Recently, 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 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 top ten disruptive tech trends driving the tech M&A market, tech valuation metrics that determine how much a company is worth, and how CEOs can get their board, shareholders, or partners to see the importance of calibrating the value of their company in the market.
This is the second part of a multi-part series of articles about the conference. It focuses on what tech company investors look for in investment targets. The first part of the series [add hyperlink] covered the top ten disruptive technologies that currently drive tech M&A.
The investors panel
One of the excellent panels at the conference included five experienced investors in tech companies:
- Alexandra Nicoletti, Investor at Amber Creek, a venture capital firm focused on investing in real estate tech companies.
- Kelly Ford, General Partner and Chief Operating Officer at growth/expansion firm Edison Partners.
- Risto Rautakorpi, Managing Partner at Gorilla Capital Management, a Finland-based Venture Capital Fund.
- Roland Dennert, Managing Partner at Cipio Partners, an investment management and advisory firm based in Germany.
- James Shen, Managing Partner at Pioneer Ventures, an early stage Venture Capital fund based in Canada.
The investors were asked a variety of questions about the characteristics they look for in companies for investment.
What qualities do you look for in a company?
Asked to think about companies they invested in and what stood out about those companies, the investors cited a number of characteristics.
As a venture capital firm focused on investing in real estate tech companies, Camber Creek has an interest in funding companies that digitize the real estate transaction process. Alexandra Nicoletti indicated that the pandemic actually was a catalyst in furthering that objective, pushing stakeholders to adopt software and different technologies to enable digitization. One example is Camber Creek’s investment in a company called Bowery Valuation that digitizes appraisal workflow for commercial real estate asset valuations. According to Nicoletti, “Bowery Valuation's software solutions compress the commercial appraisal process dramatically, getting us a step further to fully digitizing the transaction process."
James Shen pointed to a nanosatellite company in which Pioneer Ventures invested. The company recently launched its first nanosatellite. What stood out for Shen was the revolutionary impact the company can have on the use of satellites. Shen put it this way, "Traditionally, most of the satellites that we deploy into space are large and very expensive. But nanosatellites are several orders less costly. And with them there will be new applications that are much easier to deploy. So we're very excited with that.” In more general terms, this investment indicates the type of companies Pioneer Ventures looks for. According to Shen, "We're interesting in any kind of company that can create more cost efficient, more time efficient, or more productive results anywhere in the supply chain."
What came to mind for Roland Dennert is a company with the interesting name of Welcome to the Jungle. The company is a branding and recruitment SaaS provider based in France. What attracted Dennert was the company's dominant position in the market. With between six and seven thousand customers on their platform, Welcome to the Jungle is seen as a must have if a company wants to hire young, highly qualified people in France. And there are almost no significant competitors in that market. Only two relatively small companies are active in the market in the U.S., and none in Europe. Cipio Partners, which focuses their investments in European growth stage tech companies, recently invested €50 million in Welcome to the Jungle to help them expand into other markets. To Dennert, the investment presented a huge opportunity. He said, "We see this as a very interesting business, strongly growing, and so we see a boulevard of growth ahead of us."
For Risto Rautakorpi, the important factor is the quality of the team that runs the target company. It's not about the tech or products that the target company makes, but rather the company's insights into their customers. Rautakorpi noted that Gorilla Capital Management focuses on the type of founders and their team who understand why customers buy, who listen to customers, and who can derive insights and then execute based on that information. According to Rautakorpi, "That recipe has served us well."
Growth opportunity is also a significant investment factor for Kelly Ford's company Edison Partners. Ford pointed to a recent investment that Edison Partners made in Solutions by Text, a company that provides a text messaging platform for consumer financial services institutions. The company helps financial institutions be compliant with fair consumer finance practices through their compliance-first text messaging platform. Ford said. "What we liked about the business was that the founders, two brothers, managed to build a $12 million revenue business without raising outside capital ‒ no debt. And they were profitable and growing." Edison Partners, which helps CEOs and their executive teams grow and scale successful companies, saw an opportunity to accelerate Solutions by Text's growth by refining their go-to-market strategy, and by developing new revenue streams for the company's text messaging solutions. For Edison Partners, what attracts investments is performance and growth trajectory.
How has the virtual world changed your investment approach?
With things being much more virtual since COVID, the panel was asked how the pandemic has changed their investment approach.
