These alarming headlines may seem all too familiar today, but each was originally published between 2007 and 2010. The Great Recession has dramatically slowed venture capital funding for many companies. Just as today’s recession fears are shrinking the venture market.According to Pitchbook, VC investment fell 30% in Q2 2022 compared to 2021, and IPOs hit a 50-year low. While some iconic brands such as Uber, Airbnb and Square have successfully emerged from the last recession, most venture-backed firms have struggled during this time and many are hesitant to pursue his M&A strategy. became.
When trading slows down, VC dollars typically favor companies viewed as market leaders and drain other venture-backed firms in the same capital space. Some companies adapt and survive, others retreat and create M&A opportunities. The process starts slowly, but as the graph below shows, his venture-backed M&A plummeted during a recession when venture investment also slowed. However, in the early recovery, his VC-backed M&A recovered and surged. Annual trading volume has stabilized until he surpassed $30 billion in 2010 and over $70 billion in 2014.
See more HBR charts with data and visuals
It’s important to note that the M&A process typically takes 12 to 18 months from start to finish, whether you’re looking for a buyer or taking advantage of changing market dynamics to make strategic acquisitions. A sharp slowdown in VC investment today suggests his post-recession wave of M&A is on the horizon. Startup founders can start positioning now to be acquired on that wave. Unfortunately, many acquisitions between now and then will be in trouble. How can this needless fate be avoided?
To begin the process it is important to know how you are valued by potential buyers. There is a ranked scorecard that includes specific criteria such as gender, potential benefits, and finally “upgrade”.
The last category is the most practical. If M&A is likely in the intermediate future, your job today is to reduce lead lift and increase “acquisition potential.” To accomplish this, the entrepreneur must answer his three questions to prepare the buyer to come knocking.
How scalable is the system?
You and a potential acquirer may have different definitions of “scalable system”. From a buyer’s perspective, scalable means being able to grow without the immediate need for significant infrastructure investments, even if you just turn your pipeline and relationships toward sales operations after an acquisition. Buyers may eventually consolidate back-office systems, IT stacks, supply and logistics networks, but first ask if they can take a no-interference approach and still get value. As a director of multiple companies, I often advise against acquisitions that require additional investment to realize value. The simpler the value realization, the lighter the lift.
Scalability, in addition to providing a system with excess growth capacity, also means audited finances and cleaned up clutter. If you’re hesitant about closing an underperforming department or settling an annoying lawsuit, do it now. And it leaves off the cap table dissenting shareholders who demand management time beyond their actual strategic or financial contributions. It’s a delicate message to convey, but try framing it like this: If current and new secondary sales opportunities arise, would you like to be contacted?” It is in the interest of all parties to participate and research these conversations early.
How do I insert my company into the M&A deal flow?
Getting acquired by the right partner is hard enough, but if the market doesn’t know both your company and its story, or worse, if the market has the wrong story, a successful M&A process is virtually impossible. Thankfully, there are two specific things you can do to improve your position.
If you’ve been avoiding this process until now, now is the time to meet and get to know 3-5 investment bankers who know your industry well and participate in the industry’s active deal flow. rice field. An introductory breakfast and office visit are a good start, followed by regular check-in conversations of 60 to 90 minutes. provide valuable industry insight.
When looking to hire advisors, make sure they understand your company, your team and their strengths, and what you are trying to achieve, so they can accurately tell your story to potential acquirers. This is a story-setting exercise, and while you may never actually activate all of these relationships, sharing it with a potential financial advisor will help you later. It may help you in the process. Who knows—they might be advising your perfect buyer.
A second non-traditional way to enter the M&A stream is through strategic board strengthening. Networking is one of the many reasons people come to boards. Adding directors who are active in adjacent categories or have recently retired from large companies in the industry is one of the cheapest ways to reach out to potential business or strategic partners and grow your profile. It’s one.
Will my company be considered a good business partner?
Buyers are busy and often evaluate multiple opportunities at once. They are also human and will naturally focus on options that seem ready to complete the transaction. To establish your company as a good business partner, ask yourself the following questions.
- Is your operational plan up to date?
- Do you have a detailed version with the current fiscal year and another high level plan for the next 3-5 years?
- Do these include detailed organizational design and recruitment strategies?
- Is your IP fully scheduled and in digital form?
Best practices include maintaining an updated virtual data room at all times, even when a company is not actively pursuing M&A. It’s well worth considering how quickly you can provide the information critical to this transaction without stressing your organization or risking poor performance in the midst of acquisition negotiations.
The best CEOs I know keep three active lists on their desks. The first is a list of top executive talent they would like to hire. The second is a list of acquisition targets that may add long-term value at the right price and at the right time. The third is short, a company that could be a suitable potential acquirer.
Knowing who’s on your list and how to get on another company’s list can make the difference between finding the right partner or settling for a lesser one. Once the wave of acquisition begins, the wave moves very quickly. One of the most disturbing emotions is watching weaker competitors thrive in a recession by being acquired by giants simply because they were ready.
Many of the actions that make your company a desirable acquisition target can also help you navigate economic uncertainty. Selling during a period of consolidation is not always inevitable, so the goal is to create options so that you can efficiently decide whether it is the right outcome. The proactive steps above help ensure that the decision to sell is your choice, not a requirement.
