Bruno: Yeah, if you are a foreign investor you need to be patient to make your first investment, but the return could be much quicker than it is in the US.

* This is an excerpt from an interview report. Download full report at Angels and Startups, Don’t Play in China Until You Read This.

Right now, there’s a lot of hot money in China. The differentiation you can make is the people you know on the ground. Being here, or working with people whom have been here for a while, is one of the keys of succeeding as an investor here. I have been able to — and my group as well — to find companies that are both a good investment from a team perspective, as well as from a valuation perspective.

To be credible, to be consistent, and to make sense, you need to be on the ground for a little bit. When you’re confident that you’re working with the right people on the ground, let’s say AngelVest, my angel group, or any other person that you feel is trustworthy, then once you have made the first investment it’s actually pretty quick to…

Photo: ~Brenda-Starr~

Rich: So, the patience comes not so much with the return, but with getting started, making sure you’ve got your feet on the ground and that you’re working with credible people.

Bruno: Yeah, and it’s much easier now than it used to be because you can now easily connect to investors in the US as well as China.

To be confident that you understand the market well enough you need to spend time on the ground. Otherwise you’ll need to rely on other people; however talented they may be, it’s always better if you see the company that you’re going to invest in.

The other thing is investing here in China is no different. Because the market has been educated about this offshore legal structuring, it is not that difficult to invest here in China.

What you have to focus on is actually the same as what you have to focus on elsewhere, which is the team, their talents, and their track record.

And you need to understand the regulatory environment because this is apparently a component that is not as strong as it is in the US, especially in the Internet arena.

* This is an excerpt from an interview report. Download full report at Angels and Startups, Don’t Play in China Until You Read This.

Bruno: Completely. This is the most obvious unfair advantage of local companies have over Western companies in China. For example, Facebook has been banned…blocked since the Iran troubles two years ago, I think.

* This is an excerpt from an interview report. Download full report at Angels and Startups, Don’t Play in China Until You Read This.

Rich: Right, right.

Bruno: From that moment on the Chinese government has put a firewall on the Internet to effectively block Twitter and Facebook, which means that two of the most powerful social and communication media in the West have been blocked.

Because companies are not allowed to provide unfiltered search results in mainland China, Google had to redirect their search results to Hong Kong. Google lost a lot of market share because it’s much more difficult to redirect results to Hong Kong. It took much longer and the advertisers were not very happy.

Photo: trix0r

So, there is absolutely a completely unfair advantage to local companies when it comes to certain aspects. It’s very difficult for a pure Western Internet company to compete head-to-head with local companies in China. I think entrepreneurs should be aware of that.

If you’re competing at the technology level, yeah, there is an opportunity. If you’re competing at the media level, say, Internet media, then you have to become either local, or be aware of the risk that there’s going to be an unfair advantage.

There are huge social networks here in China, and they don’t face any competition from Western social networks.

Rich: Oh, I see. OK, so it isn’t just Facebook and Twitter, but all foreign-based companies operating in that particular niche will find it more difficult to survive in China?

Burno: Yeah. We were even worried that LinkedIn would be banned for a while because LinkedIn offers a gateway to Twitter, if you’re aware of that.

Rich: Right, exactly.

Bruno: This year, there were a few incidents where LinkedIn got blocked for a few hours, or a few days. It was very cumbersome. It also made the Internet much slower.

So, in general, local Internet users are at a disadvantage, but local companies have an advantage over their foreign competitors.

But this is only one side of the coin. If you’re a local company you have a huge overhead – to filter the content that is going through your pipes.

So, while you have more competitive edge over their foreign competitors, you have to waste a lot of resources filtering, reviewing, and putting teams to read messages or blogs to make sure that it is compliant with the Chinese government’s requirement.

* This is an excerpt from an interview report. Download full report at Angels and Startups, Don’t Play in China Until You Read This.

Based on the number of subscribers alone, China is definitely the number one mobile market in the world.

The Chinese people “are actually much earlier adopters than we think,” Bensaid continues. And there’s an explosion of apps for all sorts of phones in China.

The mobile market is huge, but is it profitable for startups and angel investors?

Bruno Bensaid

What’s the legal, operating, and funding environments like in China?

