2014 has marked one of the most active years in tech M&A history, largely caused by the strong public markets and cash-rich tech majors.
The only more active year was during the tech boom of 2000.
This year we’ve seen an inordinate number of billion dollar venture-backed exits such as Nest (acquired for $3.2B by Google), Beats (acquired for $3B by Apple), Minecraft (acquired for $2.5B by Microsoft), Oculus VR (acquired for $2B by Facebook), Twitch (acquired for $970M by Amazon) and of course the largest venture-backed exit of all time with Facebook’s $19B acquisition of WhatsApp.
As we look to 2015 the sustained strength of the public markets is questionable, with macro economic pressures such as rising interest rates and shaky international markets.
If they cool as expected, we’ll see the traditional acquirers be more spendthrift in their M&A strategies, resulting in fewer billion dollar megadeals.
What won’t change however is the number of new buyers coming to the table. These buyers aren’t your typical Silicon Valley tech acquirers, they are more traditional household companies and brands looking to embrace technology to better reach end users and create greater efficiencies within their own businesses. And their appetite for boutique acquisitions of tech companies is just gearing up.
As a leading indicator for corporate interest in the space, recent data from the National Venture Capital Association shows that strategic investments by corporations is at levels not seen since the year 2000, and will reach an estimated $3.5B in investment capital in 2014.
UnderArmour acquired MapMyFitness. Hearst acquired BranchOut. Capital One acquired Adaptive Path. Walmart acquired over 15 tech companies in the past four years. There are more corporate buyers in the market than ever, and as detailed by The Economist, “25 of the 30 firms that comprise the Dow Jones Industrial Average” which include everything from The Coca Cola Co. to Caterpiller Inc. have a corporate-venture unit. Even Chobani, the Greek yogurt company, has a tech incubator. These are all attempts to assimilate technology into the businesses of large companies whose core business or focus is not technology.
A “boutique acquisition” is a deal under $100M transaction size where both the product and selling team experience is the primary driver of the deal – and both investors and selling team members see positive and favorable financial gain.
Google, Facebook, and Twitter cut the path for the acqui-hire and eased the “Series A crunch.” Other companies have paid attention and evolved to realize that there is a more efficient way of building muscle in weak, but important growth areas. Buy the solution, buy a company.
There is certainly no lack of early-stage tech companies out there these days. There is a reason Yahoo’s head of corporate development is also the head of human resources. The rest of the market is wisening up, expect to see these two functions combined more regularly outside of just technology companies.
While some of these deals are buyers looking purely to acquire talent, many of them are equally as much about acquiring a product or Intellectual Property to fill an important need. In many cases, these boutique acquisitions result in key products for a large company in both the short term and long term, consider Twitter’s acquisition of Vine as an example.
Boutique acquisitions don’t mean that early team members and investors have to sacrifice financial gain; in fact, in many cases boutique acquisitions offer greater return on investment in less amount of time (i.e. better IRR).
As detailed in Exitround’s Tech M&A Report $0 to $100M which looked at over 250 actual private tech company exits over the past 8 years, companies that raised between $5M and $10M, on average had higher exit prices than those companies that raised between $10M and $50M.
It’s logical to assume that in these cases as well, the company would retain greater ownership than in the lesser-raised scenario, thus resulting in an overall better outcome for both early team members as well as investors.
As you think through your priorities for 2015 consider how you can take advantage of the skyrocketing demand for technology by companies outside of the traditional tech sector.
Time for another roundup of the news from the week in tech M&A.
Connexity, the company formerly known as Shopzilla, bought price comparison aggregator Become.com. Terms were not disclosed.
CenturyLink wrapped up a busy week, picking up disaster recovery provider DataGardens (for an undisclosed amount), and big data/analytics startup Cognilytics (also undisclosed).
Twitch (now part of Amazon) has acquired livestreaming ad agency GoodGame, for an undisclosed amount.
In another disaster recovery and cloud-backup acquisition, Datto picked up Backupify. Terms were not disclosed, but Backupify had raised close to $20M, and CEO Rob May reports they sold “for a lot more than [they] raised.”
Belden is buying IT and security compliance company Tripwire for $710 million.
