When we start to talk to shareholders about the process of selling their business, we always explain to them how long the process can be and how physically and emotionally wearing it is for vendors.
To some extent the impact can be mitigated by diligent planning and preparation but even the best prepared shareholders going through the process for the first time are shocked and horrified by the depth, detail, and repetition inherent in a financial and legal due diligence exercise. It doesn’t matter how much I warn them, they are always shocked and horrified!
They are often also surprised by the emotional toll that the process takes on them over the period of a deal. Towards the end of a transaction process my role is frequently as much one of counsellor as adviser, and I thought it was worth a few moments reflection on what elements of selling their business create the pressure and stress that particularly impacts vendors.
1. Uncertainty
The process of selling a business is inherently uncertain. At the outset you cannot know that someone will be interested in it, what they might be prepared to pay for it and what they might want it for. Even once a buyer has been identified and a price agreed, the deal is not “done” until the legal agreements are signed, and the money is in the bank. The whole process can easily take between 6 months and a year and for the whole of that time there is no certainty about the outcome. More than most people, successful entrepreneurs with established businesses have become used to being in control of their environment. The uncertainty of the early days have evaporated and they are very much masters or mistresses of their own destiny. Far from being comfortable with the uncertainty of the process, they find it profoundly uncomfortable and the longer a process goes on, the more difficult they typically find it.
2. Control
This is a corollary of the uncertainty. A successful deal is the outcome of willing buyer meeting willing seller and free will on both sides resulting in a deal which is mutually acceptable. Vendors are not in control of the “other side” and the frustration which often arises from a perception that acquirers or investors are being unreasonable, slow, dense, focussed on the wrong things, unable to “take a view” and unduly influenced by their advisers can be intense and prolonged. There is often a strong desire to bring things to a head by issuing ultimatums or threatening to walk away but these simply don’t work in context, and can have the converse effect of forcing a vendor to back down or to lose a deal which they (really) wanted to do. Accordingly, vendors are obliged to trust their advisers and bite their tongues which is neither natural nor easy and can be very stressful.
3. Trust
Many vendors will have undertaken acquisitions in the past and go into a process believing that they understand how it is going to be. For larger deals however, and particularly where a private equity acquirer or investor is involved, the level of diligence and the degree of complexity can be far greater than they have ever experienced. The Vendor is forced into a situation where they have to trust others to help them evaluate whether a deal is good or bad and whether the other side is being fair or unfair, reasonable or unreasonable. For some vendors ego can be a factor at play and a fear that they are somehow being “done over” or made to look stupid can create an environment of distrust which can undo a transaction entirely. I have known vendors walk away from an excellent set of terms because of the sense that the other side was not honouring the deal they thought they were doing and because they couldn’t trust them. The occasional tendency of private equity firms to “chip” is particularly risky in context of a trust-challenged entrepreneur
4. Secrecy
My advice to any vendor is to tell as few people within the business as possible that they are in a disposal process. The reason is simple, it isn’t just vendors who hate uncertainty and if a team is worrying about what is going to happen next at a point where it is not possible to reassure them, it will make them stressed and unable to focus fully on their jobs. It is kinder for a vendor to spare individuals that uncertainty for as long as possible, ideally until immediately after the deal is done and the acquirer can step in and reassure them as to the rosiness of their futures. It is also better for the business…. To most vendors this feels like lying, often for months and months and often to people that they have worked with for years and have a personal as well as a business relationship with. It just feels wrong, even though it is right. It is stressful and difficult and requires the support of family and advisers to cope with.
5. Fear
However much a vendor wants to vend, they typically have mixed feelings about selling their business. They cannot look forward with confidence to the future yet because the deal is not done. They might start looking at brochures for boats or villas, but they cannot do anything about buying one until the money is in the bank. They cannot think themselves fully into a different future because of the uncertainty over whether the deal will deliver. For some vendors there is an almost superstitious refusal to do anything which might “jinx” a deal which means they won’t even talk to a wealth adviser in advance of completion. But this leaves them in a personal limbo. They cannot focus as they have for years, often decades, on the business and their plans for it and they cannot commit to a new, uncertain future. This leaves them with a conceptual vacuum in imagining their future which often leads to fear that they are making a mistake, won’t be able to fill their days and will have no purpose. Worse, they often cannot talk to people they usually confide in or discuss things with because the fact of the deal is still a secret. This is perhaps the most difficult aspect for an exiting shareholder of the whole process and one which requires the support of family and advisers.
