Exitround Tech M&A Report from$0 - $100 Million: The Exit Curve May 2014 By Tomio Geron, Exitround This is a complementary partial version of the Exitround Exit Report. For information on how to get the full version of the report, please contact exitround.com/data. Page 1 - Exitround Tech M&A Report from $0 - $100 Million: The Exit Curve A common mantra in Silicon Valley is that you should raise as much capital as possible. There are many practical and logical reasons for this, but Exitround has found a reason to be cautious. There’s a sweet spot for how much capital to raise for startups that want to get the most money out of their sale, according to proprietary data we analyzed covering more than 200 companies acquired since 2006 for under $100 million. Actually, there are two sweet spots. Exitround has found that the best exits from a return-on-capital perspective cluster around total raises of $2 million to $3 million and between $5 million to $10 million. Given that 88%[1] of all tech M&A activity occurs under $100 million exit size, this is relevant for the vast majority of entrepreneurs and investors actively building companies today. This is just one fnding from the enclosed report. Other notable fndings include: enterprise companies have better average exits from a return-on-capital perspective than consumer companies--by a factor of close to 3x. Overall, some sectors such as mobile (13.1x avg ROI) and cloud (9.8x ROI), had higher average returns on investment than others like social (6.4x ROI). Finally, it’s clear that on the whole, value creation does not happen overnight. There is a dramatic increase in overall exit value after companies pass the four year mark, suggesting a correlation to more advanced company stature and traction in market. The focus of this report on exits below $100 million is to provide actionable insight to the growing and dynamic angel, seed and Micro-VC landscape as entrepreneurs and investors consider building, funding and selling technology companies. This report has direct implications for those individuals creating companies at a time with two dominant trends: a) an increasing fow of angel and seed/micro-VC capital, b) increasing M&A activity both by acquirers inside of technology, as well as by “non-tech” companies that are realizing that “software is eating the world,” and they must stay innovative to survive. The report ofers a frst-ever look at the type of exits that are most lucrative for investors and entrepreneurs, based on their size, capital raised, types of buyers and other factors. 1. Capital IQ via Woodside Capital Partners. Page 2 - Exitround Tech M&A Report from $0 - $100 Million: The Exit Curve Methodology The study analyzed more than 200 acquired companies, using anonymous primary data about the specifcs of these M&A deals. Looking at this precise, accurate data enables Exitround to provide new insights into technology M&A activity and trends. The study analyzed exits from 2006 to 2014. This is the frst of a planned series of studies and future studies will include insights into M&A activity greater than $100 million. Typically, M&A reports analyze publicly available data; however, this report is unique because all of the data reported herein is private, previously undisclosed data. This information is not publicly available, for a number of reasons: prices (and deal structures) are often inaccurately reported in the media at this size, prices are not released by companies, and public companies often do not disclose acquisition prices for deals below a certain size. The Exitround Exit Report is based on Exitround’s proprietary data, which comes from a variety of sources. Support in obtaining anonymous data was provided by top incubators and investors, including: Bowery Capital, Cendana Capital, IA Ventures, SoftTech VC, Techstars, Transmedia Capital, Xenon Ventures, Y Combinator and others. For their participation, these partners receive an in-depth detailed analysis of our proprietary data. To participate in future studies, please contact Exitround at exitround.com/data. Page 3 - Exitround Tech M&A Report from $0 - $100 Million: The Exit Curve Executive Summary Some key fndings in the report include: Exitround’s analysis of the best performing exits shows raising more capital does not necessarily result in larger exits. Companies that generate substantial exits are usually at least four years old. Certain sectors such as cloud and mobile provide the best return on invested capital. • • • Page 4 - Exitround Tech M&A Report from $0 - $100 Million: The Exit Curve 1. Table of Contents The Exit Curve - Finding Patterns In The Best Company Exits The Data Behind The New Seed/Venture Investing Landscape What Size Exits Have The Best Returns? Which Size Exits Have The Best Multiples? How Long Does It Take to Build a Successful Startup? Which Generates Better Return Multiples: Consumer or Enterprise? How Does Team Size Afect Price? (or vice versa) Who Pays More: Public Or Private Buyers How Are Investors Paid? How Much Of A Deal Is Held Back For Earn-out/Retention? Which Sectors Have The Best Outcomes? 