Mobile app developer AppGyver acquired competitor AppArchitect for an undisclosed amount.
Microsoft picked up crash-testing service HockeyApp.
Open Text is buying analytics company Actuate for about $330 million.
And, in not-quite-an-acquisition news, humor sites Funny or Die, The Onion, and now CollegeHumor are reportedly all available. (IAC is reportedly seeking $100m for CollegeHumor.)
The full breakdown on the current landscape of AI and machine intelligence—an absolute must read.
For the entrepreneurs in the house
A nice breakdown of the different crowdfunding sites, and what they can do for startups.
Tomas Tunguz sees a fertile market for M&A in 2015.
That whole Sony Pictures / North Korea hacking thing? Sony is fighting fire with fire.
Just for fun
Photo credit: CCO Public Domain / Pixabay
For founders at startups, their attention is often laser-focused on building their companies as quickly as possible and making the enterprise successful.
But one area entrepreneurs often overlook is their personal finances and how those finances are affected by decisions that the company makes. This can particularly be the case if their startup is acquired, but it can also apply even if a company is not acquired.
Many founders neglect to deal with these matters because they are so busy building their companies. But often, they will realize their mistakes and if they start a second company, they will make the time for it, says Elliott Elbaz, founder of Mill Valley, Calif.-based Gordian Wealth Advisors.
For founders who are close to or above $10 million in net worth (if married) or $5 million (if single), planning can make a big difference in tax implications and estate planning.
Clearly, everyone’s situation is unique (and this post should not be considered financial advice), so entrepreneurs should talk to an investment professional or advisor about their specific situation. That being said, here is a brief overview of some important tips for entrepreneurs:
– Qualified Small Business: When starting a company, the type of incorporation is important and should be carefully considered. If you set up a C corporation, you can sign up for a Qualified Small Business Election – if you acquired the stock after Sept 27, 2010. This tax incentive gives a tax benefit if you hold stock in a company for five years before the company is worth up to $50 million. While there is no way to know what will happen in five years, it’s worth it to prepare for this, says Michael Phippen, chief investment officer at Gordian Wealth Advisors.
– “Key man” Insurance: A “key man” is a critical person to a company who can trigger certain structural changes in a company. (Key man clauses, which are often part of venture capital firms, can enable a VC firm to disband if certain partners are incapacitated or die.) Key man insurance can be triggered in the event of a person dying, being incapacitated or in some instances leaving the company. Once triggered, the key man insurance is paid to the company, which would then buy back the company’s shares from the key man. The shares could then be used to bring in a new person. For small startups key man insurance may not be used, but often for larger companies, key man insurance is used and some VCs will insist on it.
– 83b Election: This early exercise of company stock, which can be instituted for founders or employees, enables founders or early employees to exercise stock options and purchase stock early – before the stock has vested. This can enable the shareholder to save significantly on taxes in the event of a liquidity event by paying long-term capital gains instead of short-term gains.
– Estate Planning: If you’re married with children, there are a number of things you can do to maximize what you give to your children or other beneficiaries. One thing to know: you can give a “lifetime gift exception” of about $10 million (for married couples) to your children and not have it count towards your estate – i.e. not be taxed. Anything above that will be taxed. But with estate planning, you can ensure that you give to your children and minimize tax implications.
One thing you can do is set up a Grantor Retained Annuity Trust or GRAT. In this scenario, a trust is created for a certain period of time. You would pay tax upon establishing the trust. When the trust expires, the beneficiary – your children or a charity – could receive the assets tax-free. If the assets are shares in a company, for example, this can be particularly beneficial because there are a number of things you can do with shares including borrowing against them.
– Why is this planning so important? You could be paying much more in tax if you don’t plan. Also, if you have children and you want to pass some of your wealth on to them, the amount you give to them could be greatly affected by tax implications, Elbaz says. “You could pay a big tax bill,” Elbaz says. “Also, if you take some of that wealth that will be created out of your estate, it’s less taxable upon your death if you do it smartly.”
