DevelopmentCorporate

How Much Equity Do VCs Really Get?

In challenging economic times like this many folk are tempted to break out of their personal economic straight jackets by launching a technology startup. ‘Capital-light’ startups are the rage today, thanks to the extremely low costs of hosted services and the plethora of open source infrastructure software solutions. Many newbie entrepreneurs look to venture capital as the best way to finance the launch and development of their business. A common question raised by many of these entrepreneurs is ‘how much equity do VCs typically get?” Thanks to the folks at OwnYourVenture.com, entrepreneurs can now use a web based tool to model the impact of multiple rounds of venture capital funding. This post explores not only the math behind how founders’ equity gets diluted by venture capital, but it also models what founders’ ultimate payoffs can be in various exit scenarios. One pof the key takeaways is that you should worry more about how much VCs will own at the end of the fund raising process and what your exit will look like versus how much equity you give away in your Seed or Series A round.

Why I’d Prefer 1,500 Mid-Market Customers over 25 Fortune 1000 Customers

As the reality of 2010 sales forecasts settle in, enterprise software firms are beginning their annual hunt for new revenues. Many of them are considering moving ‘down-market’ into the mid-market space. This is a re-post of a piece I did last summer that talks about why I’d rather have 1,500 mid-market versus 25 Fortune 1000 customers.

SaaS Valuation Update January 2010

Interest in public company SaaS valuation trends continue to grow. This post presents an update on key valuation metrics for public SaaS companies as of January 2010. Includes metrics on Enterprise Value, EV/Revenue, EV/EBITDA, Gross Margins, EBITDA MArgins, Revenue Growth Rates, and YoY Stock Market Returns.

A Tempest in a Chinese Teapot. The Non-Merger of CDC Software & Chordiant

It only took six days for CDC Software to launch and then exit an unsolicited offer for Chordiant Software. CDC’s offer was spurned by Chordiant since it “significantly undervalues Chordiant and is not in the best interests of Chordiant’s shareholders.” Yesterday CDC Software announced their intention to sell the 1.3% stake of Chordiant they owned. CDC Software’s offer may have been spurned, but a deeper look at the numbers show it was spot on for public companies in Chordiant’s space CDC Software’s prescription for Chordiant’s ailments is probably spot on. Click through to read more details about this saga as well as three other enterprise software firms that decided to accept low, but viable offers for their businesses in the past week.

What the Proposed Carried Interest Tax Means for Private Equity Portfolio Companies

Congress is looking to raise $24 billion over the next 10 years by changing how private equity firms are taxed on the profits of their investments. If you are a senior executive at a private equity backed portfolio company you need to understand how this tax change will impact your owners and their attitudes toward your business. As noted in a recent Wall Street Journal article there are very different opinions about the tax law change. “Private equity will endure, but the draconian tax hike, if enacted, will unquestionably slow the flow of capital to companies struggling to get back on their feet during this very fragile economic recovery,” said Doug Lowenstein, president of the Private Equity Council, a trade group. “It’s amazing to me that at the same time the U.K. is imposing a 50% excise tax on bankers’ bonuses, the private-equity guys aren’t even willing to pay the usual ordinary income rate,” Mr. Fleischer said. “You would think they would recognize a fair deal when it’s offered.”

Whether the tax is fair or not is not the major issue for portfolio company executives. The real issue is that private equity owners could push for the sale of your business in 2010, at significantly reduced prices, to maximize their yield on the investment in your firm. Click through to read the whole post and take a look at the math and its implications for your business.

Manufacturing Revenue 2010

If your company’s products/services are in the middle to latter parts of the life cycle, it is harder to sell new customers. In 2010 a lot more companies will be looking to acquire social media analysis/monitoring platforms, hardware/software virtualization, and cloud computing services than those looking for ERP solutions, mainframe job scheduling, or electronic data interchange. This does not mean that there are not significant revenue opportunities for older technologies – it just means that you have to work a lot harder since most buyers do not wake up in the morning and say “I really need to buy some middle-aged technology today!”

Manufacturing revenue is a harsh reality for most tech companies today. Over the next few days we are going to be exploring a few techniques you could leverage at the start of 2010 to get you closer to hitting your revenue numbers. The first approach is euphemistically entitled “The Bowling League Sales Program.” This program focuses on building awareness of your brand and customers’ successes via a geographically focused customer success blogging, social media broadcasting, and digital body language monitoring program. It’s a lot of work but it enables you to effectively leverage some of the most active and effective marketing technologies in today’s world to drive new revenues for your business.

