As 2008 has started, we continue to see a ton of growth and activity globally within our firm. We are looking to make investments this year in a permanent EMEA footprint that will better help us serve our current and future European client base. In the past 12 months we’ve really extended, working with companies in Asia, Latin America, Europe, Russia, and North America.

I’m hopeful the team’s contribution to this blog and resulting dialog with business owners will be insightful and interesting. Here’s to a great 2008.

John Barneson

Strong prediction that multiples will stabilize after several years of increases, with strategic buyers making perhaps a more aggressive play for bolt-ons while private equity players continue to look for opportunities to bring what is a still a significant amount of capital to bear on the market.

Mid-Market Investment

The cutoff for deals that look to continue to be active during a tighter lending market seems to be $500 million and lower. Nevertheless, it’s at this price point and below where the real action for 2008 will be, thanks to a tightening down of leverage levels and remaining economic hurdles in the big-market landscape. After many years of steep increases in valuations-where generous terms drove leverage multiples as 8-12x EBITDA look to anticipate stable pricing for the foreseeable future, with companies valued under $500 million financed at multiples in the range of four to six times EBITDA.

Private Equity – Not Going Anywhere

Private Equity will remain a player, having collectively raised $300 billion in 2007, which is $46 billion more than in 2006. Terms and leverage might not be as easy as 2007,

Multiples

Multiples will probably hover in the same range-four to seven times adjusted cash flow-even though demand is expected to tick upward. Buyers remain cautious, even skittish, and the smaller the deal, the more challenging it will be to close the transaction.

Sweet Spot Scarcity

Meanwhile, sellers with revenues between $10 million and $20 million with good earnings remain in a very strong position. However, acquisition opportunities in this sweet spot are scarce. Hence, the renewed focus on strategic acquisitions under $10 million. Now more than ever it critical to have the right advisor on your side if attempting to raise capital or be acquired. The intricacies of the financial and strategic dealscape are becoming more and more complex, and more and more often we are seeing unrepresented sellers leaving money on the table.

Confrontation is not a good environment for negotiating. Most people are intimidated by the prospect of having to barter to begin with. Create a pleasant environment for the other party and show respect and genuine interest for the other parties concerns and values. Treating the other side with respect means less defensiveness and more rational, reasonable communication. Better yet, build a reputation as someone who is honest, prepared, and intelligent, and deliver on that every time.

Corporate Venture Activity
Corporate venture capitalists invested $1.3 billion into 390 deals in the first half of 2007, representing the highest percentage of corporate venture deals and dollars since 2001.

Q3 Deal Volume
In the third quarter of 2007, total disclosed venture-backed M&A dollar volume reached the highest level
since 1Q 2001, when 37 disclosed deals accounted for $7.7 billion in value. Additionally, the average deal
size for disclosed venture-backed M&A transactions has not reached 3Q 2007 levels since the fourth
quarter of 2000. The Technology sector dominated the venture-backed M&A landscape, with 45 deals with disclosed values of approximately $3.8 billion. The Computer Software/Services and Internet Specific industries saw 17 and 15 transactions, respectively. The Internet Specific sector reached $2.2 billion in disclosed deal value – 59 percent of the overall value within technology businesses.

Source: NVCA.org

Thoughts

Despite the headlines about a tightening credit market, capital is still very much in play. The increase in corporate investments and M&A activity have helped keep the market liquid. There is still a lot of middle market targeted private equity and venture capital powder out there.

Having PE, VC, hedge fund, corporate buyers, and a healthier IPO market all competing for deals will help sustain the mid term investment landscape.

Your M&A advisor requires the same level of disclosure. Hiding skeletons, whether they relate to past owners, founders issues, balance sheet, debt problems, or employee issues, you must communicate with your advisors. If issues are discussed early, some can be solved, others alleviated. At the very least you will get a professional opinion on the potential effect on a transaction. Due diligence will uncover these issues even if you fail to communicate them up front. If a buyer unearths a skeleton in due diligence you are going to be dealing with trust and ethics questions that could easily end interest.

In addition I have been working on setting up an office in New York City. This will be an exciting expansion that will give us an even greater capacity to work on international deals, as well as providing a local presence to our New England client base. I will be moving to NY for the office launch in August.