“That’s why advisors can help. Because most entrepreneurs are so busy running and gunning and growing their business they often don’t focus on this,” he says. “We try to help entrepreneurs early so it doesn’t cost them. Otherwise, they’ll say, ‘I wish I would’ve known.’”
It’s a lesson that many entrepreneurs learn the hard way. “Typically entrepreneurs who are pretty successful have multiple exits and they get smarter over time. The first time they get enlightened, so the second time they know that they should set these things up. The third time they know it. It’s old hat.”
Preparing for an Acquisition:
– How to Prepare for M&A: If you know your company could be acquired, there are certain things you can do personally to prepare for this event that could make a big difference financially. You can gift some of your shares through a GRAT, as mentioned above, or a family limited partnership. In the event that your shares are acquired by a large company, having those shares in a GRAT or other form of trust could minimize the tax implications for you, the founder, as well as for your children, spouse or charity.
– Many Permutations: Of course, this depends on what kind of acquisition it is. If you’re being acquired for stock, you have more options to lessen tax implications. For example, for founders who have a large amount of stock in one company after an acquisition, there are exchange or swap funds for investors to pool large single stock positions in exchange for shares in the fund. This diversifies your holdings without having to directly sell the shares, Elbaz says.
Here are more tips from Gordian Wealth Advisors in this infographic:
It’s the week before Thanksgiving, but the tech world isn’t showing any signs of letting up. We had a pretty busy week so let’s get to the recap…
Groovebooks has been acquired by Shutterfly for $14.5 million in order to scale its photo-printing capabilities.
The ad-tech space has been consolidated as the Rubicon Project acquires iSocket and Shiny Ads to further automate ad buys.
Squarespace beefs up its developer offering by acquiring Brace.io.
Groupon acquires in-store analytics and marketing startup Swarm Mobile.
Customer relationship management firm Merkle has acquired loyalty retention service 500friends.
iOS app prototyping startup RelativeWave gets acquired by Google and makes its interactive app prototyping app Form free.
Chat app Kik raises $38 million and buys GIF messenger app Relay in its first acquisition deal.
Skills assessment startup Smarterer accepts a $75 million acquisition offer by online training platform PluralSight.
SAP’s CEO Bill McDermott says that the company will taper down its acquisition deals.
The DreamWorks merger with Hasbro Inc. may no longer be feasible.
TechCrunch Disrupt San Francisco winner Alfred goes live in New York and raises $2 million for its butler service.
Teespring raises a $35 million Series B from Khosla Ventures and will expand beyond apparel.
Relationship management startup Accompani gets another $15 million while still in Alpha.
Bigcommerce gets $50 million to set up online shops for small businesses worldwide.
Kiip raises a strategic funding round from Verizon Ventures and Michael Lazerow as it looks beyond mobile ads.
Getaround takes in $24 million more to help make car sharing instant.
IPO and accelerator news:
Rocket Internet says its portfolio value increased by approximately $92 million after IPO, gives a bullish outlook for the next decade.
500 Startups launches a $10 million mobile collective fund and hires ex-Dolphin Browser executive Edith Yeung to run it.
Techstars releases report on graduates’ survival rate: how many are active, were acquired, or failed.
Vevo confirms Rio Caraeff to step down as CEO with CFO Alan Price to replace him as interim chief.
Bill Gates invests in the Unitus Seed Fund to support entrepreneurs in India get new ventures off the ground.
Former BlackBerry CEO Thorsten Heins has been named to run wireless charging firm Powermat.
Geekwire Q&A with Seattle investor Gary Rubens about his 50 deals in the past 18 months.
After selling Draw Something to Zynga for $200 million, founder Dan Porter launches new startup Tally.
Say hello to the “hardware unicorn club“.
Young Brits in Silicon Valley: How to make it big
Why Silicon Valley shouldn’t be the model of innovation.
Honda opens up a developer studio in Silicon Valley to accelerate integration of mobile apps into its vehicles.
Contractor or employee? Silicon Valley’s branding dilemma.
Fred Wilson writes about values and culture.
Eric Schmidt’s Innovation Endeavor firm teams with Flextronics Lab IX to launch Farm2050 Collective to back agriculture tech startups in an effort to feed Earth’s growing population.
