VC Exit Through M&A - Aleksey Krylov

Aleksey Krylov

• 20+ years of experience

• Tialma, Lead Consultant

• FTERA Advisors, Managing Director

• Last 6 years, strategic CFO for VCbacked private/public companies with focus on strategic transactions (fundraising, M&A, JV)

• 12 years with 4 different family offices: VC, LBO, structured and distressed investing: 25 deals, $500M+ invested

• Started career in investment banking

• MBA Columbia Business School, BS Babson College

• aleksey@tialma.com

Arete Labs case study

TOC

Exit Options: M&A BOD LOI Alternatives

Valuation

Disclaimer

The numbers presented in the deck and the model are not the actual historical numbers nor they are projected numbers reviewed or endorsed by the company

This exercise is for illustrative and educational purposes only

This is not a sale or solicitation to buy the company’s securities or its services/products

Case Study: Arete Labs (AL) Business

At-home blood-testing with patient-centric data analysis

Focus on preventative care, early detection, & chronic disease monitoring

Subscription-driven business model

Case Study: Arete Labs

Frank Far launches and invests

$50K (pre-seed, SAFE)

$1M Series A

$50M Purchase offer / M&A exit

May 2020

Dec. 2022

Feb 2020

June 2021

September 2023

$150K SAFE (seed)

$6M Series B

AL Financial Snapshot

Steady growth

Historically profitable

Gross profit ~30% as – with investments in cost-down, can reach ~60%

Clean balance sheet/no debt/no convertibles

Arete Labs M&A Offer

Frank had drinks last night with Peter, VP of BD for a strategic buyer, Ripe Aid

They are interested in submitting an unsolicited offer to buy the Arete Labs today for $50M

Frank has called a Board meeting later this afternoon

Should the Board sell the company?

Arete Labs case study

TOC

Exit Options: M&A BOD LOI

Alternatives

Valuation

Direct listing

Traditional underwritten IPO Recap

Reverse merger

SPAC

Merger

Strategic acquisition

Secondary sale (PE, block trade)

LBO/MBO

Rollup

“Going private”

IPO

• Some securities are listed on an exchange

• Most commonly common stock

• Can be debt or other securities

• Automatic conversion

• Holders sell at will

• All prefs go into common

• Upside: The stock may run up further post-IPO

• Downside:

• Execution risk

• IPO flat or down

• Automatic conversion ONLY in qualified financing events (e.g., size or valuation triggers)

Arete Labs case study

TOC

Exit Options: M&A BOD LOI Alternatives

Valuation

M&A

• Acquiror (buyer) takes over control of the Target (seller)

• More likely to be a private / non-transparent process

• With VC-based companies, trigger liquidation preferences

• Vesting of options for employee/execs/BOD

• Depending on the offer (cash vs. stock), locks in the return

Strategics Private Equity

• Synergies / higher growth opportunities

• Corporate identity / mission

• Long-term perspective

• Access to resources

• Likely premium in the acquisition

• Financial & managerial expertise

• Capital

• Flexible deal structure

• Leverage may be available

• Focus on growth

• Integration challenges

• Loss of independence

• Inflexible deal terms

• Regulatory hurdle / clearance risk

• Short-term focus / limited horizon

• Likely loss of control

• Exit pressure

• Reorganization / cost cutting / layoffs

M&A: Complex Ecosystem

Diligence

Process

Financial: valuation

Operations: Post-deal integration

Structuring

Others?

•

Value of the seller

• What is intrinsic value?

• Discrete views on the value

• Valuation analyses*

• DCF

• Comps (trading, deals)

• LBO

• Premium <> Synergies

• Sum of parts

• Historical multiples

• Step-up

• Structuring

BOD

Public vs. Private Acquiror vs. Target

Target

Friendly Hostile Fiduciary duties/liabilities

Target shareholders Proxy and shareholder vote Tender offer, then acquisition

3D Chess: Regulatory/Legal/Compliance

Securities laws (federal)

State corporate laws (e.g., Delaware)

Exchange rules (e.g., Nasdaq 20%)

Common / case law

IRS regulation/taxation

HSR (anti-trust)

Other gov reviews: CFIUS + industry-specific

Arete Labs case study

TOC

Exit Options: M&A

Alternatives

Valuation

Directors Have Fiduciary Duties

Photo by Alexander Grey on Unsplash

Review and assess the offer

Respond to it (silence is a response)

Document the process and resolutions (if any)

$50,000,000

Photo by Alexander Grey on Unsplash

Does the BOD need advisors?