Very few vendors regret doing their deal. Once the ink is dry and the money is in the bank, they quickly move on to enjoying the fruits of their labours. Teams understand that shareholders have to retire, and they quickly move on in their thinking and their loyalties; if they don’t like a new regime in the business, they will leave. Even the process, looking back from the sunlit uplands of post-completion, doesn’t seem quite so long or quite so bad. But in the same way would-be vendors are advised to prepare their businesses for exit, they should also prepare themselves for the process. Think about how it will feel to go through the process and to come out the other end. Make decisions about advisers not only based on their industry knowledge and experience, but also on your ability to trust them and their advice to you as an individual and prepare your family for a bit of a roller coaster !
When we start to talk to shareholders about the process of selling their business, we always explain to them how long the process can be and how physically and emotionally wearing it is for vendors.
To some extent the impact can be mitigated by diligent planning and preparation but even the best prepared shareholders going through the process for the first time are shocked and horrified by the depth, detail, and repetition inherent in a financial and legal due diligence exercise. It doesn’t matter how much I warn them, they are always shocked and horrified!
They are often also surprised by the emotional toll that the process takes on them over the period of a deal. Towards the end of a transaction process my role is frequently as much one of counsellor as adviser, and I thought it was worth a few moments reflection on what elements of selling their business create the pressure and stress that particularly impacts vendors.
1. Uncertainty
The process of selling a business is inherently uncertain. At the outset you cannot know that someone will be interested in it, what they might be prepared to pay for it and what they might want it for. Even once a buyer has been identified and a price agreed, the deal is not “done” until the legal agreements are signed, and the money is in the bank. The whole process can easily take between 6 months and a year and for the whole of that time there is no certainty about the outcome. More than most people, successful entrepreneurs with established businesses have become used to being in control of their environment. The uncertainty of the early days have evaporated and they are very much masters or mistresses of their own destiny. Far from being comfortable with the uncertainty of the process, they find it profoundly uncomfortable and the longer a process goes on, the more difficult they typically find it.
2. Control
This is a corollary of the uncertainty. A successful deal is the outcome of willing buyer meeting willing seller and free will on both sides resulting in a deal which is mutually acceptable. Vendors are not in control of the “other side” and the frustration which often arises from a perception that acquirers or investors are being unreasonable, slow, dense, focussed on the wrong things, unable to “take a view” and unduly influenced by their advisers can be intense and prolonged. There is often a strong desire to bring things to a head by issuing ultimatums or threatening to walk away but these simply don’t work in context, and can have the converse effect of forcing a vendor to back down or to lose a deal which they (really) wanted to do. Accordingly, vendors are obliged to trust their advisers and bite their tongues which is neither natural nor easy and can be very stressful.
3. Trust
Many vendors will have undertaken acquisitions in the past and go into a process believing that they understand how it is going to be. For larger deals however, and particularly where a private equity acquirer or investor is involved, the level of diligence and the degree of complexity can be far greater than they have ever experienced. The Vendor is forced into a situation where they have to trust others to help them evaluate whether a deal is good or bad and whether the other side is being fair or unfair, reasonable or unreasonable. For some vendors ego can be a factor at play and a fear that they are somehow being “done over” or made to look stupid can create an environment of distrust which can undo a transaction entirely. I have known vendors walk away from an excellent set of terms because of the sense that the other side was not honouring the deal they thought they were doing and because they couldn’t trust them. The occasional tendency of private equity firms to “chip” is particularly risky in context of a trust-challenged entrepreneur
4. Secrecy
My advice to any vendor is to tell as few people within the business as possible that they are in a disposal process. The reason is simple, it isn’t just vendors who hate uncertainty and if a team is worrying about what is going to happen next at a point where it is not possible to reassure them, it will make them stressed and unable to focus fully on their jobs. It is kinder for a vendor to spare individuals that uncertainty for as long as possible, ideally until immediately after the deal is done and the acquirer can step in and reassure them as to the rosiness of their futures. It is also better for the business…. To most vendors this feels like lying, often for months and months and often to people that they have worked with for years and have a personal as well as a business relationship with. It just feels wrong, even though it is right. It is stressful and difficult and requires the support of family and advisers to cope with.
