A difficult decision: when is the right time to sell your company?

The secret to comedy is, apparently, timing. But it’s also the secret to maximising the sale value of your business. Because — as all good entrepreneurs know — there’s nothing funny about losing value.

The subject of ‘the right time’ is a subject that comes up with a lot of the companies that I mentor or angel-invest in. It’s actually a good question to hear early on — if the subject comes up, you know the founder will not hold on forever and you can start planning for the exit.

Of course, each market’s optimum time is unique; there’s no ‘one size fits all’ solution. The key action point here is to know which industry you are part of — remarkably, some don’t — and forecast how it’s going to play out. Here, I’ll give my method for working out when your market is ripe for sale value, diving into mobile to illustrate my point. The techniques I’ve used can be applied to any tech market.

The background

I spent almost a decade working in mobile as part of a great founding shareholder team (alongside Luke, Ol, Dean, Alex and Alex). Together, we built a fantastic mobile tech company from a handful of people to over 300, from one office to nine around the world.

We raised several million dollars along the way to help us grow, and the big exit did happen (in 2017). We might be left might be wondering whether a higher value was still around the corner, or if we had not sold then we might have missed the boat. Did we call our market’s timing early, maybe it was a little too late, or was is it bang on? Wasn’t the year of mobile meant to be last year, or was that 2010?

The state of play during 2017

Here’s what we were looking at in mid 2017:

• Social is in the acquisition stage and has arguably topped out after the purchases of Whatsapp and Instagram.
• Fintech is probably coming to the end of the investment stage — 2016 did not, and 2017 is not expected to, exceed 2015’s peak investment levels, due in large part to the lack of $1 billion+ mega-deals (but look out for companies like Stripe, Sofi and Kensho if you’re still keen to invest).
• Mobile had a very active year in 2016 as you will see below. Was that peak of its market valuation and the beginning of the acquisition stage?
• Edtech is just starting to limber up, but has hardly got going yet — there are some big deals ahead.

Yes, every industry has its investment phase, followed by its exit phase. Bit of a hype cycle by industry, really.

So, has mobile’s ship sailed?

Let’s examine the evidence — starting with the basics. The first exercise is to map the current ways your industry makes money.

Find the money in your market

For illustrative purposes I will use the mobile market as my example from here on. The diagram below (made on Paper, a great app and business) shows that mobile money is now made in six places:

• The companies that make apps
• The IT consultants
• The platform providers and background service providers
• The apps themselves
• The advertisers on those apps
• And, of course, the handset makers.

I’m going to ignore the apps themselves, the mobile media and the handsets. Instead, I’ll focus on the bottom horizontal slice of the picture — the value created when apps are made — which is where the likes of FeedHenry, NewRelic and Xamarin all sit.

Examining your market’s recent activity — often the last 2/3 years

After the simple progression from SMS campaigns and WAP sites since 2000 to the glory days of the mobile pure-play agencies and tech companies about four years ago, the mobile game had changed by late 2014. The last three years have seen unprecedented activity and changes in where money is made as the market matures.

The value of the market that the app-making niche players (such Mubaloo, Chelsea Apps Factory, Tigerspike, Golden Gekko and Monetise Create) had created began to be sliced three ways. Simultaneously, prices started to get squeezed downwards by offshore companies who came of age and those that suddenly simplified the app building process such as Pixate (bought by Google) and those that provided useful services such as Zipdial (bought by Twitter).

• Value split away from the app makers to the left. High value, high margin sectors such as IT consultancies, UI/UX and business process re-engineering came into high demand as apps became business-critical projects; companies like Accenture bought Fjord; Deloitte, Synnex, Infosys, Cognizant and the big guys made big IT consulting plays, winning multi-million dollar contracts for app delivery.
• And value also split to the right: analytics platforms such as Omnivore, app performance platforms such as New Relic, multi-platform development tools such as Xamarin and Titanium, and BaaS platforms such as FeedHenry have all taken a chunk of money out of the mid-section of the diagram.

Until the first half of 2016, a little euphoria crept in. More capital spilled into Wall Street, the London Stock Exchange and mobile company founders’ hands than ever before.

The mobile market reached an important stage of maturity, with evidence of significant late-stage investment, 100% acquisitions and even stock market IPOs:

• In 2013, Monitise bought Grapple for ￡16.5m.
• In 2014, New Relic IPO’d (and got a jump in value of more than 45% on its first day!) after Red Hat bought FeedHenry and Monitise bought Turkey’s Pozitron for more than ￡60m.
• 2015 saw Google buy Pixate, Localytics buy Splitforce and Twitter buy Zip Dial.
• Early in 2016, Mubaloo was sold privately for an undisclosed sum and The App Business was sold to the St Ives group for more than ￡50m (not bad on the back of an ￡11m turnover).
• Microsoft recently bought Xamarin, which was expected, but no one foresaw that Deloitte would continue their acquisition of mobile tech companies/agencies (which pretty much started with Ubermind in 2012) with their purchase of Heat.

Money has been rushing into late-stage private tech markets, with private equity groups and traditional mutual funds trying to squeeze into the stocks before IPOs happen. Founders are starting to make real money off the companies they started, on average, four to eight years ago.