Banker

Consulting/accounting/technical (less common)

The format of the offer dictates the response…

• “Let’s meet” – no specifics

• LOI/Term Sheet (non-binding): some items are clear (e.g., price, time, process)

• Firm committed offer: yay/nay response

Arete Labs case study

TOC

Exit Options: M&A BOD

Alternatives

Valuation

LOI

• Structure

Deal value

Earnout (?) • Agreements

Timeline

• Dividends

• Debt

• BOD

• Operations

• Conditions to close

• Governing law

• Other provisions

Assessing the quality of the offer?

• Structure: Cash vs. stock

• Contingencies

• Valuation

Arete Labs case study

TOC

Exit Options: M&A

Alternatives

Valuation

Alternatives

• Do nothing

• Another buyer (strategic) / term sheet

• Another buyer / investor (private equity)

• IPO (S-1/S-4)

Can BOD quickly generate any?

Preparedness for alternatives

• Business Plan / Strategy

• Pitch

• Historical financials (audited)

• Projections

• Compliance (IP, regulatory, etc.)

• Data room

Arete Labs case study

TOC

Exit Options: M&A

Alternatives

Valuation

Source: https://finviz.com as of September 19, 2023

Unreasonable ask?

1) Ask for margins credit (synergies)

2) Ask for market multiples (15x – 20x CF)

$80,000,000 –

$150,000,000

Valuation Football Field

Stakeholder Waterfall

Consideration $150,000,000

COH $9,000,000

Fees ($2,000,000)

$150,000,000

$157,000,000

Series B Pref (9,366,904.11) $

$80,000,000

Consideration $80,000,000

COH $9,000,000 Fees ($2,000,000)

$50,000,000

Consideration $50,000,000

COH $9,000,000 Fees ($2,000,000)

$87,000,000 Series B Pref (9,366,904.11) $

$77,633,096 Series A Pref ($1,181,260)

$147,633,096

Series A Pref ($1,181,260)

$146,451,835.62

Series SAFE Preferred (3,246,810.22) $

Common stock (68,183,016.85) $

Preferred B as converted (54,085,684.38) $

Preferred A as converted (16,234,047.15) $

Options ($4,702,276)

$57,000,000 Series B Pref (9,366,904.11) $ $47,633,096 Series A Pref ($1,181,260) 46,451,835.62 $ Series SAFE Preferred (1,029,828.64) $

Common stock (21,626,402.13) $

Preferred B as converted (17,154,986.89) $

Preferred A as converted (5,149,141.95) $ Options ($1,491,476)

Available (0.00) $

76,451,835.62 $

Series SAFE Preferred (1,694,923.11) $

Common stock (35,593,386.55) $

Preferred B as converted (28,234,196.13) $

Preferred A as converted (8,474,613.51) $

Options ($2,454,716)

Stakeholder Returns

Path Forward?

Photo by Tim Swaan on Unsplash

What Should the Board Do?

• Reject offer?

• Engage in negotiation to improve offer?

• Explore alternatives (other acquiror? IPO?)

Scaling Initiatives

• Sales & marketing

• Cost down initiatives

• Product line expansion

• R&D, proprietary products

• Geographic reach

• M&A

• AI

These uses of cash creates “drag” on profitability, sometime over the long term

Quick and steady turn to profitability is unusual, especially for high-growth potential businesses

An Opinion

• Untapped potential for the business

• No time to scale

• Incentives for some stakeholders to take the $ while others may prefer to stay in

• Benefit from longer track record of execution

• Approach to negotiation:

• “Go shop”:

• Seek alternative bids from strategics

• Seek private equity partner and structure a partial sale through a secondary and possibly new capital investment

• Of strategic, aggressive valuation ask (e.g., $150M) but flexible on timing / terms (e.g., $70M cash upfront, earnout $50M in 2024, $30M in 2025)