There comes a time for most entrepreneurs when they ask themselves one of the age-old questions: “Raise capital or exit?”
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This is a highly strategic question and as expected, the answer is “it depends.” This discussion can be complex and there are many factors which go into addressing it properly.
Below are some of the many considerations which should be taken into account.
Technology middle-market M&A for the win
The probabilistic outcome of exits is helpful in forming the long-term strategy of entrepreneurs and investors. We at Allied Advisers analyzed data over the last five years and it’s clear: acquisitions (loosely defined as deals below $200 million) comprised over 92 percent of the exits and 90 percent of the exits are below $100 million.
Allied Advisers Data Sources; All undisclosed values are assumed to be less than $100M
While big-ticket deals such as the Salesforce acquisition of Slack for $27 billion and IBM’s purchase of Red Hat for $34 billion generate a lot of media buzz, it’s emerging growth and mid-size companies that keep the technology M&A market humming and exciting.
The chart below may help shape the thinking of entrepreneurs and investors as they look at this critical question – should I raise my next round or should I exit? Some businesses have the potential to become unicorns, decacorns or trillion-dollar market cap companies, but most businesses can have a healthy outcome earlier in their lifecycle. Some may choose to bootstrap, taking in a smaller infusion of capital thereby reducing their dilution and having optionality for an earlier exit.
As an entrepreneur and investor, being cognizant of your capital structure is critical, including the total amount of capital you have taken in and investors’ expected returns. If the future dilution is offset by growth and gains in market share, and the valuation increases then by all means, you should raise additional capital. Other considerations include strategic buyer and private equity investor appetite and the ability to pay specific to your industry. Doing so will help maximize shareholder value.
Other aspects to consider
Running a dual-path capital raise or exit process – For companies of a certain size (generally above $10 million Annual Recurring Revenue), especially for B2B SaaS companies, they can be attractive to both private equity (PE) investors and strategic buyers. Having both options enhances valuation and allows entrepreneurs and investors to choose the path.
Raising secondary capital – Growing a business to become a unicorn is a long and arduous process and the path to eventual liquidity can get stretched. PE firms and growth stage venture investors offer options of secondary liquidity given the timeline for an exit continues to lengthen. A recent example is workflow automation company Zapier where Sequoia and Steadfast Financial purchased shares at a $5 billion valuation from Zapier’s original investors. We have been in plenty of situations where investors have provided meaningful secondary liquidity which provides for a “nest egg” for an entrepreneur and also gives them focus and cash reserves for personal needs to go for the “second bite of the apple” via an eventual IPO or larger exit down the road.
Personal preferences – Entrepreneurs by nature are visionaries. When they get frustrated with lack of ideal solutions for existing problems they go out on their own to solve complex challenges. They do not suffer the bureaucracy, overhead and restrictions that come with working in larger organizations. At some point in their journey they need capital to grow. Exceptions like Veeva (which took $7 million of capital before it got to an IPO), Atlassian, Mailchimp, Qualtrics etc. waited for a long time before raising money and most of their capital raised was secondary.
Some entrepreneurs can use the infusion of capital to create value for all shareholders and for some entrepreneurs it can be challenging to get used to board oversight and governance that comes with outside capital. As an astute investor once told me “It is easier to get out of a marriage than a cap table.”
Entrepreneurs and investors should think carefully about what their goals and vision are while assessing their ability to work well together to create something larger that could be done by raising capital. Navigating carefully can be beneficial for all parties.
Gaurav Bhasin is Managing Director with Allied Advisers, a global technology-focused boutique advisory firm focused on investment banking for entrepreneurs and investors. The Silicon Valley-based firm with a presence in Los Angeles, Israel and India serves entrepreneurs and investors of technology growth companies on strategic advisory including M&A and capital raises.
Illustration: Li-Anne Dias