Did you know that the moment that a Chinese company accepts one penny, or one yuan, from a foreign investor, the status of the company could change radically?

Bensaid addresses these popular questions and many, many more in this interview.

If you’re a tech startup thinking of breaking into China’s humongous marketplace, or an investor itching to invest in the innovation hub that is China, you definitely don’t want to miss this information-packed series where Bensaid generously imparts his expertise in the mobile and Internet market in China.

What You’ll Learn

• What foreign/Western startups must absolutely be aware of if they want to break into the China market.
• The type of companies that have a completely unfair competitive advantage over foreign/Western companies.
• The pros and cons of converting into a local company in China.
• What investors need to know before pumping money into the burgeoning country.
• The main configuration for angel or venture capital investment in China.
• The differences between pure local and offshore local companies and why they matter to investors.
• The easiest way to invest in Chinese startups.
• Profitable angel investment niches to consider in China.

About Bruno Bensaid

Having had a vision that China would emerge as a technology and consumer powerhouse 15 years ago, Bruno Bensaid decided to learn Chinese and move to China. Ever since, he’s been deeply involved in China’s tech industry and has taken on various roles to help not only China, but also Europe and US’s startup and investment community.

As an angel investor, Bensaid primarily invests in young ventures through AngelVest, an angel group based in Shanghai, China.

As a mentor for a number of startup development programs, the latest one being Dave McClure’s startup accelerator 500 Startups, Bensaid helps incubated companies understand the Chinese marketplace and attract investment capital.

As a founding partner of Shanghaivest, Bensaid provides fundraising and strategic advice to early stage companies as well as fosters cross-border M&As between Chinese and European companies.

Bensaid is also the founder and organizer of Mobile Monday Shanghai, the most developed mobile industry-related community and event organizer.

What You Get

• MP3: 33 minutes | 29.75 MB (refer to PDF for download instructions)
• PDF: 24 Pages (Edited transcript + Quick Recap)
• Word Count: 5,500+

What You’ll Learn

• Why companies should have either angels or VCs as their funding source, but not both, and how the company’s decision would affect its angel investors.
• Why the multi-hundred million dollar traditional VC funds don’t work in the 21st century.
• Differences between venture capitalists and angel investors – some investors are calling themselves VCs but they really are angels.
• What are capital efficient companies and in which sectors do these companies exist.
• Why having a clear, written exit strategy almost from the earliest days is the most important goal for every externally financed company.
• Some of the important elements that make up a good exit strategy – it’s much simpler than you think.
• Myths, misperceptions, and outright lies about exits and mergers and acquisitions that often led boards and management teams completely down the wrong path.
• What companies really need to do today to have a successful exit.
• Why receiving an unsolicited acquisition offer is almost never good news.
• The type of exits current economy favors.
• New dynamics of the exit environment and the urgent requirement of having an exit coach.
• Pressing challenges for entrepreneurs in today’s economy.
• Whether angel investors should be optimistic or cautious about backing startups in the current economic climate.
• And more…

Inside This Report

• MP3: 34 minutes | 30.78 MB (refer to PDF for download instructions)
• PDF: 29 Pages (Edited transcript + Quick Recap)
• Word Count: 6,200+

Available to Members Only

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* This is an excerpt from an interview with Dr. Basil Peters. Download full report at Basil Peters Debunks Outright Lies About Startup Exits and M&As.

Basil: Great question, Rich. I agree with you. The changes that we’re seeing now are as profound as we worked through during the industrial revolution, but the difference is that it’s happening in a shorter timeframe. Everything seems to be accelerated, compressed in time.

The thing that I think has changed most for people who are at the early stages of their careers today is that the world has become one homogeneous market.

It used to be that you could have a national economic strategy where you could operate in a country, say a country like America, in relative isolation from the rest of the world. For example in the auto industry, people used to say, “What’s good for General Motors is good for America.” That was a common thought in our lifetimes.

Today of course, that poor company is pretty much gone. I don’t think it will ever again be a globally competitive producer of automobiles, because other countries with different costs of capital and labor have also figured out how to build cars. And, just a huge percentage of us now are buying cars that were made in Asia, Europe, or other places because those people are doing a better job of it.

