Tech exits: To sell or not to sell, that is the question

21 Nov 2016

Are young tech companies under too much pressure to sell? Image: txking/Shutterstock

In this era of acqui-hiring and pressure for tech firms to exit, there may be a danger that start-ups will sell out before they reach their full potential, writes John Kennedy.

About a year ago, I met some start-ups in the life sciences world and marvelled at all the regulatory and financial hoops they had to go through, just to come up with a viable product they could bring to market.

“Yeah, all I really want to do right now is get it to the point where we can make an exit,” one of the company founders said wearily.

‘In the last 18 months, a number of very exciting businesses were sold that I believe could have gone on and potentially become the next Kerry Group or Ryanair’

“Sacrilege!” my mind screamed. But yet I sympathised.

You see, I still dream of a day when an Irish tech company will be a household name worldwide.

When I hear of or report companies being acquired, part of my mind wonders: “What might have been?”

Every exit is different

A decade ago, there was a real sense that when a company was acquired – or sold out, depending who you were talking to – there was frustration that they could have gone the distance and gone public, like the numerous Israeli companies that float on Nasdaq by comparison.

Now, an exit is an exit. The buck stops there and no one really asks: was it a successful exit though? Why did they exit? Did the founders get anything for their efforts? Who really wins here?

We applaud exits through trade sales as if that was something to celebrate, not asking ourselves what might have been.

This is not a black and white issue. Companies sell for many reasons.

In the present era, acqui-hiring (buying a company to bring in the talent) is an accepted norm in the technology world. Companies like Apple and Google do this all the time and with such frequency that it rarely hits the news radar.

Sometimes, a trade sale is the logical next step for the technology to develop. A tech giant like Microsoft or Intel may have the resources to bring the technology further along, and it is a nice result for the founders and investors. Movidius, the Irish chip firm behind AI technology in Google devices and drones from DJI, was acquired by Intel for a rumoured $300m. I sense it was the logical next step if the technology was to have a future. With Intel’s resources behind it, anything is possible.

I sense the logic was the same for Cork firm InfiniLED, which was acquired by Facebook-owned Oculus to bring the technology forward. This was actually good news for Cork, because the company is likely to double employment.

The same is likely for Barricade, the Cork company led by David Coallier, which was acquired by infosec giant Sophos for both its people and its AI-based technology.

Then there is the mammy and daddy of all exits in Irish tech industry history: Verizon’s $2.4bn acquisition of Fleetmatics, a company founded above a shop in Terenure in 2004, which grew to connect 37,000 business customers and 737,000 vehicles. In a sense, Fleetmatics did go the distance; it became a multinational player and it listed on Nasdaq. Its acquisition came just two months after Microsoft acquired LinkedIn for $25bn in cash.

And then, of course, there are the acquisitions probably brokered by venture capital investors who want a return on their investment after five to seven years of round after round.

This begs the question: how many companies prematurely sell out before their time because investors require a return? This isn’t so much a dirty little secret of the tech world as much as it is going to be an ongoing reality, as venture investments peak but the trickle of tech firms to IPO slows.

Twilio and Atlassian were the two biggest IPOs of 2016, and now all eyes are on Snap Inc, with an IPO valued between $20bn and $25bn when it floats in March 2017. Its investors, who backed it to the tune of $1.8bn earlier this year, will do quite nicely out of the flotation.

There are a myriad of reasons why a trade sale makes sense. One such reason is that it is the right thing to do for the technology and for the founders to develop to the next step of the journey.

But the elephant in the room is the issue of trade sales that happen because investors require the exit for their balance sheets. It is nothing personal. That’s just business.

Research in September by Mind the Bridge and CrunchBase on transatlantic M&As focused on 6,000 start-up acquisitions performed by US and European companies.

It revealed that a total of 82pc of the deals have been completed by US companies. Only 18pc were by European companies. In other words, three out of four start-ups have been acquired by US companies. Some 21pc of the deals have been completed by Silicon Valley companies. Among the top 15 acquirers in the ranking, there are 11 Silicon Valley companies. None of them are from Europe; the first European one – Germany’s SAP – ranks 33rd.

