In today’s VC market, it’s age before beauty. This is according to a new study released today by Shareholder Representative Services (SRS), the company that represents shareholder interests during the post-closing process in mergers and acquisitions deals. In other words, SRS is an independent advocate for shareholders that offers communications, accounting, and dispute resolution services to an impressive list of clients, which includes the likes of Accel, Benchmark, Kleiner Perkins, Sequoia, Khosla, and more. (Basically, the list is a who’s who of venture firms.)
The study, which looks at the 196 transactions SRS was involved in between July 2010 and September 2011, identifies trends in these M&A deal terms: One of which is that startups are today raising significantly more outside financing before exit than they were three years ago.
The study found that companies are, on average, raising 3.57 rounds of preferred stock financing — the type of investment that’s the staple of venture capital and private equity firms. This represents a 27+ percent increase from 2008, when startups were averaging 2.8 rounds of financing. Essentially, buyers are favoring companies that have raised more money and are profitable. In a sluggish economy, companies are more risk averse to dumping a lot of money into M&A, so buyers are looking for safe bets.
Furthermore, thanks to market volatility and poor financial conditions, global M&A activity fell by 19 percent in the third quarter, according to Dealogic. Thus, with deals drying up and few companies looking to buy, startups have instead opted to go after further rounds of financing. This is likely the reason that we’ve been seeing “series F” pop up more and more, and may also be another result of how late-stage funding is undergoing a seachange.
As Business Insider says in depth, companies are now waiting for longer periods of time to IPO, secondary markets are on the rise, there’s a rise in late-stage private equity, and investing in maturing private companies is becoming ever-more efficient thanks to the Internet and the plethora of financing options, be they crowdfunding, accelerators, etc.
SRS also identified another trend on the rise this year: Cash transactions. According to the study, 86 percent of deals it participated in were all-cash transactions, thanks to low interest rates and brimming cash reserves. As Mark Vogel, Managing Director at SRS, told peHub, buyers today “have lots of offshore cash and don’t want to pay the repatriation taxes to the U.S. They’d rather use it”.
And this cash seems to be flowing into big deals, as 25 percent of transactions were for over $200 million — with the software and IT services industries representing over 40 percent of the businesses being sold over the last 14 months.
Thus, with more cash exchanging hands as part of this elevated rate of follow-on and late-stage financing, management teams have become more diluted and are requiring further incentives to get in-line with the milestones set by buyers during acquisitions. The study found that this has led to an increase in management carve-out plans, which were part of 33 percent of deals in 2010 and have been part of 25 percent of deals in 2011.
For startups and mid-level companies, it seems that the prevailing trend is to raise more money, hold-off on IPO, and wait for the right buyer — with cash.