Photo Credit: ToastyKen

That’s not even a good example of what we’re talking about. It’s far better to think about where was the computer that you’re using built? Where did your television set get manufactured? Your clothing? Even our food; lots of our food is coming from Asia now.

So, because of the internet, because of low cost air travel, because of inexpensive broadband and telecommunications, the world is one homogeneous place.

What that means is we have to find a way to be globally competitive, even if we’re growing vegetables. It means that we as a western economy have to adapt to a new world where the average wage is probably US$2 or $3 an hour, not US$20 or $30 an hour. There are some incredibly smart people in India and China, who are writing software now, doing anything that we can imagine doing here as well, but happy to do it for 1/10th of the wage.

That’s what is costing some of these gyrations that you mentioned earlier in our local economies in the western world. It’s just that we have to find ways to do business a whole lot smarter than before.

* This is an excerpt from an interview with Dr. Basil Peters. Download full report at Basil Peters Debunks Outright Lies About Startup Exits and M&As.

* This is an excerpt from an interview with Dr. Basil Peters. Download full report at Basil Peters Debunks Outright Lies About Startup Exits and M&As.

Basil: Yes.

Rich: What are those types of companies? Are they only in technology? Or, are we talking about across several industries?

Basil: This is definitely a broader phenomenon than just in tech, but it’s most familiar to the people in tech. The capital efficiency that’s possible today is really driven by technological innovation, and primarily by the internet.

The internet has probably been the thing that has changed how we work more than any other previous technology. I think more than the printing press, the railroads, air travel, and telephone communication. The internet has really been the biggest change.

Rich: Absolutely.

Basil: One of the things that the internet has enabled every type of company to do, and perhaps technology companies best, is to build companies and scale them up for dramatically less money than was possible when I was a starting entrepreneur.

Photo Credit: deanj

When I was getting out of grad school, it didn’t seem to matter whether you were starting a software company or a hardware company.

If you were going to grow that to a few hundred employees you needed to have tens of millions of dollars of capital. That’s just how it worked. You couldn’t generate enough profits out of operations to grow it fast enough to get to a few hundred people inside of a decade without capital.

And that’s what gave rise to the large traditional venture capital funds that we still have today. The situation has changed dramatically, where now, because you don’t need to buy infrastructure and you don’t need to write codes from scratch, open source, new ways of hiring and even managing people are possible. Lots of companies don’t even have physical facilities anymore.

Technology entrepreneurs are building companies that are worth tens, or in some cases, hundreds of millions of dollars with just tens or hundreds of thousands of dollars of capital. When you look at some of the exits that ended up worth tens of millions, or in some cases, hundreds of millions of dollars today, often the invested capital is less than $1 million.

The capital efficiency is driven by the technology. When you look at it from an investor’s point of view, those capital efficient companies are the ones that are producing phenomenally higher returns on invested capital.

* This is an excerpt from an interview with Dr. Basil Peters. Download full report at Basil Peters Debunks Outright Lies About Startup Exits and M&As.

Dr. Basil Peters

There are some dangerous misperceptions, myths, and outright lies that are commonly told in the industry that lead boards and startup management teams completely down the wrong path, Dr. Basil Peters, an exit strategist, technology angel investor, and angel fund manager for Fundamental Technologies II, tells Venture Hype.

He continues:

I’m dismayed by how often I see good boards make very bad decisions about the exits, primarily, in my opinion, because the information isn’t readily available. There’s not enough investor and entrepreneur education available about the things to watch out for when you’re thinking about designing and executing an exit.

Investing is easy; exiting is hard, adds Peters. That’s why he devotes most of his work time writing, talking about, and executing exits, with the goal of educating angel investors and entrepreneurs about the importance of designing a clear exit strategy. His motto: Exit Early, Exit Often.

His first book, Early Exits, challenges angels and entrepreneurs to take a serious look at exit planning. What the CEO of Cisco has started saying today is exactly what Peters had written two years earlier in Early Exits. When Peters talk exits, you better sit up and listen.

