?? The Lack of Exits (IPO & M&A) & How to Approach M&A | #11

Good morning, fellow founder! ??

Welcome to another edition of FounderForge. Your Europe-focused startup digest - just because we do things a little differently here! ???????

If you missed our last issue, you can still read it at the link below! ??

?? The Massive Scale of LinkedIn & Founder Personal Branding 101 | #10

Today's topics are all about exits:

• The Lack of Exits (IPO & M&A) ??
• How to Approach M&A as a Small Startup ??

???Data Dive: The Lack of Exits

In 2023, cash was king. ????

With interest rates still high, there was little appetite to invest in risky stocks.

So the IPO window remained closed and only the bravest (or most desperate?) took the risk…

But hey, with capital drying up, cash-strapped companies have to look for a way out. Right?

The perfect storm for heavy baggers to go on a shopping spree for some cheap equity. ???

At least that is what many expect, but it never happened.

Contrary to initial predictions, the M&A landscape remained surprisingly quiet, with the number and value of deals hitting record lows. ??

According to Pitchbook , 2023 was the worst year in a decade for VC-backed M&A deals.

Fewer than 1129 startups exited for a total value of $61.5 billion.

The “year of efficiency”, as our boy Mark Zuckerberg called it, seems to have been in full effect for most of Big Tech (our usual "exit gateway").

And for Meta, at least, it paid off big time - last Friday (02.02.24) the stock was up 20% (or $196 billion - the largest gain in stock market history) after great numbers across the board. ??

Creative approaches to M&A & IPOs

With the exit market in crisis, new creative opportunities are emerging.

One particularly interesting one, which is becoming increasingly fashionable, is the private reverse merger (PReM). ?

Now the obvious question is: what the hell is a PReM?

It is a strategy in which a smaller, fast-growing but loss-making private company acquires a larger, more profitable incumbent.

The ultimate goal is to achieve growth while increasing profitability by merging the two separate entities. ??

Some have even used this strategy to pave the way to the public markets, saving the cost of a formal IPO (which has also contributed to the historically low number of IPOs, as we saw in 2023).

A very interesting under-the-radar concept (that could work for you too? ??).

If you want to know more about it, take a look here. ??

How a PReM can boost your scale-up | LinkedIn

Worrying regulatory developments

Something less talked about, but also a possible reason for the low level of M&A activity, are the recent blockages of major M&A deals:

• Adobe's $20B acquisition of Figma: BLOCKED ??
• Amazon's $1.4B acquisition of iRobot: BLOCKED ??
• JetBlue's $3.8B acquisition of Spirit Airlines: BLOCKED ??
• Visa's $5.3B acquisition of Plaid: BLOCKED ??
• UBS's $1.4B acquisition of Wealthfront: BLOCKED ??
• Meta's $315M acquisition of Giphy: BLOCKED ??

It's no fun to buy when the regulator keeps you on hold only to end up banning the acquisition altogether. ??

Fingers crossed we see some action coming back in 2024! ??

?? Founder's Toolkit: M&A Guide for Small Startups

There are 100 reasons why it might make sense to sell your company:

• You can't scale any further
• You have too much legacy or operational debt
• You are unable to raise the necessary funding
• You have new or changed personal circumstances.

The list goes on. ??

Whatever the reason, it may simply be necessary to reach the next phase (you and/or your company).

So how do we get things started? ??

Probably the best way to get into an M&A deal is through the experts. ??

Unfortunately, M&A advisors are not really an option if your company is worth less than 8 figures - realistically, anything under 50 million is not an attractive case for M&A advisors.

Yes, some do smaller deals, but frankly, they rarely deliver value for money ??

?? Next are marketplaces like acquire.com .

Simply put, these are websites where you can list your business like on eBay.

Let us just put it this way: if you are not a profitable Micro-SaaS (like 99.99% of all venture-backed startups), you can save yourself the trouble and just shut down. There won't be much money left when you sell on a marketplace. ??♀?

So let's look at the last (and only) option: DIY (like everything else in life, eh?). ??

Let us at least give you a hand and show you how to do it. ??

