In our previous posts we have covered issues such as why being sold to the US is a big thing and who’s doing all the buying. Another important aspect in all the M&A activity is to look at company valuations and what affects them, especially from an investor’s point of view. In this post we cover valuable insight from Nexit Ventures on what creates value in startups.
To start off with, let’s determine value. In basic form, there are two kinds of value – strategic and financial. Albeit financial being the one that interests most – startups have to understand that they can have two kinds of value accumulated inside their company. Below is a graph showing the strategic value curve, as well as the financial one and what affects them.
Strategic value is mostly built into those companies that are working on a new technology and through that can offer existing market players competitive advantage in the market place.
One of the key things to understand is that valuations are greatly affected by the exit market and where it resides for your company. 75% of tech acquisition globally are made in the US. Furthermore, exit markets can be very cyclical as we’ve noticed in the past few years. One way to look at it is that it correlates relatively well with NASDAQ, but has about a 6 month delay.
Some larger issues that affect exit markets and also thus the valuations of companies are the three following factors. 1) Waves of consolidation; is there a trend in the market place that larger companies are buying certain technology or key competitors? 2) technology shift; a larger change in consumer/client behaviour that drives demand for newer technology and 3) lead position; are you able to take the key position in a new and emerging market segment?
Much of the value creating inside your company also relates to the exit process itself. Essentially, it’s all about how well you’re able to identify potential acquirers and understand their plans and behaviour. There are two sides to this, the business and the people. By business, we mean that you need to understand technology roadmaps, business strategies of your potential acquirers as well as the possible shortcomings they have in terms of technology or other assets that you have. Regarding people, you need to have established personal relationships with acquirers and the relevant people in their organisations. Having these two pieces of the pie in place, you’re well ahead of the game.
Furthermore, if you’re able to understand the value drivers and prior M&A transactions in your business area – you’re able to better position your company and advantages. Being able to pitch the precise motives and value drivers (eg. team, domain knowledge, technology, product, customers, distribution channel, revenue, profit, eliminating competition, critical mass, time to market, ability to grow, etc.) acquirers are looking for is incredibly powerful.
So while it’s all about increasing value in your business through executing a well thought out plan, you need to keep your eyes focused on your business as well during negotiations. Nothing is more destructive than putting all your energy into a possible M&A deal that then turns sour only to find you’ve neglected your basic business in the process.
This post is part of a series of posts supported by
Nexit Ventures is a mobile venture capital firm focused on wireless technologies and services. Leveraging its extensive network in the global mobile marketplace, Nexit invests primarily in Nordic and US-based earlystage companies with products and services for a global market. For Nordic mobile companies, Nexit provides a bridge to Silicon Valley markets and exit opportunities.