The Information takes a look at the companies that never became a unicorn.
Photo credit: curtiscopeland/Pixabay
Hello, happy Friday, and happy Veteran’s Day week! Here’s a roundup of news, tidbits, and data from the week in tech M&A:
Yahoo has agreed to acquire video ad company BrightRoll for a reported $640 million. Ad Age has an interesting take on why Yahoo simply had to make this deal.
Churchill Downs, which owns the Kentucky Derby, is buying Big Fish Games in a deal that could be valued at up to $885 million.
Mandalay Digital is buying mobile app marketer Appia in a deal valued at $100 million in stock, options and debt.
Microsoft acquired Israeli cloud security firm Aorato in a deal rumored to be valued at $200 million.
Media house Fullscreen acquired Austin digital studio Rooster Teeth, for an undisclosed amount.
App marketplace AppDirect acquired data visualization startup Leftronic. Terms were not disclosed.
The SunPower Corp has agreed to terms with clean energy startup SolarBridge. Terms were not disclosed, but SolarBridge had raised more than $100 million.
And in not-quite-an-exit-yet news, Funny or Die has hired a financial advisor to explore valuation and a possible sale.
Tech M&A deals hit a new post-dot-com high of $73.7 billion, up 4% year-over-year, according to data released by Ernst & Young. There were 923 deals, the highest in a quarter since 2000 and 19 of the deals were larger than $1 billion–a new record for a quarter.
Venture funding continued to stay hot in Q3 2014, though not quite as scorching as in Q2, according to Fenwick & West’s quarterly report. Fundings with an “Up” round exceeded down rounds by 76% to 12% in Q3, which was down from Q2, when up rounds beat down rounds by 80% to 6%.
Interesting look at two of the week’s biggest IPOs (Hortonworks and New Relic), and the percentage of overhead covered by actual revenue of these two companies and several others.
For the entrepreneurs in the house
Satya Nadella breaks down his vision for the future of Microsoft. Not surprisingly it’s Windows, Office 365, and Azure.
A good refresher: Justin Kan of Y Combinator creates a quick guide for founders looking to sell a company.
Joseph Walla gives detailed guidelines on how to valuate your company for a seed round.
And in case you haven’t seen it, The Oatmeal takes on Net Neutrality…as only The Oatmeal can.
Elon Musk is turning his attention to satellites.
A totally awesome, modular 3D printer that also engraves, scans, and more.
And in some epically cool news, the European Space Agency’s Rosetta mission successfully landed a probe on a comet.
Photo credit: werner22brigitte/pixabay
What are the actual returns for investors and founders when startups get acquired? There is plenty of talk lately about bubbles, burn rates and risk, but what are the actual returns that these companies are making?
One obstacle to determining real numbers is that most tech companies that are acquired do not release exit prices. Only 31.6% of the total M&A deals last year released an exit price, per Crunchbase. This happens for various reasons. Private company buyers are not required to release prices. Meanwhile, public company buyers often do not release a price if it is not considered large enough to be “material.”
Despite the lack of disclosure, it’s still possible to analyze the industry’s exit prices and returns. To do this, Exitround did an in-depth analysis of exit returns across different verticals. Using detailed data from Exitround’s Exit Report, we found that companies with exit prices below $100 million returned on average 12.8 times their total invested capital. For comparison, companies in Crunchbase with exit prices below $100 million generated 8.97 times total capital invested. Meanwhile, that number was higher for all acquired companies in Crunchbase: 17.2–that includes companies exiting over $100 million.
For comparison, Fred Wilson has written that a typical venture fund needs to get 4x return on its investments to generate a 2.5x distribution to limited partners. While a 4x return is lower than the average companies in Exitround or Crunchbase’s data, Wilson’s analysis includes companies that are shut down–which are typically one-third of a fund. So if you want to consider the return figures at an investment fund level that should be kept in mind.
As noted above, the M&A deals in Crunchbase’s data under $100 million had a lower average return on capital invested (8.97) than did the companies in Exitround’s report (12.8). What explains this difference?
