The first quarter of 2021 was a busy season for technology exits. Coming off a hot period in the final quarter of 2020, it was no surprise that tech upstarts pursued liquidity through a variety of mechanisms as the new year began.
There were IPOs, there were direct listings, there were PE deals. Hell, we even saw enough SPACs that we lost track of a few; amid all the noise, you’ll miss the occasional note no matter how well-tuned your ear.
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Each path is still open for later-stage startups to pursue exits: The IPO market was welcoming until a few minutes ago and private equity firms are stacked with cash and willing to pay higher multiples than they might in more normal times. And there are sufficient SPACs to take the entire recent Y Combinator class public.
Choosing which option is best from a buffet’s worth of possibilities is an interesting task for startup CEOs and their boards.
DigitalOcean went public via a traditional IPO, raising a slug of capital in the process. The SMB-focused public cloud company likely felt like a somewhat obvious IPO candidate when you read its results. The Exchange spoke with the company’s CEO, Yancey Spruill, about the choice.
Latch, in contrast, decided that a SPAC was its best route out the gate. The Exchange caught up with the company’s CFO, Garth Mitchell, about the transaction and why it made sense for his company.
And, finally, The Exchange spoke with AlertMedia’s founder and CEO, Brian Cruver, about his decision to sell his Texas-based company to a private equity firm.
To prevent this post from reaching an astronomic word count, we’ll give a brief overview of each deal and then summarize the company’s views about why their liquidity choice was the right one.
Three paths to liquidity
Kicking off with DigitalOcean, a few notes: First, the company has been pretty darn public about its growth in the last few years. We knew that it had an annualized run rate of around $200 million in 2018, $250 million in 2019 and around $300 million in the first half of 2020. It later announced that it hit that mark in May of last year.
So when DigitalOcean decided to go public, we weren’t bowled over. The company wound up pricing at $47 per share, the high end of its range. Since then, its stock has struggled somewhat, falling below $37 per share before recovering to $43.80 at the end of trading yesterday.
Enough of all that. Why did the company choose to go public via a traditional IPO? Spruill said his company looked at SPAC deals and direct listings. It selected the IPO route because it fit the company’s goals of generating a broad base of shareholders while creating a branding opportunity.
The cost of an IPO is comparable, he added, to other exit options. Spruill also praised the IPO process itself, noting that its rigorous requirements made DigitalOcean a better company.
Earlier in our chat, I asked Spruill a question that I put to every CEO on IPO day: How are you feeling? It’s a bit of a sop, but it sometimes elicits insights from executives and founders who, after weeks of discussing their companies’ inner workings, are asked a rare personal question.
Spruill said he felt incredible and that nothing could replicate an IPO as the culmination of so much work put into building a company and its team. If you add up the wins and losses over time, with more of the former than the latter, and can cross the finish line with the right metrics and market, you can earn a spot to be “grilled” by the “best investors,” he said.
Those investors put $750 million or so into his company, Spruill added. Funds that it can use to retire debt and free up more cash flow. Not a bad day, I’d say.
Turning to Latch, getting time with its CFO, Garth Mitchell, was a useful exercise. The company has announced its combination, released its numbers and is now working through the paperwork for its impending corporate fusion.
Why did Latch pursue a SPAC-led deal? It was the right time, with the right amount of capital and the right partner. The timing is obvious, with a hot market when Latch announced its deal. The capital is clear from the deal’s terms. But the partner point is worth exploring.
Latch is not combining with a generic blank-check company for its debut. Instead, it’s tying up with a SPAC sponsored by Tishman Speyer (TS), a privately held commercial real estate company. Latch works with residential buildings. You can see the possible synergies.
And Latch didn’t take the option on a whim: Per Mitchell, it started receiving inquiries back in 2019, eons ago in the SPAC era.
Without delving into expected 2021 revenue growth (as doing so would take up the rest of our space), Mitchell said a SPAC-led debut was a unique opportunity to access the capital Latch needs today because its customers are adopting its products faster than it anticipated. Due to the lag between the time that Latch’s hardware is sold and new tenants take occupancy, there can be a delay between install costs and recurring revenues. So, capital is not unwelcome.
And, now that it is tied up with TS, perhaps Latch will push harder into the commercial real estate market.
Finally, AlertMedia! Per Fortune, the former startup’s deal with Vista Equity Partners to sell the majority of its business was worth $400 million. For a company that had raised $60 million before its exit, the number was likely a win for its investors. (The company’s final valuation in its April 2020 round was around $250 million.)
The same article reported that AlertMedia’s CEO, Brian Cruver, said the deal would allow his company to greatly accelerate its plans, moving the efforts that would have taken it five or 10 years to the next two or three years instead.
With our general expectation that private equity firms are effectively vultures made out of debt, hungry to strip assets from victim companies and then sell the bones, The Exchange was more than curious to ask Cruver why a founder would sell the growing company to Vista when things looked like they were going well.
Cruver said some strategic buyers were interested in AlertMedia in the second half of 2020 because the company’s product fit well into the pandemic year.
Rising interest from strategic and institutional investors swelled before the company’s eventual deal, somewhat kicking the sales process off. A number of offers turned into bidding, which led to the Vista deal, which Cruver was very bullish on during our chat.
Why? Vista is also based in Austin, and Cruver said it wants to keep the company’s leadership in place and agrees with its view that employers have a duty to take care of their workers. Given AlertMedia’s business, that’s a key location to find common ground.
Cruver added that Vista is well-versed in how to get his company “to the next level.” So, an exit for employees and other shareholders, capital for the business so that it can tackle the other 99% of its market that it doesn’t yet sell to, a general agreement on how the company should be run, and advice on how to grow.
Not a hard sell, I reckon, so long as the price was right. Listening to Cruver discuss the Vista deal, The Exchange kept waiting for the hammer to drop, the catch to be unveiled. But, no, it appears to get its hands on AlertMedia, Vista is at least saying that it is not planning to strip-mine the business to boost near-term cash flow.
Notable. But perhaps given the sheer number of options that tech upstarts have today — see above — private equity has to play a little nicer than it once did.
To sum up: Every company wants capital, something an IPO, a SPAC or a private equity deal can provide to varying degrees. And every exiting company wants the right partner or partners. For DigitalOcean, it was a public company’s shareholder base. For Latch, that meant a deal with TS. And for AlertMedia, a tie-up with a capital behemoth based in the same city that it may also lean on for operational guidance.
There is no single right answer, we suppose. Pick your poison!