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Page 5 - Exitround Tech M&A Report from $0 - $100 Million: The Exit Curve 1. Exit Distributions: The Exit Curve Exitround’s analysis of acquisition data has found a unique and irregular distribution curve of companies’ exit sizes. This distribution is easiest seen by looking at how much capital the companies have raised. Companies with the best outcomes (in this study of exits below $100 million) tend to fall into two groups. (See Chart 1) This frst chart plots the amount of capital that acquired companies had raised along with their exit prices. The frst group of companies are those that exited after raising between $2 million to $3 million in capital (the second group, described below, are those that raised $5 to $10 million). This frst group of companies had an average exit price of about $18 million, indicating a nice return (up to ~10x) for investors, particularly seed investors. For companies that raised less than $2 million, they could still have positive outcomes and their exits could provide returns of up to 10x. But their exits tended to be smaller. In some cases these were talent or acqui-hire deals. The companies that raised $1 million to $2 million had an average exit price of more than $10 million, and a median price of about $5 million, indicating most of these companies had a return on total capital invested of about 3 to 5x. Capital Raised Exit Price Sizable Exits Larger Exits Acqui-hires Small exits/ Shut-downs The Exit Curve (Chart 1) Page 6 - Exitround Tech M&A Report from $0 - $100 Million: The Exit Curve Raising more capital does not equal a bigger exit Startups that raised more capital did not necessarily end up with the company eventually getting a higher exit price. In Exitround’s analysis, companies that raised $5 million to $10 million actually generated larger average exits than those that raised $10 million to $50 million. And those companies that raised $3 million to $5 million had a lower average exit price than those that raised $2 million to $3 million. Despite raising more capital, some companies had a lower average exit price. Somewhat counterintuitively, at this very early stage, companies doing better tend to raise less capital. At this stage, lean startups with small teams move quickly and build a product that takes off, so they often don’t need to raise more than that initial $1 million or $2 million--until they really grow and raise a much larger round. Meanwhile, companies that raised $3 million to $5 million in capital had lower average acquisition prices--or they did not make it to the next stage and shut down. $35,000,000 $30,000,000 $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000 0 Raised <$1m Raised $1m-$2m Raised $2m-$3m Raised $3m-$4m Raised $4m-$5m Raised $5m-$10m Raised $10m-$50m Average Exit Price Median Exit Price Exit Curve: Exit Price Compared to Total Capital Raised (Chart 2) Data powered by Exitround Page 7 - Exitround Tech M&A Report from $0 - $100 Million: The Exit Curve Making it to the Next Stage The second group is made of companies that raised more capital to try to get much bigger. These companies raised between $5 million to $10 million in capital and grew enough to make it to a much larger exit of, on average, more than $30 million (In other words, they “crossed the chasm”). There are also companies in this group that had much lower exits, as indicated by the lower median exit price of about $5 million. Of course, some companies do go on to raise more capital--$10 million to $50 million on chart 2--and see substantial exits. For startups raising capital or investors looking to invest, they have to ask themselves what is necessary to get to the next exit stage. We will cover more on this below about the characteristics of the exits. 