The founders have received the note that the ground is moving under their feet at this time. What to do about it is the question. Already, teams plan to cut spending to preserve capital. They make painful staff cuts for the same purpose – or institute hiring freezes.
But they should also think a lot more about building relationships with bankers and big companies who might be interested in acquiring their startup, say two lawyers who work on both the buy and sell sides. deals, with both large corporate and venture backed companies, both of which have over 20 years of experience.
Indeed, to better understand some of the options founders may have, we spoke earlier today with Denny Kwon and Scott Anthony, who both represent white shoe law firm Covington & Burling (where the former US Attorney General Eric Holder is also a lawyer). They answered a series of questions we thought startups might be asking right now. Our cat has been slightly edited for length.
TC: How much has the world changed in recent weeks?
DK: There’s definitely a feeling of more pressure on sellers to close deals as quickly as possible given that there’s a lot of volatility in the market right now and they don’t know how buyers might react to a significant drop in their stock price. Small businesses also face the prospect of a slightly tougher fundraising market, so the alternatives for them are narrowing.
TC: Given that public equities are so volatile right now, are acquirers more or less inclined to offer equities as part of a transaction?
DK: It is much more difficult to price trades with a large inventory component in this market. Regardless of volatility, you don’t have a clear idea of a stock’s inherent value, so all-cash trades are much more favorable to targets.
TC: Are targets currently able to make requests? What is the leverage effect of a startup whose options are dwindling?
DK: Whenever we see volatile markets, where valuations were incredibly high [and are] be reset, it always takes time for sellers’ expectations to reset as well, so although they may be temporary [lull in activity] Due to the market, if there is any “normalization” ahead, we are likely to see M&A activity, particularly when valuation expectations are reduced on both the buyer’s side and the seller’s side.
my sense [right now] is that buyers may view the market correction as potentially opportunistic, but sellers may not have the same expectations as they may be hoping for a rebound in the near future. Once sellers’ expectations drop and they continue to hear from VCs that financing may not be as available as it was 6-12 months ago, they will be even more pressured to decline offers. acquisitions that are coming.
TC: Do you see deals canceled as buyers seek to reprice previous deals to their advantage?
DK: The pending deals that I’m working on are continuing apace.
TC: We all hear – and read – already of very significant valuation declines. Do you have any idea how much value your customers have lost in recent weeks, or if certain industries are being hit harder than others?
SA: There is pressure on valuations, but it is difficult to assess [the degree]. Granted, we have companies rushing to close valuations [before Russia invaded Ukraine] and [that period since] changed everyone’s expectations. I think companies are worried that investors will sit down and that will drive down valuations.
Businesses with revenue and good prospects will weather any downturn better – they always have. Sector wise it will depend but all stablecoin [debacle] didn’t help the crypto stuff.
TC: How important are antitrust regulators to your biggest clients?
DK: This is a priority for all practitioners, but there is a dichotomy in that some transactions are reportable and some are not. For those that are reportable—the threshold is about $100 million—we spend an incredible amount of time analyzing the potential for regulatory issues.
TC: How long does an M&A process take and when do the two parties agree on a price?
DK: From this initial step of a buyer, the delay can vary from a few weeks if there is alignment right away, up to several months if the target company wants to see if there are other interests. Much depends on how compelling that first offer may seem. Once you get a handshake on an assessment, it usually takes six to eight weeks to get a final agreement signed.
SA: If the [startup] is the one who makes the decision to find a buyer, and then the process – maybe they hire bankers, maybe they use board member connections to reach strategists – the process and the timing can be very different depending on how quickly they need the money and how quickly they can interest potential buyers. . . and size of business, but buyers will still perform their due diligence process.
TC: Let’s assume that mergers and acquisitions will be a bigger factor, given the cooling funding environment. If you had to advise a startup on the pros and cons of continuing, what arguments would you make?
DK: Many companies at an inflection point that need to raise funds to fund their growth or expansion are going to have a difficult decision to make, which is either to raise a new round where the valuation may not meet to their expectations, or [where they see a lot of dilution]or an M&A exit, where they see product now but lose on [potential] Upside down.
TC: Should startups that are open for sale reach out to anyone, or should they wait to see who approaches them? Some might worry that the value of their startup will drop as soon as they indicate they are willing to sell.
DK: I would advise startups to talk to bankers and maintain relationships with people at big companies that they know just because we could be in a longer-term correction, where funding becomes even more difficult than it does. has been for the last few months.
SA: Having relationships with bankers is prudent, so if you need to check the market, you already have those relationships. Additionally, staying in touch with larger customers and strategic partners who would be natural buyers for the business could short-circuit any type of sales process down the road.