One explanation is that Exitround’s data has the exact amount of capital that companies raised – whereas often companies do not publicly disclose this information. Crunchbase does not always have this data, particularly for smaller companies. So Exitround’s data has some higher ROI deals that Crunchbase does not. This can be seen in the capital raised section below (chart 3), where Crunchbase companies with exits below $100 million raised close to $10 million at the median and $23 million on average, whereas companies in Exitround’s data had raised $1.2 million at the median and $3.6 million on average.
The other explanation is that Exitround’s data set comes primarily from top seed investors and incubators that have backed companies that have generally performed well. Crunchbase, however has a broader set of companies, some of which may not get strong returns from seed or Series A deals.
Which Companies Had The Best Return On Capital?
In terms of specific sectors, mobile companies and SaaS companies had better returns on capital invested, while ad tech and social companies did worse, according to Exitround data. Some larger exits boosted the average prices of mobile and SaaS companies, while median prices of mobile and SaaS did not differ much from ad tech and social companies.
The Exitround exit data is directionally similar with Crunchbase data for return on capital invested. The sector where Exitround’s data differed from Crunchbase’s most was in social/adtech. This suggests there were proportionally more high multiple exits in ad tech/social than in other sectors.
Which Companies Had The Best Exit Prices?
While return on capital shows mobile and SaaS companies did best, a look at exits in absolute dollar terms shows that mobile companies had the largest exits, according to Exitround’s data. Interestingly, however, mobile companies raised among the least amount of capital (see chart 3 below), which explains why mobile companies had among the highest return on capital invested. One explanation: more mobile companies were consumer companies and therefore got traction faster than some of other types of companies.
The other sectors, such as adtech/social media and cloud/SaaS had lower prices than those for mobile, hovering near $10 million in average exit price. But lower exit prices did not mean that ROI was not high. For example, despite lower average cloud/SaaS exit prices compared to mobile companies, ROI for cloud/SaaS companies was almost as high as it was for mobile companies in Exitround data (See chart 1).
We also compared exits prices in Exitround’s data set at less than $100 million with companies in Crunchbase to get an equivalent comparison. In this comparison, median Crunchbase deals were 5.1 times larger than median deals in Exitround’s data and 2.84 times the average deal in Exitround’s data. This can be explained by the fact that the prices of many smaller deals under $10 million do not get reported publicly and therefore not included in Crunchbase, which inflates average Crunchbase deal sizes. Also, many “leaked” exit prices are not accurately reported in the media. Typically, leaked small deals are reported as a $10 million or $30 million deal but are actually much, much smaller.
Which Companies Raised The Most or Least?
In terms of capital raised, mobile companies raised the least on average, according to Exitround data. This could be because a number of mobile apps were quickly acquired before raising much capital. Cloud and SaaS companies raised the most on average, which could be due to enterprise companies often taking longer to build their products and gain traction in the market.
Happy Friday, and happy Halloween! Here’s a recap of the week in tech M&A:
Deezer, a French music streaming service, has acquired Stitcher, a provider of personalized Internet talk radio. Terms were not disclosed.
Google’s Nest Labs is a buyer again, this time picking up Revolv, makers of an IoT unification app. No terms were disclosed, but Revolv had raised about $7 million.
Amazon acquired Rooftop Media, an online comedy service. Terms were not disclosed.
Yelp picked up French restaurant and nightlife reviews site Cityvox. No financial terms were given.
In an “all-equity deal,” in-store analytics company Brickstream has acquired competitor Nomi.
BuzzFeed has acquired Torando Labs to create a foundation for a new big-data team.
In case you haven’t seen it, Benedict Evans has a fascinating deck showing how “mobile is eating the world.”
For the entrepreneurs in the house
In another sign the IPO market is cooling, secondaries player Akkadian Ventures just closed a $74 million round.
In an unusually candid (but must read) series of posts, social media platform manager Buffer is sharing everything about its valuation, term sheet, and funding process. And we mean everything.
In a follow up, Shri Bhashyam wonders if Buffer’s series A is a “paradigm shift in fundraising.”
CurrentC may be “clunky,” but it’s taking on Apply Pay and Google Wallet, among others, with its non-NFC mobile payments solution.
In related news, Alibaba is exploring an alliance between Alipay and Apply Pay.
