Friday, September 27, 2013
Surveying SoCal's M&A Landscape, with David Siemer
Story by Benjamin F. Kuo
One of the most frequent questions from high tech startups is: where's my exit? We caught up with David Siemer, both an investment banker who runs Siemer & Associates (www.siemer.com) and an early stage investor here with Siemer Ventures (www.siemervc.com), to get his thoughts on the subject. Siemer & Associates runs its annual conference next week to delve into the same topics.
What's the current environment for M&A and IPOs, in general?
David Siemer: I'll start with IPOs, something we don't here. We don't spend a lot of time there, except that we're active investors and bankers who are affected by what's happening in the IPO market. Certainly, the IPO momentum seems to be back, and even more surprisingly, ad-tech has been lots of those IPOs. What's interesting, is that in 2011, there were seven large ad-tech firms which had all planned to go public and hired bankers. But, most did not file their S-1's. Now, a new breed of companies is finally making it out, which has had a huge impact on valuations. Even now, we're seeing that at the seed and A round stage. For a couple of years, ad-tech had been heavily out of favor, and it's bouncing back into favor again. There's also been a number of decent exits, but IPOs are driving that valuation more than anything. There's a huge backlog of companies trying to make it out.
What's interesting about ad-tech, is that with the exception of AdaptTV and AOL, there's not a lot of large buyers out there for ad-tech companies. The problem is diseconomy of scale. There's many $100M plus revenue companies, and no one wants to buy them or has the wherewithal to buy them. Their only option is an IPO. That's true of many Southern California ad-tech companies. There are just not buyers out there. Google and Yahoo aren't going to buy them, AOL has already made its bet, and your only real path to an exit is an IPO for any kind of liquidity. That's why the IPO markets coming back is so critical.
How about mergers and acquisitions?
David Siemer: More generally, the M&A market is solid. If you rate the market on a one to ten scale, with one being 2002 and ten being 2007, we're probably at around five or six. There's a lot of buyers looking for companies. Transactions are getting done, and the valuations are solid. We were involved in the Gradient X deal, and that was a nice one. I think that the market was, however, hotter two years ago, when companies were buying more aggressively, and there was lots of pent-up demand. The large acquirers, the Microsoft and Yahoo's of the world, were buying 20-40 companies a year. That pace has definitely slowed down a little bit. Buyers are being more thoughtful, buying what makes sense, and what fills a need--not just tacking stuff together. For good companies, it's a great exit opportunity. For the more questionable ones, ones with less sustainable differentiation, this time it's a little tougher than a couple of years ago, and certainly much more so than 2006 and 2007.
Is there a difference in how companies here ought to approach this versus if they were in Silicon Valley?
David Siemer: The types of companies are different, but the approach is not different. One area of interest is cross border M&A. This might be self serving, because we have a bias and a number of global offices, but international buyers in Asia are far more active now. They're also less valuation sensitive. SingTel was an investor in GradientX, and we are seeing very good interest from Southeast Asia, China, Japan, and even India. They're much more aggressive buying companies for the first time. In 2012, half of all the M&A transactions were cross border, for the first time. Globalization is a big trend. Right now, the market is a 5 or 6, but if it weren't for globalization, it would only be a three on the M&A scale. There are lots of companies, particularly in Japan, who are buying their way into the U.S., which is still a premier market for the world. That's fueling lots of the activity we're seeing now.
You have a unique position, being both in the investment banking as well as being an early stage investor. What's your perspective on where fundraising is for startups here?
David Siemer: Early stage investing activity is, on the same scale, probably a nine or ten. There's tons of activity, and lots of companies getting funded. I think the incubators have a lot to do with it. It continues to be somewhat surprising to me to see the number of angels who have been entering this space. There have been a lot of new angel investors coming out of the woodwork, and lots of companies getting pretty good funding and valuation.
We invest globally, with 20 percent of our funds outside the U.S., an incubator in Singapore, and we do a dozen or so investments a year. For California investments in general, the funding has kicked up pretty remarkaably. For a similar company, with the same metrics and stage, valuations had been tiny. If you go back to 2005 and 2006 and look at a company which would have a $5M pre- then, it's now $8 to $10M, all else equal. That does, however, lead to a lot of the perceptions you see of a Series A crunch. I don't agree there is a crunch, but we do see that there are investments which were made at too high of a valuation. There are lots of guys who can't raise money, but I think that's because typical A round investors, which is what we are, are seeing companies with a post money valuation of over $10M, but are still pre-product and going for their A round. That kind of investment is challenging for us. That's not a valuation you'd expect, if the company has not a penny of revenue. I think that leads people to think there's a Series A round crunch, but I think it's actually the A round guys, including us, being wise. We're all being a little more selective, because even though you might have been able to raise a million dollar seed round, you might not have made enough progress for an A round.
What do you think will take Southern California's technology community to the next level?
David Siemer: That's something we've spent a lot of time talking about at our last summit. I do think the community has made huge strides. About two years ago, we spent a lot of time talking about the SoCal community, trying to figure out if it's vibrant enough, if the ecosystem is strong enough, and if there were enough successful entrepreneurs who had built and exited companies, so we'd have the genetic stock in our ecosystem. We don't worry about that anymore. Now we have it. Even after some large flameouts, the ecosystem is very strong. I think, of course, that we're miles behind the valley, and probably behind event New York, but there's no question this will be a highly vibrant ecosystem, and already is. It's more a matter of time. I think we have lots of great companies, lots of technology, we're producing more engineers, and we're seeing companies go from B-to-C and relatively low tech, to deeper technology companies and companies with more differentiation. There are lots of ad-tech companies, which don't have lots to differentiate themselves, and e-commerce isn't super differentiated, but we are also getting lots of more truly technology companies, around video, analytics, and things like that. That's a pretty big paradigm shift. The sheer quantity of programming talent here is rising.
What advice would you give to startups who are thinking about being acquired?
David Siemer: That depends on the phase of the company. Even being a banker, and having a hammer where everything's a nail, the last thing you should be thinking about at the early stage is an exit. You should be thinking about how passionate you can be about building a great company. Exits usually come for great companies. E-commerce is a great example. There are a ton of e-commerce companies, and they've been the highest recipient of seed and A-round investments. But, there have really been very few e-commerce exits. I think there have only been four over $100M in the last several years, but $400 to $500 has been poured into that sector. The exits will come, as buyers and consumers are shifting their behavior. So, as long as you build good companies, with real revenues, and real profits, there will be buyers down the road.
My most frequent advice to later stage companies, is they're a little too coy with their more logical buyers. They have to be sensitive to competitive dynamics, but, if you are in ad-tech, and WPP or Google is the best buyer for your company, why not spend some time with a VP at Google? You should get to know them really well, and get as integrated with them as possible. The companies who are bough at high valuation by valuations, already have been working with those strategics. That's how they see they need to go in and pay a ridiculous multiple. One you have a decent size company, identify the possible buyers, and get close in early. That's paramount to a great exit.