Amend, Extend & Pretend

2009 saw a record number of PE-backed firms filing for Chapter 11 protection. 83 firms went bust in 2009, versus 46 in 2008 and just 2 in 2007. The numbers could have been significantly higher in 2009 if the infamous ‘amend, extend, & pretend’ phenomenon didn’t start kicking in after Q1 2009. Click through to the full post to see the detail behind the numbers.

Mary Meeker on Steroids

Morgan Stanley’s Mary Meeker, the “Queen of the Net”, is famous for her in-depth analyses of technology markets. In 2009 Mary and her team have been heavily promoting mobile Internet as the next big wave in the technology market. Several copies of her 68 slide October “Economy & Internet Trends” presentation from the Web 2.0 Summit have circulated around the web. Recently Morgan Stanley released the 671 slide presentation, the Mobile Internet Key Themes Report, that underlies Mary and her team’s research. Click through to the full post to review the entire presentation or to download it from Morgan Stanley.

11 Random Year End Links

Why Children’s Clothes Makers Need to Get Into VoIP, Startup Visa Xenophobes, Taxing Private Equity Carried Interest, Why Don’t Fortune 100 CEOs Care About Social Media, Disney’s Magic M&A Machine, Why Obama Doesn’t Realy Tweet, and Things VCs Never Say.

Suing Gartner Won’t Solve Your Magic Quadrant Problems Part Deux

The ZL Technology/Gartner litigation continues. After having their first case dismissed, ZL has filed an amended complaint charging Gartner with defamation and trade libel. Given the high standard of proof in American libel litigation it is unlikely that ZL will fare any better this time around than they did the first time. Perhaps ZL might consider the advice of Vivek Wadhwa, an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. In a recent TechCrunch article Vivek describes how he turned his developers into the best enterprise sales people in his market. Vivek’s experiences are interesting for not only startups, but mature companies as well. His strategies certainly have a much higher probability of success than ZL’s quixotic litigation approach. See more details inside the post.

Supply Chain Management Exits

Supply Chain Management is not the most glamorous or valuable software market. In Q309 public Supply Chain Management companies had media EV/Revenue metrics of 1.3x and EV/EBITDA metrics of 9.8x. According to the Software Equity Group Supply Chain Management ranks 19th out of the 24 software technology categories they track. Interestingly enough, there have six major exit/corporate development events in the past two months in this market space including a major dividend, two major acquisitions/mergers, a large secondary offering, and two IPO filings. If boring old Supply Chain Management can generate this much activity then perhaps the rest of the tech market can look forward to a happy new year as well.

Suing Gartner Doesn’t Work After All

Recently ZL Technologies Federal lawsuit against Gartner was dismissed by the Federal Court for the Northern District of California. ZL had sued Gartner over their placement in the email arching Magic Quadrant and Gartner’s supposed bad acts that had cost ZL millions in sales. ZL will not be able to cash in on the $1.696 billion in damages they had claimed. This post explores the details behind the Court’s ruling on the seven claims ZL made. We also provide some advice from a noted industry expert on how companies like ZL can actually use marketing, sales, and branding to positively influence their relative MQ positioning.

JDA & i2 Part Deux or The ‘New Normal’ for Tech M&A Deals

In late 2008 JDA attempted to acquire i2 by primarily funding the deal with new senior debt. As the credit markets melted down JDA was unable to close the financing and ended up walking away from the deal by paying i2 a $20 million termination fee. Barely 11 months later, JDA and i2 have struck a new deal at a higher price, but with a radically different transaction structure that is engineered to ensure certainty of closure for the i2 shareholders. This post explores the history of these two transactions and the creative structure that JDA is proposing. This new structure has the potential to become the blueprint for technology M&A transactions in the post-credit-crunch world.

SaaS Company Valuation Trends

How does the market value SaaS companies in comparison to other software companies? Out of 25 different categories of software companies, pure play SaaS companies are the third most valuable category. Not surprisingly, SaaS companies are faring well on exits as well. In this post we will take a look at SaaS valuation and exit trends as well as some interesting trends that potentially foretell a significant slowdown in SaaS company revenue growth and valuations.

Using Wisk to Clean Up Your Social Media Reputation

Earlier this week, the makers of Wisk (the ‘ring around the collar’ folks) announced a Facebook application (Wisk-It) to help you remove pictures on Facebook that you really don’t want the whole world to see. This post explores the social media reputation repair community, including the infamous Dr. Phil’s recommendation for how to fix your social media faux pas. We also ponder what other well known brands (Ivory Soap, Clorox, Preparation H, etc.) could get into the social media reputation repair business.

