Need an exit from your investment in a tech company or your shareholders want out?

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Need an exit from your investment in a tech company or your shareholders want out?

At the start of every year, the minds of investors, management and their advisers of many tech companies often wonder if this is the year that the company will deliver an exit for their shareholders. Ascendant, like most other corporate finance houses, takes the opportunity of the new year to get its team to research all the deals done in the last year to offer insight into market trends and developments. Whilst we share these stats with clients and prospects, we rarely publish them as we find that the participants in a very significant proportion of completed transactions (c.40%) do not give any indication of value of the deal. This results in very unreliable conclusions and can often lead the misinformed advisers to give quite misleading advice.

There are, however, three variables that are consistently available and therefore useful – the volume of transactions completed, the most active sectors, the locations of buyers.  I will talk about sectors in another post but for now, a quick analysis of our data on exits of UK/Irish Tech Companies shows:

So the market is definitely trending down – no sectors are immune although software is doing better then others. Yet again the most likely buyer for UK/Irish companies is….UK/Irish companies!! For what it is worth the percentage of UK/Irish buyers rockets to 69% for businesses sold for less than £20m. This seems obvious but many of the companies and shareholders we speak to, still believe that a US buyer is the most likely purchaser for their business. That might be true but statistically it is not!

We also look at the number of deals that involve a private equity house as a buyer. Our data on this tells us that a PE firm was the purchaser in 23% of all deals in 2015 – unchanged from the previous 2 years despite the up and downwards movements in the market as a whole. Notwithstanding our comments above of poor disclosure of the value of consideration, 49% of these deals were for less than £20m.

Disclosure of transaction values disclosure tends to improve as the deals sizes get bigger so one of the measures we track is the number of deals in each year that are greater than £100m. Many VCs have for years stated this as one of their key ambitions for every company they invest in.  Here’s the data for the last few years on exits for UK and Irish based companies that have exited via a sale of the business (but not an IPO).

 

Not of all of these had VCs on their shareholder list, so it is clear just how few VC investments do hit the big success mark. VC Investments in the tech sector in the UK/Ireland have run at 250-350 deals per year in the last 5 years, so by simple arithmetic the much discussed “portfolio” effect is very apparent.

Finally it would be inappropriate to exclude everybody’s favourite term in 2015 – unicorns. Our data highlights 6 UK/Irish Unicorn exits (by disposal) occurred in 2015 – exactly the same as the year before. 5 of these had received PE (but not VC) investment. So taking venture capital is neither a necessary or sufficient factor for getting a “mythical” exit but it does help many get a “rich” one!

  • So in general the advice UK tech companies and their shareholders is:
  • Exits are definitely possible at all valuation levels, but the market is tightening
  • UK buyers are the most likely to buy your company – however much you want it to be a US buyer – this is particularly true of companies with a value of less than £20m.
  • PE houses are a key component of the market and should be included on every buyer list.
  • Every time you hear a VC saying that they only in companies that can achieve a £100m exit, smile gracefully and nod – like you do with your grandparents who have begun to lose touch with the real world…

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