Recruiting interest has been strong for our New York City office but I’m always interested in qualified, passionate candidates. If you have interest, feel free to e-mail jobs.

Thanks to everyone who has helped with the move!

Lakshmi Mittal spoke at the Wharton commencement ceremony a couple of weeks ago. His story is a powerful one. He was born in a small town in India and learned the steel trade through his fathers local operation. Lakshmi had the foresight and opportunity to open a plant in Indonesia on a plot of land his father wanted him to sell. From there, Mittal has grown into the largest steel company in the world with over 330,000 employees in more than 60 countries. Production capacity is over 130 million tons a year representing 10% of world output.

Mittal’s keys to success in entrepreneurship are: Patience, perseverance, and work ethic. Common sense but on point. He also believes that climate change and the associated business response will be a key driver for change and growth in this century.

I also had the pleasure of hearing British Ambassador David Manning speak at the Johns Hopkins School of Advanced International Studies commencement. He had some fun and interesting stories to tell, ranging from his early days stationed in Moscow and Warsaw during the Cold War to his modern day post in Washington dealing with globalization and issues around terrorism, technology, and climate change.

Especially interesting was the impact that technology is having on how the world of international relations operates, through the impact on communication, information gathering and exchange, etc.

One of the entertaining quotes from his speech: “When I asked Justice Sandra Day O’Connor for advice about what to say for this commencement a few days ago, she said in the inimitable style of hers, “Be brief, graduates don’t want to hang around listening to you, they want to get on with their lives.”

I was impressed that Ambassador Manning held up his commitment to speak at the SAIS commencement even with Tony Blair’s last minute visit to the White House ongoing the same day.

What defines the entrepreneur’s difference is an altered perception of the riskiness of the venture, underlying values that justify known risks, and the willingness to act.

Perception of risk:
I may question the likeliness of success in starting a company that sells widgets due to competitive concerns, size of market, reliance on other’s technology, and weak barriers to entry. Another person may see opportunity in these same variables: a proven market, vertical oriented with a familiar customer base, low startup costs building on a proven platform, and first mover potential to counter low barriers. Perception is the key. Risk is not quantifiable here, it’s subject to the lens of the viewer.

Values:
Probably cleaner to talk about this as the benefits side of the cost/benefit equation. Entrepreneurs value variables at different weights than you might normally observe. Independence, ownership, passion, and purpose are weighted heavily. Infrastructure, order, and specialization get low marks.

Even “failure” and “success” means different things. An entrepreneur may see the failure of a company as a means for learning, networking, and gaining visibility to new opportunities. Success may mean freedom to choose hours, work from home, or work on a passionate interest full time. Even a lackluster growth year can be a success when working on something you love and truly care about.

Action Orientation:
Moving quickly means making assumptions and trusting your instincts on a limited set of data. To do this, you need confidence. Confidence helps lower the perception of risk. Successful entrepreneurs believe in their plan, their team, and the opportunity. Believing in your ability to lead and maneuver helps to mitigate perceived execution risk, while again, making the risk appear manageable.

Risk it because you’re passionate, confident, and committed. The process itself can be the reward.

• Bootstrapping: friends, family, customer and personal money.
• Angel Investment: high net worth individuals, various levels of sophistication.
• Traditional Venture Capital: early, mid and late stage.
• Corporate Venture Capital: key distribution partner, technology partner.
• Private Equity: minority and majority.
• Public Markets: USA and abroad.

PROS/CONS:

• Bootstrapping:

  PROS: Teaches you to focus on cash flow first, creates lean/mean startup culture, ties your short term success with real customers and real requirements.

  CONS: If your business model benefits from rapid growth (first mover models, etc), bootstrapping can be too organic and slow. Competition can react and catch up rapidly in some cases.

• Angel Investment:

  PROS: Money is cheaper than with early stage VCs, can get experienced former entrepreneurs involved early, often bringing relevant sector experience. Angels can move quickly.

  CONS: Angels can be hard to locate and their approach with regards to both strategy and involvement can vary greatly.

• Traditional Venture Capital:

  PROS: Significant amount of capital available, can often participate in multiple rounds. Good venture partners can help bring other investors to bear in later rounds. Allow you to achieve significant scale. Strong expertise, focus on home runs.