Suing Gartner Won’t Solve Your Magic Quadrant Problems

On May 29th of this year ZL Technologies sued Gartner Inc. and one its analysts, Carolyn DiCenzo, for defamation, trade libel, false advertising and other charges over Gartner’s placement of ZL Technologies in the 2009 Email Archiving Magic Quadrant. In their original complaint ZL asked for over $1.696 billion in general and punitive damages, plus attorney’s fees and disgorgement of any of Gartner’s profits from the unlawful acts claimed by ZL Technologies. While I can empathize with the challenges of being placed in the ‘Niche Quadrant’, I also know from experience that strong execution can improve a firm’s Gartner rating over time. This post explores the details of ZL Technologies’ lawsuit as well as the grim reality of how their competitors have scaled their businesses to the point that ZL has little to no chance of ever achieving market leadership, except by suing Gartner.

Mary Meeker Internet Trends October 2009

Everyone is looking for the looking for the next big wave to ride in the tech marketplace. While social media has exploded in the past year it has not created a wave of hyper-valuable new companies aside from Facebook, MySpace, Twitter, and Zynga. Morgan Stanley’s Mary Meeker thinks the next big wave will be Mobile Internet. Mary details her thinking in her Web 2.0 Summit presentation “Economy & Internet Trends” As TechCrunch’s MG Siegler noted “She thinks the mobile web will be 10 times as big as the more traditional desktop Internet, and that it will grow much faster.” The entire presentation is embedded in the post, along with a copy of the presentation she developed in March 2009 that described the background of the current recession along with her perception of the emerging Internet and Social Media opportunities.

Putting Recent IPO / M&A Hype in Perspective

In the past two weeks there has been a huge buzz about how some recent IPOs and M&A deals signals a return to the good times of great technology company exits. Thanks to some decent stats from the National Venture Capital Association and Thomson Reuters, the reality of the situation is pretty grim. Most tech companies stand a better chance of winning the Lotto than getting a 10x return exit. This post takes a look at the numbers as well as examining how minority investments may be the best short term exit alternative for tech companies.

Will Twitter Dis-intermediate Investment Bankers?

It was bound to happen sooner or later. Twitter is now being credited with playing an important role in two companies selling themselves. This post reviews the recent sales of Tinkoff Restaurants and JobVent, both of which marketed themselves for sale via Twitter.

Tuesday Morning Random Links

VCs relying on gut feelings, User time on social networking sites triples in one year, VCs as scourge of the earth, The Soviet Doomsday Machine that still exists, Debunking the myth of the long tail, and why one serial entrepreneur went corporate instead of launching another startup.

How to Build an Exit Strategy

Exit strategies for technology companies are like sex in high school – everyone talks about it but only a few are doing it right. The objective of this post is to layout a basic approach your company can use to achieve a successful exit. There are three major components to an exit strategy: 1) Understanding Exit Options, 2) Identifying Likely Exit Scenarios for Your Firm, and 3) Developing and Working a Specific Exit Plan. The post also includes a model you can use to estimate the value of a strategic acquisition, leveraged recap, sale to a minority investor, sale to a financial sponsor, or conversion of your business to a cash flow / lifestyle model.

Did Meetup Beat Facebook to Profitability?

Both Facebook and Meetup achieved important milestones recently. Facebook became cash flow positive while Meetup actually had real profits. Facebook’s news came via a blog post from Mark Zuckerberg, while Meetup’s information came from shareholder documents leaked to TechCrunch. While this post doesn’t get into the ethics of leaking, it does take a deep look at Meetup’s numbers. In a nutshell, Meetup is a great example of how a SaaS startup can scale revenues and profits from nothing to probably over $8 million in three years. While it may not be as exciting as what Twitter’s revenues could potentially be someday, Meetup is a great example of what a typical, successful startup can achieve.

So Private Equity Isn’t Evil After All . . . .

Private equity has been compared to ‘swarms of locusts” or “financial wolves” that fall on companies, devour all they can, and then move on. While such statements make good political theater it turns out that the reality of the situation is a bit different. As noted in the EY report “The most significant finding of our research is that, in aggregate, large businesses across Europe achieved impressive growth and performance improvement under PE ownership. Our findings show average per annum growth of 15% in profits, 5% in employment, and 9% in productivity from the time of acquisition to exit.” This post reviews the background behind the infamous locusts and financial wolves myths associated with private equity and explores the key findings of the EY report.

How to Build an M&A Strategy

This post presents a basic primer on how to develop an M&A strategy for your company.  If your company is interested in leveraging mergers, acquisitions, or divestitures you should have a basic strategy that has been documented and reviewed/approved by key stakeholders such as the executive team, board of directors, key investors, and debt holders.  [...]