What You’ll Learn in This Interview

* Fit for beginners

• Why companies should have either angels or VCs as their funding source, but not both, and how the company’s decision would affect its angel investors.
• Why the multi-hundred million dollar traditional VC funds don’t work in the 21st century.
• Differences between venture capitalists and angel investors – some investors are calling themselves VCs but they really are angels.
• What are capital efficient companies and in which sectors do these companies exist.
• Why having a clear, written exit strategy almost from the earliest days is the most important goal for every externally financed company.
• Some of the important elements that make up a good exit strategy – it’s much simpler than you think.
• Myths, misperceptions, and outright lies about exits and mergers and acquisitions that often led boards and management teams completely down the wrong path.
• What companies really need to do today to have a successful exit.
• Why receiving an unsolicited acquisition offer is almost never good news.
• The type of exits current economy favors.
• New dynamics of the exit environment and the urgent requirement of having an exit coach.
• Pressing challenges for entrepreneurs in today’s economy.
• Whether angel investors should be optimistic or cautious about backing startups in the current economic climate.
• And more…

More About Basil Peters

While working on his Ph.D. in Electrical and Computer Engineering at the University of British Columbia in Canada, Peters started Nexus Engineering and went on to take home the Entrepreneur of the Year Award, Entrepreneurship Silver Award, BC Science and Engineering Gold Medal, and Business Leader of the Year Award.

A decade later, he sold the Nexus Group to its biggest competitor and is now part of Cisco. Through the process, he went from being a starving entrepreneur to actually having some nice coins in the pocket. Like many successful, cashed-out entrepreneurs, Peters started angel investing. He’s been investing in startups since the mid ’90s and has founded three technology investment funds. He now belongs to three angel groups and dedicates most of his time on exit transactions.

What You Get

• MP3: 34 minutes | 30.78 MB (refer to PDF for download instructions)
• PDF: 29 Pages (Edited transcript + Quick Recap)
• Word Count: 6,200+

Your Investment: $15

Download MP3 and PDF Report Now

Special Offer

+ $4 and receive “Angels and Startups, Don’t Play in China Until You Read This”

Original: $15, You Save: 73%

What You’ll Learn

• What foreign/Western startups must absolutely be aware of if they want to break into the China market.
• The type of companies that have a completely unfair competitive advantage over foreign/Western companies.
• The pros and cons of converting into a local company in China.
• What investors need to know before pumping money into the burgeoning country.
• The main configuration for angel or venture capital investment in China.
• The differences between pure local and offshore local companies and why they matter to investors.
• The easiest way to invest in Chinese startups.
• Several potentially profitable investment niches for angel investors.

Inside This Report

• MP3: 33 minutes | 29.75 MB (refer to PDF for download instructions)
• PDF: 24 Pages (Edited transcript + Quick Recap)
• Word Count: 5,500+

Note: To receive this offer, both reports must be purchased together.

Download Both Reports Now for Only $19

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Garold Breit of UMTTO

In University Technology Transfer: Smart Managers Do Creative Deals, we visited two technology transfer models; learned how technology transfer deals were managed in the past; reported why startup companies are a powerful launching vehicle for new discoveries; and inspected some of the newer ways forward-thinking technology transfer managers are using to construct creative deals.

According to Garold Breit, executive director at the University of Manitoba Technology Transfer Office, university technology transfer managers are now taking dilution prevention into account. They’re structuring deals in such a way that the university’s final percentage ownership may increase or decrease, depending on

• the company’s financial realities,
• commercialization efforts,
• technology development progress, and
• the technology’s attribution to the company’s success and ability to raise risk capital.

Technology Doesn’t Create Company

But if you think that the technology being transferred is the key to successful commercialization, think again.

One experienced angel stresses that the technology is never worth more than 10 percent of the equity of the venture. The key to success is always the management team, not the technology. It’s all about the team’s ability to execute.

Breit also avows that “a single patent or a single technology is not going to be adequate to build a successful company.”

A vast majority of VCs and angels invest in people rather than technology; even promising technologies will be abandoned if the company and management team aren’t already in place.

Investors fund growth and customer acquisition, not product development.

Private Investors Ignore Public Sector Technology

An angel also points out that most private sector investors, i.e. angel investors and VCs, ignore public sector technology.