Looking to the future: this year of 2017 and beyond

Next, we need to work out if the focus of our market will change in the future. It’s key for your value as a company to stay where the money is going to be made, or you could end up in a tight margin segment with good money being made elsewhere.

In the case of mobile, this shift to IPO and acquisition will have a ripple effect that will change the whole mobile market. There will be some winners but the majority of companies will be losers. The entire mobile market is now headlong in a rush to create scale.

Mobile became a ‘late stage’ market (the step before maturity) in 2014 and 2015. Its current stage of market maturity still sees very high market growth and all parts of the mobile market are behaving well in this respect.

One such slice is the mobile application platform, which — according to Craig Muzilla, senior vice president of application platform business Red Hat — is one of the fastest-growing segments of the enterprise software market.

In a statement, Mozilla said: “As mobile devices have penetrated into every aspect of enterprise computing, enterprise software customers are looking for easier and more efficient ways for their developers to build mobile applications that extend and enhance traditional enterprise applications.”

This is why Red Hat bought FeedHenry. But we all know Red Hat as the most successful open source software provider with a market value of $11bn. Acquisitions such as FeedHenry have grand implications, which will cause ripple effects that will change the whole market.

During 2017 and beyond, we’ll see lots of small players being acquired to create decent-sized global players. Those that don’t get acquired will either fall by the wayside or go their own way with significant new funding rounds or IPOs to grow fast.

It would seem that if you don’t have serious scale in three years, you will be left behind. You won’t necessarily die (look at the hundreds, if not thousands, of website agencies) but you will be destined to dwell in the little league of ‘could'a been a big shot’ players.

Splitting value: where will we sit?

The right slice of our diagram above is growing fast but is so much smaller. For example, the mobile application platform market was worth $1.4 billion in 2013 and will be worth $4.8 billion by 2017 according to forecasts from IDC. Moves like Red Hat pushing FeedHenry open-source will mean it’s going to be a race to ‘free’, with revenue being made in other higher-value services (the left-hand side of our diagram above).

The old app development companies are mostly still caught in the middle. They don’t have products or platforms mature enough to move right, and they don’t have the gravitas and consultancy mindset to move left. Plus if they have not off-shored themselves, then they are still under massive price pressure from the good offshore players and larger outsourcers.

The end result: they go home at night feeling annoyed that folk like Deloitte are picking up the multi-million contracts and frustrated that companies are giving away some of their recurring revenue services for free. They’re stuck in the middle with low average value contracts, are still moving from project to project and are generally winning less at lower margin due to the downwards price pressure.

Ouch. Not a nice place to be.

So, what’s the solution? What if you’re in this trap?

The best companies will get bought — and soon, by the big IT boys. The best of the best will build their own scale by, in the vast majority of cases, moving to the left to capture the millions of dollars being taken by the big guys and raising late-stage VC money.

It’s a big leap to become big enough, trusted enough and high-skilled enough to beat the IBMs and Deloittes, but it’s not impossible. I see it happening already.

What you need are really bright people, but I’m afraid to say that mobile tech companies or agencies have not been famous for being chock-full of very smart professional services people. And once you can win this tech-consultancy style high-value business consistently (and deliver it) — build scale quickly — there are too many 50 to 400-people mobile companies out there. Decent scale starts at 500. And not in 10 locations — in just a few. In a market being squeezed on price you need economies of scale (or an acquiring partner to provide them).

So one option is to get acquired and cash out asap, but I’m assuming that if you have read to this point then you want to make it big yourself. What you now know is that you can’t stay in the middle. The move to right is hard to make (as it really means you need to become a product company) and is going to be a ‘for free’ (or nearly free) market.

The move to the left is the sensible one — but will require some dramatic up-skilling at all levels right through your company to board level. And of course, get your own offshore office while you’re at it. You will need to do everything 10 times better and at cheaper cost to win.

Lessons to learn from mobile, for any industry

Industries change fast

You often need to reposition to capture the moving value to get more, or to stop being squeezed in what become low margin segments.

Each industry has an early exit bubble

If your strategy is to get out as early as possible — at the top of the valuation bubble/sector hype — then great, you need to time it right. But, of course, you will potentially be selling your company at an early stage — and you will never know where you could have got to if you’d have kept growing it.

If you agree with the latter of these two viewpoints — if you want to build to a much larger scale before you sell — then great. You won’t get the same valuation multiples but there is always an exit route for really good companies. And the larger you build the company, the more the sale value — even if off a lower multiple.

At scale you are more likely to become an acquisition target if...

...you are larger than your competitors, fast-growing, highly profitable, have high leverage and low liquidity. A recent study by Cass Business School and Intralinks analysed 34,000 companies and 14,000 acquisition targets over 23 years to come up with the Acquisition Attractiveness Calculator; you can check your score and get the full report here. Not all the metrics are necessary for your company, but it gives you a good steer for what kind of business you need to build to look attractive for buyers in the long term.

And if you happen to be in the mobile industry...

...good luck — you'll hopefully have laid the foundations in previous years that will see you make it to the big time (or not) in this market.

Either way, strap in — you’re in for a good ride. 2017 is the year to get off in my view.

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Nic Newman

https://medium.com/@naxn