Could Someone Please Get Robert Scoble to Pee in a in a Cup . . . Twitter can’t be worth $5 billion

Robert Scoble recently published a post where he estimates that “Twitter is actually worth five to 10 billion dollars.” While that’s a nice idea, the reality of Twitter’s valuation is probably a wee bit different. Even if you were to believe Twitter management’s alleged estimate of $140 million in revenues in 2010, Twitter would have to be six times more valuable than Google to get to a $5 billion valuation. This post explores some of Robert’s thinking and takes a look at the valuation metrics of high flying tech companies that have revenues like Google, Cisco, Salesforce.com to come up with an estimate of what Twitter’s valuation could be.

How Do Angel Investors Really Decide What to Invest In?

A recently completed analysis of angel deals closed in the first half of 2009 showed some surprising results – the quality of a venture’s management team was four times more influential in funding decisions than more traditional factors like the venture’s economic model, deal structure, and projected revenue growth. Check out a detailed presentation from Venture360 on their analysis of angel investments that were analyzed using their new online platform.

Does Venture Capital Pose a Systemic Risk to the Financial System? Tim Geithner Thinks So . . .

Evidently the $200 billion venture capital industry is a source of systemic risk to the financial system. As part of the financial system regulatory redesign, venture capital firms will be required to register as investment advisers with the SEC. This will impose a significantly higher compliance burden on VCs as well as requiring VCs to comply with anti-money laundering regulations imposed on financial institutions post 9-11. I wonder how long it will be before an enterprising VC funds a SaaS/Business Process Outsourcing company that will provide regulatory compliance services for small to medium sized VC firms?

How to Calculate the Enterprise Value of Your Private Company

This post presents a simple process to calculate the enterprise value of your private company. It assumes that you have access to your firm’s financial statements. This post walks you through the steps of extracting relevant information from your financial statements as well as a process to estimate the value of your company’s equity by analyzing the valuation of some of your publicly traded competitors. The post also provides some guidance on how to find and leverage fairness opinions developed by investment bankers to support acquisitions or mergers amongst your competitors.

Everything You’ve Ever Wanted to Know About Mergers, Acquisitions, Divestitures, & Exits . . . but Were Afraid to Ask

Cisco, Google, IBM, Oracle & Microsoft are masters of the tech M&A game. They have the teams, financial resources, and connections to effectively leverage acquisitions to drive huge growth in their revenues and shareholder value. What about the rest of us? Many small to mid-sized tech companies, however, do not have a lot experience or expertise in mergers, acquisitions, divestitures, or exits. As a result, they tend to shy away from using classic corporate development techniques to grow the value of their business or to achieve a significant exit. Over the next six weeks DevelopmentCorporate is going to publish an eleven part series that is designed to provide a basic introduction to corporate development techniques. The topics include how to build an acquisition strategy, an exit strategy, how to analyze an acquisition candidate, and even how to pitch an acquisition to a board of directors, private equity firm, or VC.
This series begins with calculating the enterprise value of your firm. Decisions about mergers, acquisitions, divestitures, and exits are typically made in context of your firm’s enterprise value. If your company is public, calculating enterprise value is a piece of cake – most stock quoting sites do it for you. If your firm is privately held you need to do a bit more leg work, but you can develop a reasonable estimate in less than an hour. The balance of this post walks you through the steps in the calculation and where you can readily obtain information about comparable firms in your industry.

Tech Private Equity is Like 2003 Again . . . And That’s a Good Thing

The last great wave of technology M&A activity began in late 2003 and came to a crashing end in December 2008. In 2003 and 2004 there were lots of tech companies that had low valuations. Aggressive private equity firms entered the market and snapped up a lot of platform companies using primarily cash and limited debt. By 2006 and 2007 the market had shifted and debt became the primary acquisition currency and debt refi’s became the primary liquidity vehicle for private equity firms. As the credit markets melted down in 2008 so did tech M&A.

It’s been interesting to see in the past few months how aggressive private equity firms have stepped back into the tech market using primarily cash as their acquisition currency. This post takes a look at three recent private equity deals: Symphony Technology’s acquisition of MSC Software, Vista Equity Partners Acquisition of SumTotal, and Infor’s acquisition of SoftBrands. While these deals had a lot in common, there were unique and interesting aspects to all of them. The post ends with a challenge as to how the private equity firms can leverage newly found free cash flow in these deals to build innovative solutions to drive true organic revenue growth in these properties to support prosperous IPO or acquisition exits three to five years from now.