  CONS: Expensive money. Venture money is best targeted for companies looking to “change the world”. Can be influenced heavily by the market’s perceptions, as well as their LPs feelings about the market, state of current fund, etc.

• Corporate Venture Capital:

  PROS: Can help position the company for a future exit. Access to beneficial terms from corporate partner (supplier, technology, distribution). Can be fairly “cheap” money.

  CONS: Wide variance in approach, can take a long time to execute in some cases. Intellectual property concerns.

• Private Equity:

  PROS: Large dollars are possible at near M&A valuations. Typically later stage money with more focus on execution. Can offer partial or full liquidity to founding team.

  CONS: Can limit flexibility with business model. Many private equity firms don’t want market and technology risk and will shy away from change in strategy.

• Public Markets:

  PROS: Strong branding benefits with public. In some markets, can be important message to customers about staying power. Liquidity potential for employees, management, and investors.

  CONS: Huge costs associated with regulation, filing, compliance. Can be a distraction from running business for long term health.
  

  
  I’ll add some depth to criteria for selecting the right capital partner in a later post.

  Final thought: Entrepreneurs should dictate the type of funding strategy, not the investment community. Flush out your growth plans, your exit and liquidity preferences, and your distribution and partnership strategy before going to “market” for capital.

  {democracy:2}
  
  ]]> http://dealmakerblog.com/?feed=rss2&p=23 http://dealmakerblog.com/?p=23 http://feedproxy.google.com/~r/dealmakerblog/~3/7YkjEHoRNcQ/ http://dealmakerblog.com/?p=26#comments Sat, 21 Apr 2007 23:45:35 +0000 JBIV http://dealmakerblog.com/?p=26 The Internet has impacted many of our daily lives and I believe it’s also changing the nature of mentorship. Wikipedia describes the modern use of the word mentor as, “a trusted friend, counselor or teacher, usually a more experienced person.” The traditional mentor/mentee relationship has revolved around an older friend or family member, a boss, or a teacher. This person, through both goodwill and a desire to see you succeed
  instilled their wisdom and gave you access to their network of relationships. While this is still very much a common practice today, the proliferation of social networks, blogs, and online communities is adding another layer of seen and unseen mentors to the picture.

  This evolving mentorship dynamic has helped to create a platform for value creators to rapidly turn ideas and inspirations into companies, quickly and more successfully than ever. Brad Feld’s often linked series on term sheets is a great example of the passing of knowledge to entrepreneurs who traditionally have had to learn much of these lessons the hard way. Communities of entrepreneurs such as startupping provide a support system for both peers and mentors to contribute to the “collective wisdom”. Without any physical interaction entrepreneurs are learning, being encouraged, meeting partners, developing ideas, and building businesses with the support of mentors who both actively and passively support their cause. So what is the motivation of the unseen mentor to facilitate the success of people never met?

  • The obvious one first: a desire to build a brand and a reputation on this new medium as a trusted source and a content expert. For example, Venture Capitalists can drive additional deal flow at the margins, built relationships and reputation with peers, and connect socially with numerous channels that are potentially helpful and lucrative.
  • I also believe that, just as with networking in general, those who are genuinely interested in communicating and helping people will have the clearest voice and succeed the most in building both trust and reputation.

  Here are some strategies to keep in mind when building your online mentor network:

  1. Find Relevant Blogs: Use tools like MyBlogLog, Technorati, and Google to find blogs that are focused on your specific interests.
  2. Go Broad: Use rss tools like Google Reader or Newsgator to aggregate the constant stream of ideas and learning into an easily digestible format.
  3. Read / Archive: Read posts that are relevant to your business and save them. Most rss readers have a facility to save specific posts. This will make them searchable in the future which makes your knowledge library very useful even as it gets to be large.
  4. Comment: If you are consistently finding value in a blog, comment on a regular basis. This gives back to other interested readers, helps you “join” the community, and begins your introduction to the writer of the blog.
  5. Reach Out: When you have an idea or information that is relevant to the writers interests or business, send them an e-mail, or give a call and communicate. This step is much easier when you’ve been contributing to the dialog on their blog.
  
  ]]> http://dealmakerblog.com/?feed=rss2&p=26 http://dealmakerblog.com/?p=26