5. Fear
However much a vendor wants to vend, they typically have mixed feelings about selling their business. They cannot look forward with confidence to the future yet because the deal is not done. They might start looking at brochures for boats or villas, but they cannot do anything about buying one until the money is in the bank. They cannot think themselves fully into a different future because of the uncertainty over whether the deal will deliver. For some vendors there is an almost superstitious refusal to do anything which might “jinx” a deal which means they won’t even talk to a wealth adviser in advance of completion. But this leaves them in a personal limbo. They cannot focus as they have for years, often decades, on the business and their plans for it and they cannot commit to a new, uncertain future. This leaves them with a conceptual vacuum in imagining their future which often leads to fear that they are making a mistake, won’t be able to fill their days and will have no purpose. Worse, they often cannot talk to people they usually confide in or discuss things with because the fact of the deal is still a secret. This is perhaps the most difficult aspect for an exiting shareholder of the whole process and one which requires the support of family and advisers.
Very few vendors regret doing their deal. Once the ink is dry and the money is in the bank, they quickly move on to enjoying the fruits of their labours. Teams understand that shareholders have to retire, and they quickly move on in their thinking and their loyalties; if they don’t like a new regime in the business, they will leave. Even the process, looking back from the sunlit uplands of post-completion, doesn’t seem quite so long or quite so bad. But in the same way would-be vendors are advised to prepare their businesses for exit, they should also prepare themselves for the process. Think about how it will feel to go through the process and to come out the other end. Make decisions about advisers not only based on their industry knowledge and experience, but also on your ability to trust them and their advice to you as an individual and prepare your family for a bit of a roller coaster !
It’s fair to say that it’s been one of the most challenging years to have been raising money for early and growth stage companies for quite some time.
Before this year, we had all grown accustomed over more than a decade to historically low interest rates – cash was cheap and more and more institutional investors fanned the flames of the post-pandemic VC feeding frenzy, stoking the volume, pricing and size of deals resulting in more and more money floating into earlier stage businesses often at eye-watering valuations.
That was soooooooo 2021, but the signs were there in 2022 that the ride was starting to slow down.
By 2023, tech stocks were in freefall, tech titans were haemorrhaging jobs and high-profile financial institutions were hitting the buffers.
A faltering global economy, war in Ukraine, rising inflation and interest rates inevitably took its toll on appetite for riskier investments.
Deals volumes and valuations are down significantly, diligence is more extensive and taking forever, and investors have largely been in ‘risk-off mode’.
Consequently, companies needing the lifeblood of venture investment to continue their growth journey have had fewer options available to them and have had to undertake a healthy dose of introspection deciding whether or how to:
Hunker down, cut costs quickly and deeply to survive – recognising this may only be an option if you were able to time your last raise well, have cash in the bank and the ability to sustain yourselves through to a better investment climate, and
Focus on the fundamentals of sales and cash management and raise money at more realistic valuations – OK, so this should be less of an option and more of a given but a return to focus on the fundamentals of sales, serving customers well and tight financial management was long overdue, and whether to…
Sell up and move on – recognise that you are swimming against the tide and finding someone with established channels to market maybe the only way for your product or service to see the light of day. Understanding the harsh reality that the investment gravy train has moved on might make for difficult conversations between entrepreneurs and investors, especially for those that bought in at inflated valuations while trying to sell an immature or half-baked asset.