And Poynt aims for a single payment platform that can handle all of it.
And in warm-your-heart news, a former tobacco factory is being sold and converted to making batteries to collect wind and solar energy.
Photo Credit: CCO Public Domain / Pixabay
Exitround and ACG San Francisco recently hosted a panel on M&A at Orange Silicon Valley. Expert panelists discussed what to know and how to engage in an acquisition with private equity or corporate buyers. This event was part of the ACG Ignite launch event Where Technology meets Capital. Event sponsors were: Bertram Capital and Protiviti.
The panel was a wide-ranging discussion that covered: how to make a decision to sell, how to decide between raising capital and being acquired and how to manage relationships with investors.
Jacob Mullins – CEO & Founder, Exitround
Gary Johnson – Director of Corporate Development, Facebook
David Lam – Managing Director, West Summit Capital
Mark Selcow – Entrepreneur, Past-president and Co-founder, Merced Systems
It’s once again time for Exitround’s This Week in Tech M&A…
Yelp acquires Restaurant-Kritik, a Germany based restaurant review company.
Ooyala buys European video ad startup Videoplaza.
Yahoo is reportedly talking to video ad platform BrightRoll about acquiring it for $700 million.
Google has acquired Firebase to help developers build better real-time apps.
Citrix buys e-signature startup RightSignature.
EMC gets a bigger stake in VCE after Cisco reduces its stake in the company.
Progress Software buys Telerik for $262.5 million to help form a cloud platform for developers.
Google’s DeepMind acqui-hires two artificial intelligence teams in the UK.
Attentive.ly scores $750,000 to layer more social marketing onto companies’ platform.
Smartphone payments processor Flint Mobile raises a $9.5 million Series C round led by Verizon Communications.
Roku closes a $25 million investment round to take on Amazon and Google.
Anti-Facebook social network gets a $5.5 million investment and converts itself into a Public Benefit Corporation to legally prevent any advertising on its platform.
Urban Airship gets $12 million from its existing backers to bring its total investment to $60 million.
Slack is reportedly raising a new round that will value it at $1 billion, but the company says that it’s not true.
IPOs and corporate updates
Airbnb is said to explore an employee stock sale and could soon be valued at $13 billion.
AOL CEO Tim Armstrong says that a CrunchBase spinout is possible.
A new study suggests that venture capitalist confidence is waning in Silicon Valley.
Early stage investor Version One Ventures closes a $35 million second fund.
SOSVentures launches a pure biotech accelerator.
Google Ventures talks about its investment strategy in Europe.
TechStars is looking for more mature startups to join its various accelerator programs.
Marc Andreessen steps down from EBay’s board of directors.
The Federal Trade Commission names Ashkan Soltani, the independent researcher who helped the Washington Post report on Edward Snowden, as its chief technologist.
Why Marissa Mayer is still the right CEO for Yahoo.
Google[X] chief Obi Felten talks about finding the right real-world problems to fix.
Photo credit: werner22brigitte/pixabay
Exitround recently held an event with speakers Justin Kan and Josh Felser at 500 Startups in San Francisco. The two speakers, who are successful investors and entrepreneurs, talked about what it takes to build and to sell a successful company.
Josh Felser, cofounder, Freestyle Capital; cofounder, Spinner, Grouper.
Justin Kan, partner, Y Combinator; cofounder, Twitch, Justin.tv.
– How Justin and Josh built successful startups.
– How to assess and explore strategic options for your company.
– How to manage your team’s expectations and public perceptions during this time.
– How to work with your investors regarding M&A opportunities.
– How to get to know corp dev execs and other acquirers in your sector.
– What to know in negotiations for a deal process.
– How to know if an acquirer is a good fit for your company.
– What to know about deal structures.
Josh Felser is cofounder at seed stage firm Freestyle Capital. He cofounded Spinner and Grouper, which were acquired by AOL Time Warner and Sony for $320 million and $65 million respectively.
Justin Kan is a partner at Y Combinator. He previously cofounded companies including Twitch, Justin.tv, Exec and SocialCam. Twitch was recently acquired by Amazon.com for $970 million.