Last November, World Financial Symposiums (WFS) held its latest Growth and Exit Strategies (GXS) Conference. The GXS Conference is a regularly scheduled, half-day WFS event specifically designed for tech CEOs, founders, and investors centered around tech M&A, covering topics such as investments, growth strategies, buyouts, sales and mergers. It brings together private equity, venture capital, investors, accelerators, strategic and financial buyers, and many M&A experts and CEOs who've built and sold their own tech companies.
In this latest GXS Conference, three panels of investors, buyers, and sellers, respectively, shared their insights and tips on a variety of topics such as getting funded, what buyers look for in a purchase, and strategies for a successful sale. In addition, Corum executives presented information on topics of interest such as the state of the tech M&A market and tech valuation metrics.
Here are some highlights of the conference.
Tech M&A remains hot
Despite factors such as increasing inflation, rising interest rates, stricter regulatory rules, and geopolitical tensions, the tech M&A market is booming. According to Timothy Goddard, Executive Vice President of Corporate Strategies at Corum, trends such as people-centric productivity, actionable analytics, and remote trust are driving this boom.
People-centric productivity refers to tools that enable companies to attract, retain, and empower employees. This focus has driven a lot of tech M&A activity, particularly in Human Resources. Goddard saw more HR deals in the first three quarters of 2022 than in all of 2021, which itself had already set a record.
Companies are also putting a lot of emphasis on actionable analytics, information distilled by software that is used to make measurably better decisions. Goddard noted that actionable analytics software has been of great value in corporate performance management and is fueling a lot of deals including megadeals such as PE firm Thoma Bravo's more than $10 billion acquisition of Anaplan, a cloud-native platform for orchestrating business performance.
Goddard sees remote trust as a key factor driving demand for the infrastructure necessary to secure hybrid work environments and increased e-commerce. Noting the impact that remote trust and other security requirements had on M&A volume, Goddard indicated that he had about 200 security-related deals both this year and last, with median sales multiples tracking about eight times revenue.
As far as specific tech sectors, healthtech, smart logistics, and blue collar software are particular areas of strong tech M&A activity according to Goddard. He noted that the healthtech continuum trend is going strong in the wake of the COVID pandemic, as buyers seek to fill gaps across the continuum of care and embrace this value-based care model.
The Smart Logistics sector is being driven in large part by current events. Goddard pointed to global manufacturing shifts, increased disruption such as sanctions resulting from the invasion of Ukraine and the follow-up disruptions from COVID as driving highly variable supply and demand globally, making supply chain and logistics tools even more important.
And Goddard sees digital transformation continuing to make major impacts in traditional blue collar industries. He put it this way: "From the deep, vertical nitch software that private equity funds everywhere are bidding on, to broader segments like Agtech, construction, energy, and, manufacturing, the digital transformation that is sweeping the blue color sectors continues to be one of the key facts in tech M&A.”
The bottom line: tech M&A is thriving.
What investors look for
One of the excellent panels at the conference was an investor panel that included three experienced investors in tech companies:
- James Shen, Managing Partner at Pioneer Ventures, a company that focuses on early stage investments in high-tech and software.
- Jenny Abramson, Founder and Managing Partner at Rethink Impact, a venture capital firm investing in female and non-binary leaders using technology to solve the world's biggest problems.
- Brendan Rogers, Co-Founder and General Partner at 2am VC, a sector-agnostic, Gen Z-centric, India only, early-stage venture fund.
The investors were asked what fundamental characteristics they look for in companies as investment targets. James Shen responded that at Pioneer Ventures he focuses predominantly on early stage opportunities. More specifically, he looks for companies that create momentum in terms of number of early adopters and users. Additionally, he looks for people leading these companies who understand their industry and business really well and have the drive, motivation, and vision to create opportunities for investors.
For Jenny Abramson and Rethink Impact the focus is on tech companies led by women. Typically, these are U.S.-based companies that have between a half a million dollars and 15 million dollars in annual recurring revenue. Abramson noted that all of the companies they fund offer innovative solutions to address major market gaps, whether it’s affordability in healthcare, education opportunities, sustainability issues, or access to financial services. Rethink Impact is quite selective in their investment choices. According to Abramson, they typically look at about a thousand companies a year, of which they pick four or five in which to invest.
Brendan Rogers, whose company 2am VC concentrates exclusively on companies based in India, said his company's value add is helping Indian founders get access to U.S. investors. Rogers is an American, but was drawn to India because of its massive Gen Z population ‒ half the population in India is under the age of 27 ‒ many of whom are highly technical and are building tech startups in the country. Pointing out that what used to be a technical brain drain in India has changed, Rogers said that historically, people would leave India to come to Silicon Valley and work in startups or start their own companies there. But now people are staying in India, or they're going to school in the U.S., and coming back to India to build because of the inflow and capital.
