There comes a point in time for every startup where the decision has to be made whether to raise more capital in order to build it out further or just put it up for sale. After advising companies on mergers and acquisitions and raising capital for over 15 years in Silicon Valley and New York, Stephen Gurney, CFO and Managing Director of the San Francisco-based investment bank Viant Group, has some recommendations on how to approach this decision.
At what point should companies make the decision to either raise more capital or sell?
In the case of a capital raise – the build option – I would say at the point when there is six months’ worth of cash burn in the tank or when a clear need for more funds presents itself.
In the case of selling the company, a sale process can take from six to nine months to a year to close. Since buyers will give more value to a growing company, you want to consider selling while growing and ideally not wait until growth has slowed.
What is a typical build/buy inflection point for a company?
Many small companies reach a point where they need to decide if they are going to build out a large sales and marketing team or if it makes sense to join a company with an in-place sales and marketing team. Maybe the founders have little sales experience and even less experience building out such a team. Maybe the founders don’t have a desire to build out a team. Sometimes the goal is to get a product or service out to the entire market as soon as possible to stay ahead of the competition. In these cases it may make sense to join an existing company with sales channels that are well established and even global.
What is the likelihood of successfully selling my company?
It depends. Have you been approached by other companies that have an interest in buying your company? If so, it’s more likely that a sale transaction can be successfully completed. Do larger companies know of you and your product/service? If not, you should reach out to them and let them know that you exist. We advise small companies to periodically reach out with updates to potential buyers from day one, so that when it does come time to sell, the buyers will be familiar with the potential target.
What is the likelihood of successfully raising capital?
A large part of successful raising capital is “who you know.” Can your existing investors introduce you to other, larger potential investors? Is your Company in a currently “hot” sector? Timing is everything.
Should I hire an investment banker/broker to help?
If you are going the route of selling your company, the answer is yes. If you are raising capital, the answer is maybe. These days VCs expect companies to reach out to them directly but there are a few exceptions. Companies outside the U.S. can often benefit from connections into the Silicon Valley VC community. Another category is later stage companies looking for additional capital. Target investors in these companies are typically Private Equity funds or hedge funds. These classes of investors sometimes prefer having an investment banker represent the Company.
What types of buyers are out there?
We break the world of acquirers into two large camps: strategic and financial. The strategic buyers are typically either in the same sector, or want to get into the sector, of our clients. Strategics will typically pay a premium to acquire a company that may not have historical financial results to support a high valuation but once added into the Strategics fold, will grow. This ties back into the idea that Strategics has existing Sales and Marketing organizations and potential targets have products/services. From a Strategic’s perspective, a target may have a lot of value that the Strategic can unlock.
Financial buyers, such as Private Equity Funds, are much more focused on the historical financial performance of their targets. They may think that by changing out management or by adding some expertise that they have or by giving the company more capital, they will be able to grow the target and exit at some point via a Sale or via an IPO.
What advice would you give business owners regarding capital raise vs. selling?
I would recommend that they reach out to an investment banker for some free advice. Getting an independent, external opinion has a lot of value. If the banker is not willing to provide advice without being hired, she/he is not a banker you want to use. We are big fans of playing it forward.
Gurney has offered many good points for both paths that provide a way to reflect on your own startup and determine which path best fits your current status and overall goals. Now, it’s up to you decide a path that works for you and consider finding a partner that can help guide the journey for either path.
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