Lawrence M. Murphy of National Renewable Energy Lab (NRWL) and Peter L. Edwards of Altira Group explain why in their report, “Bridging the Valley of Death: Transitioning from Public to Private Sector Financing”:

The public sector makes early stage, high risk investments in promising innovative technologies that can address public good needs of energy diversity, national and energy security, environmental quality, and economic sustainability.

Private sector investors, on the other hand, focus their resources and efforts on market focused businesses with good profit potential – not technologies.

Hence, once these technologies have been created, many challenges in attracting private sector investors remain, since a technology does not [make] a product, business, markets, and profits.

Requirements for Successful Commercialization

To enhance the probability of successful commercialization, and to help the startup withstand the rigors of the marketplace and the demands of the regulatory agencies, a collaboration between investors, companies, entrepreneurs, and research organizations etc. is required, states Breit.

He further suggests that flexibility in deal structures is a must in attracting new commercialization partners. Ownership (final equity positions) should be determined only when the process is moving towards real commercialization.

If you’re interested in technology transfer, take a read of “Bridging the Valley of Death: Transitioning from Public to Private Sector Financing” [PDF]. It does a good job in helping investors, entrepreneurs, and technology transfer managers understand the challenges in transferring and commercializing technology, and proposes possible solutions to close the gap and improve commercialization efforts.

University of Manitoba Technology Transfer Office

Meet Garold Breit at Biofit

• Technologies available for licensing

Image by: Seth1492

There are two models in the field of technology transfer, says one veteran angel investor.

Innovations from research labs are either transferred to established corporations or startup ventures. The goal is to transform innovative technologies into marketable products and applications to promote economic growth and/or create money-making opportunities.

About 80 percent of lab technologies are suitable for established companies and 20 percent for startups, the angel continues.

University Technology Transfer: Traditional Model

In the past, university technology transfer managers predominantly used traditional licensing model as a technology transfer mechanism to generate revenues. Exclusive, rather than non-exclusive licenses, with upfront initiation fees, milestone payments and running royalties were pretty much the only way things were done, Garold Breit, executive director at the University of Manitoba Technology Transfer Office tells Venture Hype.

Universities were reluctant to license their technologies to cash-strapped startups because most can’t cough up the cash required by the traditional licensing model. In occasions where lab technologies were licensed to startups, equity was accepted only as a last resort method of payment.

Startups as Effective University Technology Transfer Vehicles

Garold Breit of UMTTO

Today, forward-thinking technology transfer managers recognize that startups are a powerful launching vehicle for new discoveries. And they realize the force young companies can bring to fortify local economic development initiatives, says Breit.

It’s startup firms, rather than their bigger corporate counterparts, that are the most effective when it comes to translating university inventions into commercial products or processes.

A licensed startup would focus entirely on commercializing the technology. A mainstream company, however, would be distracted by other undertakings. Commercializing technologies that are licensed to established corporations is “fragile at best due to competing projects, possible loss of the champion, change of management, change of company direction, etc.” Caltech opines opines on its website.

Enterprising University Technology Transfer Managers Do Creative Deals

Enterprising technology transfer managers who favor startups aren’t afraid of experimenting different structures to achieve flexibility. They’re receptive in granting co-exclusive and limited-time exclusive licenses. And they’re much more open to taking equity deals and reducing or waiving royalty rates.

Caltech comments: “This is very important to VCs or angels because high royalty rates together with the perennial problem of royalty stacking results in a lower valuation for a company at the time when an acquisition or IPO is being considered.”

According to “Equity and the Technology Transfer Strategies of American Research Universities,” [PDF] accepting equity in place of hard cash helps relieve a startup’s cash flow burden and benefits the licensing university by making the university a part owner of the startup.

Among other benefits, it reduces the time required to generate revenue compared to a traditional license, and aligns the interests of the university and the firm (towards the common goal of commercializing the technology).

These managers aren’t just accepting plain-vanilla equity. They’re making deals with creative configurations of equity, royalties, royalty holidays, and success fees (either in cash or equity), shares Breit.

For example, to prevent dilution, university technology transfer managers are structuring deals in which the university’s final equity stake may increase or decrease, depending on the company’s financial realities; commercialization efforts; technology development progress; and the technology’s attribution to the company’s success and ability to raise risk capital, according to Breit.

