquisitions are an important part of our economy and capital markets.  I know most deals don't work, but when they do it improves our economy, our stock market, our venture capital system and continues to provide that spark that for some crazy reason makes someone wake up one day and say, "I think I can do it better on my own."  I also have a great network of thinkers who like to discus deals, and I find when we do, we all learn a lot more.  So I thought this might be a more efficient way to facilitate that.

Lastly, I should disclaim the thing that makes this blog possible is that I recently left my job.  I now finally have time to think about, capture and write down all of the M&A lessons and experiences gratefully learned from those who believed in me and woefully learned through my mistakes.  Unfortunately, my next employer may not appreciate or allow this kind of educational blog targeted at helping the very companies which that employer may want to purchase.  My opinion is this - a great deal is one in which both sides can look back and have the utmost respect for each other, knowing they treated the other fairly and ethically and not having any regrets.  While it may be short-lived, I will try to get as much content out as possible.  So I dedicate this blog to all the entrepreneurs who have the guts, drive, will or whatever it takes to start something different.  I hope this helps.

Go and Sin No More

For 13 Years I've been doing M&A transactions as an investment banker, working for both buyers and sellers, and as the corporate development officer of a serial acquirer.  I thought I knew everything there was to know about acquisitions: banking provides the repetition needed to really understand deal execution - negotiating merger documents, deal structuring, financing issues, financial due diligence and understanding the financial impact of the deal; corporate development requires you to focus on acquisition strategy, business due diligence and integration.

But I don't thing I really ever understood how to make a deal work until I was thrown into the role of President of a newly acquired operating division.  The painstaking two year journey of turning this division around and completely integrating it into another division gave me an entirely new outlook on how successful acquisitions should be done and forever etched on my brain how hard it is to make an acquisition work.

Throughout all of these experiences, I have watched as entrepreneurs have made the same mistakes over and over and too often failed to properly prepare their company for a M&A exit.  Hopefully some of what follows can cure that.