Angel Investing: Early Exits via M&As

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Last Updated: July 23, 2011

First Posted: August 28, 2009 by Joey Lo

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success exit 300x238 Angel Investing: Early Exits via M&As According to The Deal, “M&A accounted for 70% of the angel investment exits [in 2008], while bankruptcies made up 26% and IPOs 4%.”

In a down economy, valuations drop and some companies see it as an opportunity to snap up smaller competitors or to bargain-hunt for startups that are strategically valuable to the acquiring company. Which means you can cash out via an M&A exit.

What Are the Motives Behind M&As?

Exit strategist Basil Peters sums it up nicely –

The only reason any company buys another company is because they believe

- they can increase the value of the company being acquired, and/or
- the acquired company will increase the value of their company.

For example:

eBay acquired payment platform PayPal to increase efficiency
Yahoo bought Flickr to acquire its tagging technology and the Flickr team
Twitter bought Summize to build out its search capabilities
Consumers Union acquired Consumerist to reach a younger audience
Facebook bought FriendFeed to enter the real-time space and get its hands on the team of seasoned ex-Googlers behind FriendFeed

In many cases, the common motive is to acquire innovation. Big companies are better off buying smaller companies outright than to waste time and resources on internal R&D. Growing by acquisitions allow them to begin adding value and/or generating revenue pronto — assuming they’ve made the right purchases, of course.

Focus on Smaller Transactions

According to Peters, you should focus on smaller M&A transactions if you want to exit and make several million dollar capital gains within a few years after the startup’s launched. Big companies typically purchase tech companies that are under US$30 million.

Once the selling price exceeds that sweet spot, it becomes more difficult for the corporation’s M&A department to get approval for the acquisition. For early exits, don’t wait till the startup has grown so big that it’s become an unattractive acquisition target.

Instead of waiting to get noticed, you may want to tee up the startup exit and seek help and advice from M&A professionals. Below, I’ve summarized 2 of Peters’ posts on this topic:

Angel Investing: Early Exits via M&As

In other words, companies under US$30 million should look for individual practitioners and boutique firms. And for these smaller transactions, be sure to look for an M&A advisor who’s close to home – the farther away the company is from the M&A advisor, the higher the transaction failure rate.

* For series, references are published in the last installment of the series.

Angel Investing, Definitions, Exits

http://topsy.com/tb/venturehype.com/tech-startups-exit-early-via-mas/ Twitter Trackbacks for Tech Startups: Exit Early via M&As | Venture Hype [venturehype.com] on Topsy.com

[...] Tech Startups: Exit Early via M&As | Venture Hype venturehype.com/tech-startups-exit-early-via-mas – view page – cached Where Venture Angels Ignite™, You attended a cocktail party with your buddy Ken, a seasoned angel who’s flexing his wings. During meet-and-greet Ken was approached by Jan, an upbeat entrepreneur who managed to pull of…, According to Peters, you should focus on smaller M&A transactions if you want to exit and make several million dollar capital gains within a few years after the startup’s launched. — From the page [...]
http://ecpmblog.wordpress.com/2009/09/02/companies-under-30-million-selling-price-should-look-for-individual-practitioners-and-boutique-ma-firms/ Companies under $30 million (selling price) should look for individual practitioners and boutique M&A firms « ecpm blog

[...] Tech Startups: Exit Early via M&As | Venture Hype. [...]
tongyun

I wonder how many people do not consider an exit strategy such as the one described in the article. This is clearly one of those steps that people need to prepare for when working with an angel investor because the investor definitely wants to know how their investment will be returned. After all, they are investing in a business with the intent of making money.
http://venturehype.com The Hyper Team @ Venture Hype

Certainly. But entrepreneurs should have an exit plan for their own sake even if they're not looking for capital.
Ricardo

I wonder if the numbers regarding the timing or sizing associated with exit plans will change in the recovering economy. We've seen things in the last year or so that we've never seen before.

I suspect we're in what could be a challenging time to predict when to make the move.
Ricardo

I wonder if the numbers regarding the timing or sizing associated with exit plans will change in the recovering economy. We've seen things in the last year or so that we've never seen before.

I suspect we're in what could be a challenging time to predict when to make the move.
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