2. The New Seed/Venture Capital Investing Landscape Our analysis of this Exit Curve shows a robust startup and seed investing mar- ket. The data shows that seed investors can generate solid returns by investing smaller amounts of capital at lower valuations, which can result in sizable returns even at exit prices of $10 million up to $50 million. Investors are on average see- ing their best returns when their companies make it to these two groups of exits. The majority of acquisitions at this stage are of companies that have raised small amounts of capital, which shows the growth and prominence of seed investing. Among all companies, the average capital raised was $3.4 million, but the medi- an was $1.03 million. (see Chart 3) This also speaks to the rise of talent deals or acqui-hires, which are often consummated when a startup has raised a relatively small amount of capital. Page 8 - Exitround Tech M&A Report from $0 - $100 Million: The Exit Curve Total Funding Raised By Acquired Companies (Chart 3) <$1M $1-$2M $2-$3M $3-$5M $5-$10M $10-$20M $20-$50M 44.5% 20.3% 14.1% 7.8% 4.7% 4.7% 3.9% Data powered by Exitround Just as the majority of acquired companies have raised small amounts of capital, most exits are not massive outcomes. The majority of exits (56.8% of the total) were acquired for less than $5 million. As noted above, the most lucrative exits, based on capital invested, are at exit prices of $3 million to $5 million and $10 million to $20 million, and those bands account for 17% and 11%, respectively, of all exit activity under $100 million (see Chart 4). 35% 30% 25% 20% 15% 10% 5% 0% Percentage of toal companies <$1m $1m- $2m $2m- $3m $3m- $4m $4m- $5m $15m- $20m $20m- $30m $30m- $100m $5m- $7m $7m- $10m $10m- $15m Exit Prices of Companies (Chart 4) Page 9 - Exitround Tech M&A Report from $0 - $100 Million: The Exit Curve The Micro-VC/seed funds that emerged in 2007-2010 (with lower capital required to start companies due to cloud computing, incubators, etc.) are showing proof points. Following innovators such as First Round Capital, True Ventures, and Foundry Group, some of the early Micro-VCs--Baseline Ventures, Felicis Ventures, Floodgate Fund, Lowercase Capital, SoftTech VC, K9 Ventures, etc-- have now raised second, third or fourth funds and many others have followed. Exitround’s analysis supports the idea that there is an emerging new venture landscape, recently described by investor Manu Kumar: pre-seed rounds of $500,000 are the new seed round, seed rounds of about $2 million are the new Series A round, and Series A rounds of $6 million to $15 million are the new Series B round. In Kumar’s formulation, startups need as little as $500,000 to get of the ground to build a team and early product prototype; then raise $2 million to get to product market ft and early revenue; and $6 million to $15 million for scaling customer acquisition and revenue. In Exitround’s data, in the frst chart above, the infection points are at $2 million to $3 million (new Seed + new Series A) and $5 million to $15 million+ (new Series B), indicating this is the amount of capital that successfully exited companies have raised. The data shows that seed investors, particularly the top tier, are generating solid returns. (Note: we are not looking at companies that shut down and we are not looking at entire seed funds so we don’t include exits larger than $100m, which would show higher multiples.) Page 10 - Exitround Tech M&A Report from $0 - $100 Million: The Exit Curve 3. What Size Exits Have The Best Returns? In Chart 4 (below) looks at the Exit Curve from the perspective of exit prices, instead of the capital raised. Companies with exit prices below $2 million raised more capital than their exit prices, indicating that, on average, they (or their in- vestors) lost money. Companies with exit prices of $2 million to $3 million had raised about $2 million in capital on average, indicating that they just broke even or made a small return (assuming no investor preferences). As companies reached exit prices of $3 mil- lion to $7 million, returns started to be made based on capital raised. In fact, the average amount of capital raised was roughly the same (about $1 million) across the range of startups that exited from $3 million to $7 million. This underscores the point made above, that companies that are doing well at this early stage do not need to raise more capital. The $1 million in capital raised can get a theoretical company to a $3 million or a $7 million exit. And companies with exit prices of $10 million to $20 million showed capital raised of just slightly more than $1 million. In other words, the amount of capital required to get to a $20 million exit is not that diferent on average from the amount of capital re- quired to get to a $3 million exit. $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 0 <$1m $1m- $2m $2m- $3m $3m- $4m $4m- $5m $5m- $6m $6m- $7m $7m- $10m $10m- $15m $15m- $20m $20m- $30m $30m- $40m $40m- $100m Average Capital Raised Median Capital Raised Exit Price Capital Raised Does Raising More Result In Bigger Exits? Capital Raised Compared to Exit Price (Chart 5) Data powered by Exitround Page 11 - Exitround Tech M&A Report from $0 - $100 Million: The Exit Curve 4. Which Size Exits Have The Best Multiples? The average multiple on cash invested for all companies Exitround analyzed was: 13.6x capital raised. The median was 5.0x. Next we look at multiples of total cash invested in the next two charts. In chart 5, companies with exits of up to $3 million had multiples of less than 5x of total cash invested. But exit prices of $3 million to $4 million had average multiples of close to 20x. Then exits of $4 million to $6 million had lower multiples, then exits of $6 million to $7 million had higher multiples. Then the multiple increased again for exits of about $30 million. In this chart you can see the optimum exit prices where investors returned the best multiples. 60 70 50 40 30 20 10 0 <$1m $1m- $2m $2m- $3m $3m- $4m $4m- $5m $5m- $6m $6m- $7m $7m- $10m $10m- $15m $15m- $20m $20m- $30m $30m- $40m $40m- $100m Average Multiple Median Multiple Exit Price Which Exits Are Most Lucrative? Multiples on Total Capital Invested By Exit Price (Chart 6) Data powered by Exitround Page 12 - Exitround Tech M&A Report from $0 - $100 Million: The Exit Curve The next graph (Chart 7) looks at the multiple generated based on amount of capital raised. As you can see, raising more capital does not necessarily result in a higher multiple in an exit. The highest multiples were for companies that raised less than $3 million, and then from companies that raised on average $5 million to $10 million. There isn’t linear growth, with more capital raised resulting in a higher multiple. In other words, it only makes sense to raise more or invest more capital beyond certain amounts if you think you will hit that next group of successful companies. While multiples are largest for companies that raised less than $1 million, many of these companies raised $25,000 to $100,000, so their return potential for investors is not large. (This chart excludes companies that raised less than $100,000--i.e. companies that were essentially bootstrapped.) 12 10 8 6 4 2 0 Raised <$1m Raised $1m-$2m Raised $2m-$3m Raised $3m-$4m Raised $4m-$5m Raised $5m-$10m Raised $10m-$50m Average Multiple Median Multiple Exit Multiples On Capital Raised (Chart 7) Data powered by Exitround Page 13 - Exitround Tech M&A Report from $0 - $100 Million: The Exit Curve 5. How Long Does It Take to Build a Successful Startup? How many years does it take to build a successful company and reach an exit? For exits over the frst four years of a company’s life, the average price remained essentially the same. Only when the company hits four years and then fve years old does the average price increase substantially. This shows that while it is pos- sible to quickly build and sell a company, the larger exits tend to be companies that are at least four years old. In other words, these companies are not built overnight. How Long Does It Take To Build (And Sell) A Successful Startup? (Chart 8) $35,000,000 $30,000,000 $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000 0 Up to 1 year old 1-2 years 2-3 years 3-4 years 4-5 years 5-8 years Average Exit Price Median Exit Price Data powered by Exitround Page 14 - Exitround Tech M&A Report from $0 - $100 Million: The Exit Curve What is Exitround? Exitround is the private, anonymous marketplace for buyers and sellers of technology companies from the small to mid-market. Using its proprietary software algorithms, Exitround provides greater efciency and intelligence enabling buyers and sellers to reach far beyond the traditional boundaries of sector, geography and personal networks. Exitround’s broad user base spans from the SMB to the Global 2000, including corporate and private equity partners looking for fnancial transactions. This is a complementary version of the Exitround Exit Report. Exitround is providing the full report to investors, incubators and other ecosystem partners who provide exit data for future reports. For information on how to get the full version of the report, please contact exitround.com/data. Other Sections Included The Full Report Which Generates Better Return Multiples: Consumer or Enterprise? How Does Team Size Afect Price? (or vice versa) Who Pays More: Public Or Private Buyers How Are Investors Paid? How Much Of A Deal Is Held Back For Earn-out/Retention? Which Sectors Have The Best Outcomes? 6. 7. 8. 9. 10. 11.
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