But if you think the technology being transferred is the key to successful commercialization, think again.

Next, we’ll reveal what really make or break a commercialization effort; why it’s difficult to commercialize public sector technologies; and the requirements for successful commercialization.

* Special thanks to Didier Leconte of MSBiV for recommending Garold.

According to exit strategist Basil Peters, selecting a great M&A advisor is crucial to the M&A process because advisors who can sell “ice to Eskimos” can increase the sale price 50% to 100%, which means investors and founders will make more money if the company is successfully sold.

Here, Maalouf picks up where we left off in Part 1 and talk about the roles lawyers play in the M&A process; why M&A deals fall apart and how to prevent it; how to select M&A advisors; and the purpose of Special Purpose Acquisition Corporations (SPAC).

* Edited interview

VH: From starting dialogue to closing, how long does it take to complete the M&A transaction?

JM: A typical M&A transaction can take anywhere from 2 to 5 months or longer. But it can vary widely depending on a number of different factors, such as

• the complexity of the deal;
• the amount of due diligence required; and
• how far apart the parties are with regard to price and other deal terms.

VH: Where do M&A lawyers come in? In what ways can attorneys help AppleSoft?

JM: Lawyers come in at the beginning of the M&A process to help AppleSoft move forward efficiently and maximize gains from the sale.

They can

• offer insight into selecting the right investment bank;
• help negotiate and structure the deal in the most profitable manner possible;
• help prevent unforeseen pitfalls, which can ruin an otherwise profitable M&A deal;
• draft all necessary agreements and documentation to protect AppleSoft’s rights and ensure it’ll receive all of the considerations agreed to; and
• advise on minimizing tax liability from the sale.

VH: Why do M&A deals fall apart? How to prevent it?

John J. Maalouf

JM: The due diligence phase is where a lot of M&A deals fall apart. If AppleSoft hasn’t involved an experienced finance lawyer in the drafting of Information Memorandum (IM) and Executive Summary (ES), then the documents may contain innocent misstatements and/or omissions, which can come back and haunt AppleSoft in the due diligence review process.

During due diligence review, if the acquirer discovers information that’s inconsistent with that in the IM and ES, even if the inconsistencies are seemingly minor, the acquirer will likely view these as “red flags” and walk away.

VH: Any advice for AppleSoft as to how to choose M&A advisors?

JM: The United States Lawyer Rankings puts out an annual list of Top 10 Finance lawyers in the US. Any of whom will be able to provide AppleSoft with excellent legal and business advice.

If AppleSoft has a value of less than US$50 million, then it may want to choose one of the smaller firms on the list to make sure it’ll receive the senior level attention it deserves.

Experienced finance lawyers have relationships with all of the major investment banks, as well as most of the smaller ones. They can help AppleSoft decide which investment bank is right for the company.

VH: Anything else you’d like to add?

JM: We’ve seen a significant increase in M&A activity lately, due in large to the use of Special Purpose Acquisition Corporations (SPAC) to fund acquisitions.

A SPAC is a newly formed company organized for the sole purpose of going public and using the proceeds of the offering to acquire an existing business.

In general, a SPAC will raise between US$50 million and US$500 million in equity in order to fund an acquisition. Key features of SPACs:

• Have a limited life span of 24 months (with a 12-month extension). During which, the SPAC must identify 1 or more companies and conclude the acquisition(s).
• All acquisitions are subject to approval by the public shareholders of the SPAC.
• Pending an acquisition, a minimum of 99% of the IPO proceeds must be held in a trust account with a major money center bank.

SPACs have increased in popularity lately, as both the NYSE and NASDAQ have amended their rules to allow this type of offering.

Image: dan paluska

Sophisticated investors always think about exits before they invest. “Does the company have the potential to go public or become an attractive acquisition target?” If not, they’d take their money elsewhere.

Going public or IPO means the company raises money by offering stocks to the general public – you know, those stocks that anyone can buy at the public stock exchange. This allows private shareholders (e.g. founders and angel investors) to eventually cash out by selling their shares in the public market, explains one veteran angel investor.