The move to a more virtual and hybrid work environment driven by the COVID pandemic has had a huge impact on the real estate world, and by extension, the PropTech space, according to Alexandra Nicoletti ‒ a space in which her company, Camber Creek, focuses its investments. Nicoletti stressed that Camber Creek has always had a strong interest in digitizing real estate-related transaction processes, which traditionally have been highly analog. She noted that real estate transactions can take weeks, if not months, and commercial real estate transactions can take even longer. Rather than being an impediment, the pandemic improved things in this area. It was actually a catalyst in digitizing real estate transactions, pushing stakeholders to adopt software and technology that enables digitization of these processes. Fostering that adoption, investors are putting money in PropTech companies.
The pandemic has also had a major impact on global supply chains, with lockdowns, labor shortages, port bottlenecks, regional wars, and other factors contributing to a dramatic slowdown in the availability of goods. James Shen pointed out that a lot of the cost structures that we have enjoyed in the last 20-to-30 years will be changing quite dramatically. Because of that, his firm, Pioneer Ventures, is investing in companies that address supply chain technological issues. Shen thinks these supply chain changes are going to lead to huge opportunities for early investors.
Kelly Ford added that global supply chains are still fragile, and there's a need for solutions to ensure their resilience. She noted that when there are risks in the chains for any reason, such as theft, or damage, or chain of custody challenges, it presents opportunities for companies that provide the ability to protect those chains and take corrective action. "There's still much that can be done around supply chain visibility, security, and insurance," according to Ford, "and it's only become a more exciting opportunity since the pandemic."
Roland Dennert sees the pandemic as accelerating digitization and spurring growing opportunities in process automation and AI. He noted that COVID has engendered hybrid work, where people don't need to be on-site. But as a consequence, it has created a more synchronous work process where people don't do things together at the same time. Instead Dennert said, "You do your piece whenever you can, and whenever you're online and available, and then the next person does the next step whenever they are available." That, he continued, "Creates the need for software platforms on which you can run your business processes. And once you digitize your processes, the next logical step is automation. That's why we have seen a huge boom in robotic process automation companies. And once you've digitized and started automating, a lot of things will be done autonomously with AI technology. And that has driven a recent boom in generative AI technologies ‒ a very exciting trend where those technologies will basically appear in any of these automated platforms.”
What advice do you have for entrepreneurs?
One piece of advice that Kelly Ford gave to entrepreneurs is to keep their time doing fundraising in check. She said, "I've often seen entrepreneurs get into this mode where they're fundraising for a living, where they get stuck in this vicious cycle of growth at all costs, constantly trying to raise more money." Ford indicated that in the current environment entrepreneurs have to get some "religion." By that she meant they need to focus on the health of their business and the ability to sustain it in a different way. She added, "I personally enjoy spending time with and backing entrepreneurs who can do the most with the least. The ability to raise funds just because you can doesn't mean you should. In today's environment there needs to be a little more mentality of doing more with less."
Risto Rautakorpi sees companies, especially product marketing startups, making similar mistakes by spending time on things such as growth hacking that are not relevant for them given their stage of the business. He likens the situation to a third grade student in elementary school trying to do things meant for ninth graders or beyond. He calls it, “A complete waste of time because you don't have any chance of accomplishing it. Plus all the time and energy spent on that is time and energy not spent on the stuff you should be doing." Rautakorpi's advice to entrepreneurs who find themselves in this situation is, "Focus on what you need to achieve this week, next week, next month, and leave everything else for the future."
Early stage founders were on Alexandra Nicoletti's mind too. She advised them to understand their strengths as founders and leaders, but equally important, know their areas of weakness as software entrepreneurs. She noted that the most successful companies she deals with have leadership teams that can identify their weak spots and hire accordingly, picking up the best talent to fill those gaps. Nicoletti advises early stage founders to be aware of their weaknesses. "Don't have that kind of blind spot,” she says. “Even if those weaknesses might not impact the business today, it's something that will as the company grows and matures."
Making mistakes is not necessarily a bad thing, especially if you learn from them. Roland Dennert pointed out that the entrepreneurial process is about venturing out into uncharted territory, something that inevitably leads to some mistakes. His advice to entrepreneurs is not to be afraid to make mistakes. “Obviously”, he says, “try to not make sort of life or death type of mistakes, where if you get it wrong, your company dies.” But he stressed, "I think this process of learning from your mistakes and correcting them quickly, and not being afraid to admit to yourself that you didn't get it right and you have to do it differently, is very important. It's what makes you successful."
What advice would you give entrepreneurs considering bringing on a financial partner?
The investors were asked what advice they would give entrepreneurs who are considering bringing on a financial partner given today's uncertain business climate.
