Hunter Walk On Prospects And Challenges For M&A

By on October 20, 2015

Hunter-WalkHunter Walk is a seed stage investor and cofounder of venture capital firm Homebrew. Previously, he was at YouTube running consumer product management. He joined Google in 2003 and managed product and sales for contextual advertising. He was previously a founding team member at Linden Lab, maker of Second Life. We caught up with Hunter to get his thoughts on the current M&A market and venture capital valuations in the private markets.  

Q: Are you seeing a slow down or pull back of any part of the VC investing market in recent months? Is it caution, valuation sensitivity, fear of the market, LPs, or something else?

HW: Homebrew is a seed stage fund and we haven’t seen any softness in seed stage financings. Additionally, startups we’ve backed are being well-received as they raise A Rounds and B Rounds. We’ve always focused on the notion of substance over noise, so startups we work with tend to go to market when they’re ready.

That said, I do think certain verticals are being looked at differently than they were a few years ago, with more of an eye towards margins than just growth for the sake of growth. Certain on-demand segments come to mind as well as ecommerce companies that are nothing more than resellers/aggregators with narrow margins.

Q: What are you seeing with M&A activity recently? Any indication that companies are more (or less) open to acquisitions recently?

HW: The days of companies just indiscriminately acquihiring teams of generic engineers are over, especially if the cap table wants to see any money returned. Specialized technical teams (Artificial Intelligence, Virtual Reality, Natural Language Processing) seem to still have buyers for talent and tech.

Upmarket there are going to be an increasingly large number of $50 million – $250 million acquisitions by large tech players, Unicorn startups and F500 corporations. The challenge for the venture community is that in 95% of cases, the acquirer is going to come to their own valuation for the startup and not base their offer on the last overheated financing round.

Q: Do you want your companies to have an idea of potential exit strategies when you invest or later on after you invest? What, if anything, would you like your companies do to proactively prepare for a potential exit?

HW: No, I hate talking about potential exits as part of seed stage funding. We want to invest in teams that think there’s a large, urgent, valuable problem to solve and it’ll take them years and years to solve it fully. Create a great technology, build an amazing team, scale an awesome business and they’ll always be exit opportunities. We do think proactively with our companies about funding paths and if it reaches the point where an exit may make more sense than pushing forward as an independent company, we work to help them through that decision.

Q: Do you have an idea of what your companies’ exit sizes could be, who’d buy them etc? Do you have a target metric or size for your exits? For example, some like Dave McClure are happy with 3x or 5x on a small investment, whereas others seem less enthusiastic (if not completely against) these smaller exits.

HW: We make 8-10 investments a year and each one needs to have the potential to be meaningful to our fund. The way we define that is, “in a success scenario for them, could we return minimally 1x the fund with our investment?” What makes this work?

First a realistic scenario of what “success” looks like – for many companies that’s a $300-$500 million exit. We don’t want to force ourselves into a corner where we look to multibillion dollar exits as the only definition of success for every type of company.

The second part of the equation is our ownership. We look to invest to the level where we can get that impactful stake at a fair price. On average this ends up being around 10-11% but we’ve gone up to 20% and higher in certain circumstances.

So we sit somewhere between Dave’s strategy for 500 Startups and the large funds that *must* own 20% or it’s not worth their time. For us it’s the right place given what we think seed companies need from a lead investor.

Q: How active do you get in terms of the M&A process with your companies?  Or do you prefer VCs stay out of it?

HW: To me, M&A is like any other funding activity – the investors can play an important supporting role but ultimately it’s about the founders and the acquiring company. I’ve definitely seen M&A deals get messed up when the investors or other intermediaries play too large a role.

That said, to date we’ve gotten very involved in these sorts of discussions, always in concert of trying to help both parties find mutual ground. We can give founders a perspective of the market, what a M&A process typically looks like, and other information which comes from our position.

We can use reputation and goodwill to help connect with potential acquirers or gain endorsements from other stakeholders within a company. We can help a startup extend their runway to let M&A discussions play out organically versus their back being against the wall. There are plenty of things a good lead seed VC can do.

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