Doom and gloom aside, one immutable fact that I’ve learnt from having been fundraising for more years than I care to admit is that markets and investment appetite will rebound, and strongly – the venture market has too much ‘dry powder’ and the desire to do deals and for reputations to be made will return. The Venture Capital market will dust itself off, crank into gear and inevitably the merry go round of boom-and-bust investment cycles will continue ad nauseum.
So, what does that mean for fundraising now?
If you are looking to raise money in 2024 then what can you do to sustain a decent valuation or worse still how do you deal with a down round?
We outlined in an earlier article that investors will want to see a clear and compelling growth plan focused on customer acquisition and retention and with strong financial discipline to manage costs. Get that formula right and money is most definitely still out there.
Valuations might not be as generous as once was, but that it is the nature of where you sit on the investment cycle and that needs to be clearly understood.
Focusing solely on a company’s valuation based on metrics from yesteryear that are divorced from the fundamentals and today’s market is a perennial problem for early stage privately funded companies and does nothing but store up problems for when institutional money is sought.
A former colleague of mine used to describe the most expensive money as the money you don’t take when its available.
Having a sense of your worth is important but expectations need to be realistic and from experience entrepreneurs are always slower to adjust expectations than investors. Establishing a competitive platform for the deal is the best way to get the best price.
What about a down round?
Experiencing a down round will be a difficult and challenging situation for any founder to navigate – not least because all those clauses tucked away in the investment agreements that you spent time being assured were ‘market’ start to rear their ugly heads and you should understand fully the implications of clauses such as the anti-dilution mechanism.
There are many good articles available about the mechanics of these and so I will defer to those for the moment. A quick google of “Are Anti-Dilution Mechanisms evil” should give you all the info you need.
However, here are a few more general strategies and coping mechanisms for dealing with a down round:
Eyes on the Prize and focus on the long-term: While this is a setback in the short-term and a real blow to the ego, it’s important to remember that the success of your business ultimately depends on its long-term growth and profitability. Focus on building a sustainable business model and executing on your growth strategy, even if it takes longer than expected.
Communicate openly and honestly: Be transparent with your investors about the reasons for the down round and what steps you are taking to address the issues. Honesty and transparency can help build trust with your investors and maintain their confidence in your ability to turn things around.
Reframe the narrative: Instead of focusing on the negative aspects of a down round, reframe the narrative by emphasizing the positive steps being taken to address the issues and position your business for long-term success.
Seek support from your network: Lean on your mentors, advisors, and other members of your network for support and guidance. They can provide valuable perspective and help you navigate the challenges of a down round.
Focus on building value: Use the down round as an opportunity to focus on building value in your business. This can include improving product-market fit, increasing customer acquisition, and reducing costs. By focusing on creating value, you can position your business for a successful future raise.
Consider alternative funding sources: While venture capital is a common source of funding for startups, it’s not the only option. Consider alternative funding sources such as debt financing, grants, or strategic partnerships.
In short, don’t be afraid to tackle the pricing issue head on. If the fundamentals of the business are still sound and there is still a long way to go, founders will have more opportunity along the way to strengthen their positions despite the odd pothole in the road.
It’s fair to say that it’s been one of the most challenging years to have been raising money for early and growth stage companies for quite some time.
Before this year, we had all grown accustomed over more than a decade to historically low interest rates – cash was cheap and more and more institutional investors fanned the flames of the post-pandemic VC feeding frenzy, stoking the volume, pricing and size of deals resulting in more and more money floating into earlier stage businesses often at eye-watering valuations.
That was soooooooo 2021, but the signs were there in 2022 that the ride was starting to slow down.
By 2023, tech stocks were in freefall, tech titans were haemorrhaging jobs and high-profile financial institutions were hitting the buffers.
A faltering global economy, war in Ukraine, rising inflation and interest rates inevitably took its toll on appetite for riskier investments.
Deals volumes and valuations are down significantly, diligence is more extensive and taking forever, and investors have largely been in ‘risk-off mode’.