Mergers and acquisitions or M&A, on the other hand, means the company

• is sold to or merged with a larger private company in exchange for cash or for private, illiquid shares of the acquirer company; or
• is sold to or merged with a public company in exchange for cash or for publicly tradable shares of the acquirer.

In angel investing, IPOs are far and few between. A vast majority of angel investors exit their early seed investments via M&As.

Ron Conway, the most influential early stage investor in Silicon Valley, said he won’t invest if he can’t think of five potential acquirers for a company within 10 seconds.

Conway is of course legendary. But you get the idea: Think about exits before you invest. That’s how you make money.

M&As? “That’s Hot”

According to exit strategist Basil Peters, an increasing number of young tech startups (two to three years old) are getting snapped up by big companies to increase competitive edge. Most of the M&A deals are done in the US $10 to US $40 million range, and the sweet spot is about US $30 million. Once the selling price exceeds that sweet spot, it’d become more difficult for the corporation’s M&A department to get approval for the acquisition.

With a record-breaking, all-time quarterly high of 111 startup M&A deals completed in the first quarter of 2010, M&A is the new black in the startup investment community. We did hear Paris Hilton say “That’s Hot.”

To learn more about the sell-side M&A process, we once again caught up with John J. Maalouf of Maalouf Ashford & Talbot to talk about small M&A transactions; specifically, M&A deals that are under US $50 million.

John J. Maalouf and Maalouf Ashford & Talbot

John J. Maalouf, known as the “Idea’s Man,” is a globally recognized attorney who’s been ranked by the United States Lawyer Rankings as one of the “Nation’s Top 10 International Trade & Finance Lawyers” five years in a row from 2006 to 2010.

Maalouf Ashford & Talbot regularly advises clients in the areas of M&As, IPOs, venture capital, private placements, and private equity investments, among others. They’ve recently opened their sixth office in Riyadh, Saudi Arabia. The firm also has offices in Boston, Hong Kong, London, New York City, and Shanghai.

* Edited interview

VH: What’s the typical sell-side M&A process? Let’s say the name of the selling company is called AppleSoft, whose valuation is under US $50 million.

JM:

1. Select M&A Advisors

AppleSoft needs to select experienced M&A advisors, such as an investment bank and a law firm. If AppleSoft selects a law firm first, the firm can help the company choose the right investment bank.

AppleSoft should look for advisors who specialize or have the expertise in representing companies of similar size. Otherwise, small transactions like this will be passed on to junior associates and won’t receive the senior level attention that it deserves.

2. Collect Documentation and Prepare Marketing Materials

This step involves

• collecting documentation, which will be required during the due diligence phase; and
• preparing marketing materials, which generally include an Information Memorandum as well as an Executive Summary.

3. Shop for Potential Buyers

Next, the investment bank will look for and contact potential buyers. These generally include: (i) direct competitors; (ii) companies that are in the same industry as AppleSoft but operate in a different geographic region; (iii) companies that are in a related industry and where potential synergies exist; and (iv) firms that exist mainly to buy companies, help them to grow, and then exit.

As an example to (i), one of our clients, which we’ve represented since the company was a startup three years ago, has just acquired a major competitor and is now worth over US $200 million.

Potential buyers are then vetted based on their interest level and financial ability. Shortlisted potential acquirers then submit a non-binding Letter of Intent, which spells out the proposed deal in broad terms.

AppleSoft compares the various offers and selects a single potential buyer.

4. Start Due Diligence

Enters due diligence, which is a lengthy and sometimes arduous process. It’s during this phase that many deals fall apart. Particular attention must be given to ensure that all documentation is in order and is in conformity with the information provided in the Information Memorandum.

5. Draft Contracts

The drafting phase is where actual contracts are negotiated and written. No two deals are exactly the same. It’s essential that the contracts are drafted by an experienced finance lawyer. Otherwise, AppleSoft may end up with significantly less than what they’ve bargained for.

6. Close the Deal

Once the contracts have been properly drafted, all that remains is the actual closing where the documents are signed and the consideration (either cash or stock) is delivered to AppleSoft.

Coming Up

Stay tuned next week as Maalouf talks about the roles lawyers play in the M&A process; how to prevent deals from falling apart; the purpose of Special Purpose Acquisition Corporations (SPAC); and more.