Long-term vision

My thoughts on the long-term viability of young Irish tech companies were stirred in the past week by two founders I spoke to, who have eschewed successive rounds of venture capital in order to do things on their own terms.

Business software company Teamwork, led by Peter Coppinger and Daniel Mackey, is ploughing $2m of its own cash into a new office refit, aimed at enticing the top developers in Europe to consider Cork. This comes two years after they spent €500,000 on the domain name. At first, Coppinger recalled, people on internet forums thought this was a pair of entrepreneurs spending VC cash irresponsibly.

“We weren’t VC backed, it was our own money,” Coppinger explained at the recent Web Summit in Lisbon.

“We could have gone off and bought two Maserati cars but we decided instead to double down, reinvest in our company, and we spent half a million on a domain name. It was the biggest decision we ever made and it was amazing for us. Things have really taken off since that point.”

Founded in 2007, Coppinger said that Teamwork – which employs 73 people and has 2.8m users worldwide from among 268,000 paying companies, including PayPal and Disney – is in charge of its own destiny.

Turnover at the company has increased year-on-year and in 2015, the company is understood to have recorded €14.5m in revenues, and is eyeing a €20m target for 2016. The objective, says Coppinger, is to become a €100m per annum company.

At the Web Summit, Coppinger said he had a boilerplate email prepared for venture capitalists who wanted to meet him. “I politely pointed out that we are not taking on investment but I’d be happy to meet for a coffee or a beer if they wanted to discuss tech trends.”

He added: “We have millions in the bank, we are totally self-funded, there are only two owners; myself and Dan. We’re putting a share option scheme in next year to give a chunk of the company to all of the long-term employees.

“We don’t have any plans to exit in the foreseeable future. We have a nine-year plan. We have a huge vision for where we want to take the company,” Coppinger said.

Another company I spoke to that has no plans to exit any time soon is Phorest, the salon-booking software company founded by Ronan Perceval, Dylan Collins and Sean Blanchfield in 2003.

While Collins and Blanchfield went their separate ways to form Demonware, which was bought by Activision in 2007 for $17m, Perceval steadily built Phorest up through tough times and a lot of bootstrapping. Today, Phorest has 110 employees and is profitable with revenues of around €9m.

He told me last week that he believes start-ups are actually under too much pressure to sell.

“We don’t intend to do another round of funding if we can help it, because we are of the belief that the real opportunity in this industry is over the long run of over 20 years. If we raise more money, then the outlook of the company will naturally become more short-term, as investors need a return within 5-7 years.”

Aside from an initial angel funding round of €1.2m, Perceval said the decision not to take further investment had actually been the saving of the company when it went through ropey times and might have had to sell too early.

“People sell out too early in my opinion. This isn’t to rain on anyone’s parade, because I know how hard it is to get a company to any sort of scale. But once a half-decent offer comes along, not only are your investors keen to realise their investment, but it means you would be financially secure for life. It is very hard to turn down.

“Once a company exits, it usually means the end of the road for that idea. I know there are exceptions but they are very rare. In the last 18 months, a number of very exciting businesses were sold that I believe could have gone on and potentially become the next Kerry Group or Ryanair.

“So how do we change that mindset? One way is for companies to bootstrap or be more self-funded, because then they are less under pressure to sell. Another is to encourage a situation where entrepreneurs can take more off the table, so that they aren’t under financial pressure or temptation when an offer comes along. I know the top guys in Enterprise Ireland are thinking deeply about this and am hoping to see some changes in policy from them around this,” Perceval said.

The state agency Enterprise Ireland’s role in changing this mindset should indeed be interesting. After all, it ranks third in the world for seed investment, according to PitchBook.

I used to hear of consternation at Enterprise Ireland when good software companies sold too early for any number of reasons.

Today, those reasons are less obvious in an era where acqui-hiring as the destiny of the technology is seen as good business practice.

But if companies are also under pressure to sell too early, that should be setting off alarm bells in the highest circles.

Monopoly board. Image: txking/Shutterstock

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years