Step 0 - Set your expectations

Before we even get started, something needs to be said: your last valuation is not what you are worth - most likely far from it. ??

Frankly, it's probably best to get that idea out of your head quickly (sorry, bro).

To set some realistic expectations, it might help to compare some numbers to the Bessemer Cloud Index .

Step 1 - Understand the value of your assets

The first thing you should do is get a clear understanding of what assets your business has and what they are realistically worth. ??

Assets can be anything from your software, brand, and licenses to more traditional things like your customer base.

Now you may be thinking, "How do I value these things? ??

Well, you have to be creative. ?

Software, for example, can be valued by specialist companies who can give you an estimate of how much time it would take to develop your software and how good it is. Add that to the average hourly cost of a software developer and you have a good estimate.

Customers, on the other hand, can be valued either by their CLTV (customer lifetime value) or - probably a more realistic figure - their current CAC (customer acquisition cost). ??

Try a few things. ??

It's more about getting a rough idea than an exact one. You can see it as a negotiating position.

Step 2 - Research your potential buyers

There are typically 3 main categories of potential buyers.

1. Local competitors: Companies that offer the same or a very similar product in a market like yours: ? In most cases, the easiest way to go process-wise.? Often many of your assets have almost no value to them (i.e. only your customer base has real value).
2. Complementary businesses: Companies where your product would be a great addition to their current offerings: ? They are likely to see value in most or all of your assets. ? Complex integration and highly dependent on the people in your company (will they/you stay?).
3. Foreign competitors: Companies that offer the same or a very similar product to yours, but in a different market: ? See value in a broader, geographically specific set of your company's assets. ? However, certain assets will likely be undervalued (e.g., the software).

The best buyer will be interested in a combination of your assets, where 1+1=3. ??

Step 3 - Prepare your operations

The moment you decide to exit, it is time to trim as much fat as possible. ??

The easier your business is to integrate, the easier the deal will be. ??

And let's face it - how much of your company's operations and systems are really needed for an acquisition?

Better to get rid of it now, before due diligence (where less is more) kicks in and things get even more hectic than they already are. ??

Step 4 - Start the outreach

Now that you've defined the perfect buyer, it's time to reach out. ??

As with fundraising, warm introductions work best. ??

Your second best option is LinkedIn.

If the first meeting went well, just be honest and direct.

There's no need to waste time and play games (that doesn't mean you shouldn't negotiate!). ????

Step 5 - Close the deal

If you thought fundraising was a long, hard process, the rigors of an M&A deal will crush you. ??

Make sure you have the runway to support a proper negotiation and be prepared for some intense days.

Whatever you think it will take - double it. ??

Make sure that the more progress you make, the harder it is for the acquiring company to stop the process.

The last thing we want is for a promising deal to fall through. ??

Step 6 - The time after

So everything is signed. What comes next? ??

Well, realistically, this whole process will take some time, even after the ink is dry, and in most cases, you will need to stay on (at least for a little while).

Take the time to recover, let go of the tension of the crazy responsibilities of the past few years, and try new things. ??♂?

There's still so much to conquer - and wouldn't it be a shame to quit now that you've done it once? ??

???Founder's Library: Curated Resources

A collection of random reads that the FounderForge team enjoyed.

• 5 Things I Learned About Leadership From the Death & Rebirth of Microsoft? by Dare Obasanjo
• Adam Neumann Is Trying to Buy Back WeWork by Mary Ann Azevedo (this guy is just crazy)
• Finding Your Company’s Next Growth Opportunity by Ross Nazarenko
• Top Five Product Lessons From Creating Snapchat by TwentyMinuteVC
• Why You Should Minimize Friction by Andrew Chen
• Why Building In Public Is a Superpower and How to Do It Right by Tyler Denk ?? (the founder of beehiiv - the tool that runs the FounderForge newsletter ??)

???Meme of the Fortnight

Better keep an eye on these liquidation preferences... ??

?? Your Thoughts on Today's Edition

• ?? It was great!
• ?? Meh - it was okay.
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Cheers,

The Founders Blacksmith ??

Issue #11 | 08. February 2023