If those are characteristics that these investors look for when funding companies, what mistakes do they see companies make when they seek funding?
For Shen, a common mistake he sees is an overemphasis on perfection. This is where entrepreneurs spend too much time perfecting their product or technology at the expense of everything else. Shen advises entrepreneurs to divide their time efficiently. His rule of thumb: “Spend 30% of your time raising capital, 30% managing your company, 30% developing sales, and the remaining 10% in everything else – even leisure. “
Abramson encounters two mistakes from people who approach her company for investment: leaders who only surround themselves with people who look like them and have the same background, and people who start a business that they're not really passionate about. She points out that while it’s easier to surround yourself with people who are just like you, it’s much better to be surrounded by people who are different than you and represent a diversity of opinion. Abramson says, “Among other things they’ll challenge you more and help you better understand other customers.” As for having real passion for a business, Abramson stresses that it’s crucial. She points out, “It’s hard enough to run a business in good times. It's particularly hard in other times. And if you don’t really have passion for the problem you're solving with your company, you won’t have that extra level of grit and determination to help you through the bad times. “
Rogers occasionally encounters this same issue of perfectionism. He says, "One of my biggest pet peeves is people who are afraid to go live. They feel they have to get everything perfect. They have to build in all these bells and whistles just to go to market. That's a huge red flag for me." Rogers looks for founders who can get their product out the door quickly. His says, "When I see founders that have raised zero dollars, but have the ability to get products live and get people on their product ‒ it doesn't have to be a million users, it doesn't have to have a 100,000 in monthly recurring revenue ‒ just show that you can build a product, get it live, and get organic distribution."
Rogers also sees situations where founders want to raise large amounts of capital ‒ more than they really need at that point ‒ but don't understand it may take more time to raise it in India. He notes that if these founders taper the round down, get value-add angels and funds, they can move that much quicker and get in the game, and not just be waiting on the sidelines.
What buyers look for
The second panel consisted of four buyers representing different types of companies that are currently active in the tech M&A space:
- Daan De Wever, CEO at Destiny, a Belgian provider of secure cloud and business communications for small and middle-sized enterprises.
- Craig Finch, Portfolio CIO and CFO at Volaris Group, a buy-and-hold acquirer of software businesses, and part of the Constellation Software Group.
- Matthew Murphy, Co-Founder and Partner at Astra Capital Management, a private equity firm that invests in growth businesses in the communications and technology services sectors.
- Jeremy Segal, EVP Corp Dev at Progress Software, a company that offers software for creating and deploying business applications.
Although the panelists represent various types of buyers, there are certain characteristics they all look for in a tech M&A target. Revenue is certainly one of them. Matt Murphy's PE firm, Astra Capital Management, looks for companies that have a minimum five million dollars in revenue. For Jeremy Segal and Progress Software that revenue threshold is around $20 million. He says that if a company's revenue is less than that, Progress Software really doesn't have the cycles to be able to put time towards it. And for Craig Finch and Volaris Group, they look at businesses that have revenue that ranges from a few hundred thousand pounds up to a hundred million, but typically they acquire companies that do around £4 million in revenue.
However, because the companies the panelists represent are significantly different from each other, there are differences in what they look for in buying a company. Daan De Wever's company Destiny aims to become Europe's leading cloud communication provider. Because of that, their acquisitions tend to be companies that help them consolidate and heighten their position in Europe. For example, Destiny recently acquired German cloud communication company easybell, which adds the German market ‒ a largely immature market as far as cloud communications, according to De Wever ‒ to Destiny's operations. In addition, De Wever said he looks for companies that provide innovative technologies such as conversational AI that will help Destiny stay relevant in the future.
By comparison, Matt Murphy's PE firm Astra Capital Management focuses on establishing partnerships with companies to help them execute on their strategy. Murphy cited as a recent example their partnership with a company called CTS that does private wireless deployment across the U.S. Murphy said Astra and CTS both realized that the market was changing and offering more potential for network ownership by companies like CTS. Murphy added, "CTS was looking for a partner, not only to provide capital for the balance sheet, but really to help go to market. And so we ended up partnering with them, doing some small M&A where we added some necessary capabilities, and picked up some new managers who really knew the space of neutral host and asset ownership.” That partnership has been very successful. According to Murphy, “CTS has been executing in a great way."