Alexandra Nicoletti advised entrepreneurs to have good alignment with their investors regarding the vision and the trajectory of their company, as well as the plan to execute on that vision. She also said, "Don't be afraid to leverage the investor network to your advantage, whether that's your Board or other investors around the table. Learn from their other companies as well. I think the more knowledge that's shared across industry is beneficial for everybody in all things."
Risto Rautakorpi added that while alignment is important it should be an honest alignment. He put it this way: "Trust your own conviction and do what you feel is right. Then find an investor that agrees with you rather than trying to figure out what an investor wants to hear so that you could get money out of him."
Honesty was also top of mind for James Shen. He said, "You always want to be honest and transparent. If you discuss issues as honestly as you can with investors, you should be able to get a deal."
Roland Dennert advised entrepreneurs to think hard about whether they really need to raise capital in the current market environment. His point: "You may be able to raise some capital ‒ maybe not with perfect terms ‒ but certainly you will spend a disproportionate amount of time on it. So is it worth doing that right now? If you don't really have to raise capital, you shouldn't." Rather, he pointed out, avoid the need to raise money by cutting some costs and being more efficient. Dennert also pointed out that in the current environment, where valuations are going down, entrepreneurs may have to raise money in down rounds, but he strongly advised that they should avoid structured rounds. He noted, "This will give you less than what you had hoped, but it's not a problem for the futurists ‒ not sort of a weight to have to carry around with you. It is better take the down round and the dilution, but have a clean cap table and a clean charter in your business. That's very important."
For Kelly Ford, the important point in this environment is being realistic about plans. She advised, “Put forth plans you can hit. Gone are the days of these really aggressive budgets. When I still see budgets coming across, where even though the growth is great and there's a lot to like in the business, you lose credibility by putting forth really, really aggressive plans." She added, "Don't be shy about asking the investor what their thesis would be and what kind of outcomes they underwrite. Investors will be transparent about this. "
What should entrepreneurs consider when they're looking for investment versus M&A?
For James Shen the question of seeking investment versus going the M&A route translates to the following question: Am I able to grow the company further by taking investments or have I reached a plateau? If the former, seeking investors may be the right approach. If the latter, going the M&A route may be better.
Risto Rautakorpi added that over time founders typically start getting a feel for how far they can go with their company. He advised that it's better to cash out before a founder exceeds that maximum. Because after that, he said, “It’s typically crash and burn."
Kelly Ford likens the investor versus M&A decision to a "look in the mirror moment," where she says founders need to be honest about what's the best thing for their company. To make the decision, said Ford, founders need to evaluate what's going on in the market and what kind of competitive pressures exist. They also need to understand what's going on in their current investor base and cap table. According to Ford, it boils down to what sort of opportunity is out there and how much is it going to cost to take you where you want to take it? Opportunity is key here. In fact, she pointed out that a lot of times M&A deals arise opportunistically. Then there's the question of autonomy. By going the M&A route, Ford said, "You will lose that autonomy. But if you want to play a long game and still want some level of autonomy, assuming you're only selling a minority stake, then investment is the right decision." But Ford also noted that sometimes a founder is just tired. “They've hit a wall and have no energy left to run the business. At that point, it's simply time to get out.”
For Roland Dennert, the decision about seeking investors versus pursuing an M&A deal needs to be looked at from two perspectives. The first is to view things from the needs of the stakeholders, the founders, and the investors in the company. Dennert noted that there may be points in time where they need liquidity, and other points where they want the company to grow further. The other consideration is to look at things from a market perspective. Dennert sees the market working this way: "Big players have it strategically on their roadmap to get into certain businesses, or part of the value chain ‒ whatever it might be. And your company has a maturity and is a viable target for these plans. Then the window opens. It will remain open for a little while, and your company would probably command a strategic premium because people want to buy it." But he also cautioned, "If you wait too long, at some point these buyers would have satisfied their strategic needs and maybe they've bought companies, Maybe they've built stuff themselves. And when a majority of the likely logical buyers in the market have satisfied their strategic needs, your company just becomes a financial object. It has a certain cash flow as a certain DCF, and people will pay for that. You can still sell. But the strategic premium might disappear and devaluation could potentially go down very, very substantially, even if your fundamentals continue to improve. So if you do the analysis from a market perspective, you really have to spend time with the buyer universe. Know your logical buyers. Be open minded about that. Read the market. Good advisors can help you do that."
The next WFS Symposium
The next WFS Symposium, titled "Growth & Exit Strategies: Building for Scale, Building for Sale," will be held on August 3, 2023. For more information about this online conference, see: