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Valuation Timing

In the Technology M&A business, we often meet fast-growing companies that have reached a critical “growth point.” In fact, we consider this to be such an interesting and increasingly relevant time in a company’s lifecycle that we named our firm after it.

The timing is especially important because from an acquirer’s standpoint, this is the ideal moment to make a strategic acquisition. Since the startup has already proven its technological and market viability, the acquirer can feel confident about what they are buying. At the same time, it is early enough that the acquirer can buy the startup without having to eliminate duplicate overhead, redundant infrastructure, and other functions (which it would have had to essentially pay for otherwise). Additionally, it can ride the full wave of new technology cycles by quickly injecting a fresh new product into its portfolio.

So when is this inflection point? It typically occurs when a young technology company has moved out of the “Start-up” phase. There a handful of telltale achievements:

Exiting at the “growth point” often has large financial benefits versus continuing to fund the business. Since the company’s growth rate is typically very high, it usually is well-valued. Often if it is one of the first companies riding a new technology wave and exiting earlier increases the likelihood of it being one of the premium/landmark acquisitions in its space. A good acquisition can produce a superior rate of return for investors – even if subsequent growth plans were to go exactly as hoped.

At the same time, these promising, high-growth companies face some rather large new challenges, all of which will require additional capital:

Moreover, much of these additional capital expenditures will go towards building out infrastructure that tends to have little value to a future acquirer. Raising more capital brings significant dilution to early investors and the management team, without necessarily translating into a higher valuation.

So, this wonderful opportunity – created by the success of a dedicated and talented team – often brings the management team to a decision point:

1. “double-down” by raising a new round (usually larger than any previous round of financing) to help finance rapid expansion, or

2. sell the business.

While the emotional appeal of going public is a powerful incentive for many founders, financial realities often dictate that a sale process provides the highest ROI. In fact, IPOs typically account for only 5% to 10% of technology startup liquidity events.

Indeed, in addition to bringing additional capital to the company, the right strategic acquirer can also dramatically improve the company’s ability to grow: it puts a well-known brand, turnkey sales/support assets, and countless other resources at the disposal of the company for the first time.We have found that strong management teams, upon reaching important milestones in their growth, take the time to seriously evaluate M&A as a route to deliver superior returns for their shareholders. M&A at the “growth point” isn’t necessarily the right solution for all companies, but in today’s markets, most successful companies exit through acquisition. We are delighted to help management teams seeking advisory at one of the most important times in the life of their business.