Exit this way, please (venture and corp dev)

05 Dec, 2024

In my post from November pick, nurture and exit, I said investors spend the least amount of time on exits. I should correct myself. What I meant is that investors can do more here. Corporate development (or corp dev as it's known) can be immensely valuable to the firm and portfolio companies alike.

I'm arguably not qualified on much but one area where I have some experience is M&A - from investment banking to corp dev to venture exits. Even though I spent 5 years in banking working on buyside, sellside and IPO mandates, it was my time in corp dev at a NYSE-listed payments company that was the most impactful. The company acquired (and still does) 3-4 tech businesses a year, many of which were / are VC or PE backed.

Taking that experience plus my experience at Keen, I wanted to provide a non-exhaustive list of things an investor can do to help founders and their firm on exits, even if you don't come from an M&A background. For ease, I have overlayed this on a 10 year investment timeline (for simplicity) around a hypothetical FinTech.

At the investment stage and the beginning part (year 0)

• The goal is an IPO of course but acquisitions by PE and strategics are statistically more likely. When you are doing the deal, know the landscape of potential strategic and PE buyers that are active in this space. At Keen, when we exited Fiscozen to Visma after our series A, we knew they were a potential buyer given their mandate
• Know of 'similar' companies in the space have IPO'd. If they have, go through their S-1 or IPO prospectus and you will find information that is helpful to your understanding of the market but can also be condensed for the founders. There is a wealth of information on the market, on customer acquisition strategy, metrics and more, which can help frame a few things for early-stage companies
• Set M&A related Google news alerts for these potential buyers

In the middle part of the investment, the nurturing part (year 1-7)

• Stay on top of those Google alerts. If a publicly listed strategic made an acquisition, they will have a press release and for larger deals, a presentation to go with it. Sometimes they will disclose deal size and financials or with a bit of Google and public database work, you could find financials and therefore the acquisition multiple. A qualitative and quantitative summary for your FinTech will be helpful
• Look at the new quarter's transcript for said public acquirer to see if management talk about the deal and their reasons for the acquisition. Lots of useful nuggets in these transcripts
• Continue to monitor tech IPOs, read their prospectus and S-1 and provide any useful information to the company
• Network with corp dev and strategy people at conferences. I think conferences are by and large a waste of time. Let's be honest, you will spend most of your time in the investor lounge BUT, as well as your favourite investor friends, corporates usually send someone from their corp dev and strategy teams. Make an effort to see them, ask them what their mandate is, how they think about M&A etc. Building relationships with corp dev people is an incredible way to network within the industry and get helpful intel for portfolio companies
• Encourage the CEO of your FinTech to also find time to speak with them at conferences. You're not forcing them to think about an exit but to start building relationships. M&A like investing (and everything else) is also relationship building
• Build relationships with the tech teams of investment banks and tech advisory firms. Focus on VPs and above as they're usually relationship managers. They also attend conferences and hold their own! Show them some love. For small and mid-sized exits in the industry, there isn't much disclosure on deals but bankers, through their network, can get high level metrics and deal multiples. Share them with your founders
• Make sure the company starts to audit their financial statements at an appropriate stage. If things are going well, FinTech has grown and has raised subsequent rounds, it's possible, if not probable, that their latest growth investor has requested the company to start auditing their financial statements. If you reach a certain revenue size in some jurisdictions (e.g. UK's £10.2m revenue threshold; soon to be £15m in 2025), you are required to audit your financials. Buyers and their advisors need audited accounts and you cannot IPO without at least 3 years of audited accounts
• Keep and eye out on the CFO or potential CFO hires. Series A CFO managing 1-5m of ARR may not be the best candidate at 25m or 50m or 100m of ARR. The CFO in many cases doesn't scale with the company. Similarly, CFOs with exit experience are valuable
• If FinTech wants to buy and build e.g. do their own M&A, make sure their CFO can do acquisitions or you nudge them to hire a corp dev head of their own

The "let's start thinking of an exit" part (year 8-10)

• Right candidate for CFO? Check
• CEO has a relationship with potential buyers? Check
• If founders, the board and investors are aligned on an exit, now is the time to make use of those banking contacts. Reach out to them, get their thoughts on the market. Don't name companies but talk generally about how the FinTech market is doing in terms of exits, valuation multiples. Relay this back to the company and / or board
• Bankers are helpful in an exit. I repeat. Bankers are helpful in an exit. Your FinTech might know their potential buyers, be it strategics or PE shops but I guarantee you that your bankers know a wider universe of potential buyers. That being said, where you will find them most helpful is manging the process, which entails a lot (preparing teasers, IM, working / marketable company model, preparing the dataroom, managing DD including lawyers, accounts, consultants, preparing process letters, benchmarking LOI and bid letters and more)
• Companies either use their preferred bank / advisory boutique or they have a bake-off where they invite a few to pitch and then select one
• Offer to help with bank selection. I would focus on 1) the team for the transaction and is it appropriately staffed 2) bank's understanding of the buyer universe 3) valuation 4) fees
• On fees, ask other banking friends and contacts if the % fees of EV quoted are in line with market
• If you have M&A experience, review the bank engagement letter. In addition to the fee structure (retainers, flat fees, percentage fees, discretionary fees), look at scope of services, term of engagement, break fees, tail period and check with someone that they are market standard (for example, do not sign a 24 month tail period!)

At exit, the final part (year ?)

• So your FinTech has received an LOI or NBO (non-binding offer) and decided together with the board and investors to sell. At this point, be crystal clear to the company about what works for your firm e.g. if the buyer offers a part of the purchase price in their shares and you cannot take those shares, flag it. If the buyer wants to pay in tranches and that doesn't work for you, flag it. There is no point in letting all parties engage advisors and run up fees only for you to draw a line in the sand on some aspect of the transaction down the line. The earlier the better
• If you have M&A experience, ask to review the SPA. It doesn't need to be every draft but usually, I would review the first draft and provide comments, particularly if it was drafted by the buyer, and I would review the near final and final drafts
• I would encourage you to spend money as a firm to hire your own counsel for a quick review of the transaction docs
• Things can get a bit messy here because interest start to diverge. Investors start to get misaligned from each other and from founders. It's imperative you don't throw your toys out of the pram and derail the whole thing. Conversations, however, difficult can overcome most hurdles!

Additional nuances to think about for a company on an IPO track

• You need 3 years of audited financial accounts at a minimum
• An IPO'able team: is there a CFO with IPO and capital markets experience, is the IR team sufficiently built out, do you have a general counsel
• Is the board and its composition IPO ready
• You need to appoint an investment bank that can run the process; in fact there will be a number of banks that will take different titles ('lead left' or 'global coordinator', 'bookrunner', 'manager' etc.) that will form a syndicate, who's job to place sell the IPO shares to investors. The company will pay a fee to each one 🤯
• Getting IPO ready is a 12-18 month process at least!

Why do this?

The goal of the above isn't to force a sale of a company or to keep forcing the topic of exits. An exit should be a founder's decision. Simply, the above, allows you to act like a fractional corp dev person for portfolio companies, which can be really helpful. Intel, transaction summaries and even introductions to pesky bankers can help founders and management teams, who are spinning 101 other plates, when needed.

Note: I have seen VC firms with a corp dev person but their role varies firm to firm. At some, they help portfolio companies with some of the above and in others, they help on financing rounds and / or support the portfolio CFO. Overall, I do feel strongly that the job shouldn't be completely outsourced to them. As an investor, you job is to pick, nurture and exit well. Like really well.