Similarly, Finch's company Volaris seeks to provide the tools that help the companies they acquire be successful. However, Volaris takes a decentralized approach to acquisition, where they give full autonomy to the owners and management of the companies they buy. Finch noted," We look for people to come in and continue running their business for us. We just provide them with enablers‒- not just capital, but also best practices, financial ratios, benchmarking, and what we believe is market-leading talent and leadership development programs.”
Segal’s company Progress Software takes a different approach than Volaris in that they fully integrate the companies they buy rather than leave them to operate decentrally. Segal said that when Progress acquires companies they also look to integrate people into their company who are motivated to grow professionally. According to Segal, “What we're focus on is that next set of key leaders who are looking for an opportunity to step up, looking to have greater leadership. It's professional development for them, and so they're motivated to stay. And that's what we want. We put a huge focus on people, the quality of the people, the culture when we bring them in to Progress.”
One issue that all of the panelists agreed on is the need for sellers to be transparent. Segal articulated the issue perhaps best. "My CEO and I will say to a company over and over again, if there are issues that we should be aware of, let us know early. It doesn't mean we're going to kill the deal. We just want to figure out how we can address it. If we find out about these issues long down the process of diligence, then the issue of trust comes into play. And if that trust is shattered, that makes things a lot more challenging and probably a lot harder for us to retain that conviction around that deal. So be transparent, be straight up, be accurate. If you say your revenue is 10 million, have conviction that your revenue is 10 million and not have us come in and figure out that it's really only seven million.”
What sellers look for
The last panel included four entrepreneurs who built and sold their tech companies:
- Barry Rudolph, former CEO of VelociData
- Rob Kopp , former President and COO of Metro Data Centers
- Robert Hopton, former CEO of Health eFilings
- Ujwal Arkalgud, former CEO of MotivBase
All of these entrepreneurs ran successful businesses, so an initial question put to them was why did you sell? For Barry Rudolph it was a matter of turning excellent technology into marketing success. Rudolph's company VelociData offered technology that collects and analyzes streaming network traffic data in real time, giving network operators the insights they need to quickly take corrective or optimization actions. Rudolph noted that although his company invested heavily in technology, it did not have an effective go-to-market model. He said, "We needed to make some investments in business applications and related modeling so we could do something of benefit with all this wonderful data we were able to collect.” That motivated Rudolph to find a buyer that had client relationships, brand awareness, and had already built some of those applications. And that buyer turned out to be OpenVault, a provider of revenue and network improvement solutions for the broadband industry. The acquisition was a win-win for both companies. Rudolph said most of OpenVault's customers were small to-mid range in terms of size and opportunity. And by combining with VelociData, it opened up a Tier 1 market in the telco space for both of them. In Rudolph’s words, “It created a much larger business with a lot more opportunity, one with pretty deep technical skill as well."
For Rob Kopp, a self-termed serial entrepreneur, it was a matter of moving a technology forward. Kopp's company Metro Data Centers was his sixth business startup, a business he started with Niles Overly. Together they turned it into a very successful operation comprising multiple edge-type data centers. But Niles got older and Kopp started to turn his thoughts to other opportunities. Additionally, the data centers were moving to the cloud and cloud hosting, which made operating costs exponentially higher. So he and Overly started to seek out a partner, especially one that had a desire to move edge technology forward. And they found that partner in edge colocation specialist DartPoints. What especially attracted DartPoints was Metro's strong ties to the metropolitan communities they were in. Kopp said these communities were starting to build out their fiber networks, and metropolitan fiber networks was something that Metro Data Center went after strongly. In Kopp's view, the combination of Metro Data Centers’ fiber network expertise coupled with the ongoing economic development within the cities they were in served as great attractants to DartPoints.
The sale of Robert Hopton's company, Health eFilings, was preplanned. The company is a Certified EHR Technology and expert in clinical data analytics delivering innovative solutions to ensure clinicians and healthcare organizations successfully and profitably navigate the complex healthcare landscape. Hopton said that from day one of the company's existence he and his business partner’s plan was to build and sell. And that sale came to fruition this past August when Health eFilings was sold to Alpha II LLC, a company that develops software solutions for the healthcare revenue management cycle. Hopton cited a number of factors that drove Alpha II to Health eFilings. One was Health eFilings' expertise in a very specific niche. The company had developed a proprietary cloud-based software platform that annually had gotten through the Office of the National Coordinator certification process. The expertise needed to get through that gauntlet is something Hopton stressed was not an easy thing to find. Second, was Health eFilings customer base, which Hopton said put Alpha II in a market leadership position “right out of the box.”
Ujwal Arkalgud's path was quite different from that of the other entrepreneurs. Arkalgud is a cultural anthropologist whose company, MotivBase is a research technology firm that applies anthropology to study millions of conversations that consumers have on the Internet. He and his team built up that business to serve some of the largest Fortune 500 companies, helping their innovation teams understand the changing cultural landscape and its impact on plans for new products and solutions.
However, that growth took its toll. Arkalgud and his co-founder were having a difficult time managing that growth and scaling it in a way that would not burn out their employees. So they decided to get help, ultimately selling their company to Lux Research, a research and advisory firm focused on sustainable innovation. What attracted Lux Research to MotivBase? Arkalgud said his company's profitability definitely helped, but ultimately it was about MotivBase's technology, adding, "There's a very unique IP there that nobody else has built."
Of particular value to prospective sellers was some pointed advice these entrepreneurs gave based on their experiences in selling their companies. Barry Rudolph cautioned prospective sellers not to underestimate the time commitment needed to successfully sell a company. He said, "You think this is going to be something that you can quickly take on. But it involves a lot of interaction with potential buyers, and there is a lot of activity associated with that." He also stressed the need to be organized. His advice: "As early as you can, use the deal room templates, and get your P&L balance sheet, contracts, pipeline, and strategy in an organized context. That will give you more time to concentrate on the deal dynamics and the fundamentals of the deal, not the plumbing of the deal."
Rob Kopp's underscored the importance of getting help. In his words, "Don't try to carry the burden of selling your company by yourself. Even though you think you're the best in the world, it's O.K. to get some help because at the same time you’re trying to sell your business you're continuing to run your business. “ Alluding to the effort it took to sell his company while still running it, Kopp recalled, "It was like carrying two pretty good size heavy loads. it was exhilarating and fun, but it was hard." Kopp pointed especially to the help he needed in putting financials together during due diligence, something he and his business partner didn't have the cycles to do in a thorough and timely manner. So Corum brought in a financial services company to work on that area. Kopp noted the assistance allowed him to work on the other parts of due diligence that were equally important such as contracts. Thinking back on his experience, Kopp said if he had to do it over again he would have asked for assistance sooner.
The need to see things from the buyer's point of view was something that Robert Hopton highlighted. He cited the fact that he and his business partner built the company’s financials, models, and its projected value in a certain way. But potential buyers saw things through a different lens. Hopton recalled, "That lack of alignment became challenging for us. We had to spend a lot of time reconstructing how we presented our company and we needed to talk in the language of the financial buyers and the backers of the strategics." One example of the communication misalignment was Health eFiling's fiscal year of April through March. Hopton and his team needed to face the fact that potential buyers were used to viewing a fiscal year of January through December. So Hopton and the team needed to conform to the buyers' way of thinking. He noted, "It became our responsibility to be able to get onto their level or their platform versus getting them to get on our platform and understand our view of the world, And that's what we eventually did."
Finally, Ujwal Arkalgud stressed the importance of focusing on the sales pipeline. He also noted that selling a company can mean managing that pipeline in a different way. He pointed out that at MotivBase, "We never had a sense of desperation when it came to our sales pipeline. We always managed it with a level of calm, because it always just sorted itself out. Then suddenly, we found ourselves in an environment where we needed to manage our sales pipeline in a way that I think much larger companies manage them." He added that in hindsight he would have prepared for it differently. Concentrating on the sales pipeline was something that Rob Kopp also pinpointed. He advised, "Be prepared to really focus on pipeline sales, because what you're really trying to push is EBITDA. And so the more you can focus on that, the better. "
The next WFS Symposium
The next WFS Symposium, titled "Growth & Exit Strategies: Women Tech Leaders Virtual Conference," will be held on Thursday, March 2, 2023. This webinar will include high-powered panels of women corporate development executives, investors, and those who have led successful company exits. They will share valuable insights on their experience and knowledge in Tech M&A ‒ something that can be of great benefit to tech entrepreneurs, executives, investors, buyers, and sellers of any gender.
- 2023 Top Ten Disruptive Tech Trends
- Investors Panel: What Women investors are looking for in funding strategies?
- Tech Valuation Metrics: What is your company worth? How do you get it?
- Buyers Panel: Do you have what they want?
- Special presentation: Getting Your Team on Board
- Sellers Panel: Her Story, Insider tips from women CEOs who’ve successfully sold
Register in the time zone that best suits you:
- North America, Latin America & Caribbean (11 AM CST)
- Europe, Middle East & Africa (11 AM CET)
- Asia & Pacific (11 AM SGT)
For more information on WFS conferences, see https://www.wfs.com/conferences