Consequently, companies needing the lifeblood of venture investment to continue their growth journey have had fewer options available to them and have had to undertake a healthy dose of introspection deciding whether or how to:
Hunker down, cut costs quickly and deeply to survive – recognising this may only be an option if you were able to time your last raise well, have cash in the bank and the ability to sustain yourselves through to a better investment climate, and
Focus on the fundamentals of sales and cash management and raise money at more realistic valuations – OK, so this should be less of an option and more of a given but a return to focus on the fundamentals of sales, serving customers well and tight financial management was long overdue, and whether to…
Sell up and move on – recognise that you are swimming against the tide and finding someone with established channels to market maybe the only way for your product or service to see the light of day. Understanding the harsh reality that the investment gravy train has moved on might make for difficult conversations between entrepreneurs and investors, especially for those that bought in at inflated valuations while trying to sell an immature or half-baked asset.
Doom and gloom aside, one immutable fact that I’ve learnt from having been fundraising for more years than I care to admit is that markets and investment appetite will rebound, and strongly – the venture market has too much ‘dry powder’ and the desire to do deals and for reputations to be made will return. The Venture Capital market will dust itself off, crank into gear and inevitably the merry go round of boom-and-bust investment cycles will continue ad nauseum.
So, what does that mean for fundraising now?
If you are looking to raise money in 2024 then what can you do to sustain a decent valuation or worse still how do you deal with a down round?
We outlined in an earlier article that investors will want to see a clear and compelling growth plan focused on customer acquisition and retention and with strong financial discipline to manage costs. Get that formula right and money is most definitely still out there.
Valuations might not be as generous as once was, but that it is the nature of where you sit on the investment cycle and that needs to be clearly understood.
Focusing solely on a company’s valuation based on metrics from yesteryear that are divorced from the fundamentals and today’s market is a perennial problem for early stage privately funded companies and does nothing but store up problems for when institutional money is sought.
A former colleague of mine used to describe the most expensive money as the money you don’t take when its available.
Having a sense of your worth is important but expectations need to be realistic and from experience entrepreneurs are always slower to adjust expectations than investors. Establishing a competitive platform for the deal is the best way to get the best price.
What about a down round?
Experiencing a down round will be a difficult and challenging situation for any founder to navigate – not least because all those clauses tucked away in the investment agreements that you spent time being assured were ‘market’ start to rear their ugly heads and you should understand fully the implications of clauses such as the anti-dilution mechanism.
There are many good articles available about the mechanics of these and so I will defer to those for the moment. A quick google of “Are Anti-Dilution Mechanisms evil” should give you all the info you need.
However, here are a few more general strategies and coping mechanisms for dealing with a down round:
Eyes on the Prize and focus on the long-term: While this is a setback in the short-term and a real blow to the ego, it’s important to remember that the success of your business ultimately depends on its long-term growth and profitability. Focus on building a sustainable business model and executing on your growth strategy, even if it takes longer than expected.
Communicate openly and honestly: Be transparent with your investors about the reasons for the down round and what steps you are taking to address the issues. Honesty and transparency can help build trust with your investors and maintain their confidence in your ability to turn things around.
Reframe the narrative: Instead of focusing on the negative aspects of a down round, reframe the narrative by emphasizing the positive steps being taken to address the issues and position your business for long-term success.
Seek support from your network: Lean on your mentors, advisors, and other members of your network for support and guidance. They can provide valuable perspective and help you navigate the challenges of a down round.
Focus on building value: Use the down round as an opportunity to focus on building value in your business. This can include improving product-market fit, increasing customer acquisition, and reducing costs. By focusing on creating value, you can position your business for a successful future raise.
Consider alternative funding sources: While venture capital is a common source of funding for startups, it’s not the only option. Consider alternative funding sources such as debt financing, grants, or strategic partnerships.
In short, don’t be afraid to tackle the pricing issue head on. If the fundamentals of the business are still sound and there is still a long way to go, founders will have more opportunity along the way to strengthen their positions despite the odd pothole in the road.
