M&A, VC Capital and IPOs: Key take-aways from our Tech Leadership Conference

A couple of weeks ago we hosted our first ever Tech Leadership Conference. With approximately 100 attendees, it was great to see such broad participation from the leaders of many of Ottawa’s technology companies. We moderated three separate panels, focusing on M&A, the Venture Capital environment and IPOs. With a good mix of out-of-town experts and local CEOs and CFOs that had experienced these processes first hand, the panels covered these critical topics from both sides of the coin.

Here’s a couple of the key takeaways:

M&A Panel (including representatives from BDC, Gowling WLG, Privacy Analytics and Sampford Advisors)

M&A has been a key topic of our blog recently, given the heightened level of activity we have seen in this area. The panel echoed some of our recent blog posts and highlighted some new areas to consider.

Always be Prepared: A lot of time on this panel was talking about the importance of being prepared especially given the often unexpected nature of M&A. So knowing who the likely buyers are, a view on valuation and organizing essential diligence materials are a must.

Internal Support: Peter Hunter from Privacy Analytics noted that the diligence on his recent process was intense and much more involved than anything he had seen before. Therefore, having designated help within the organization is a must – the CEO and CFO can’t run this type of process on their own without additional internal assistance.

Importance of an Advisor: The importance of hiring an external M&A advisor was noted by several panelists. Despite the expensive optics of the fees, the dollars spent are more than offset through some of the burden they remove from management and the negotiating skills they bring to the table to ensure a much higher price.

Protect the Earn Out: It was noted by Gowling WLG’s panelist Karen Hennessey that you have to be extremely careful when papering an earn-out. The legalization of what is and is not included in the metrics being used to track an earn-out can drastically impact the likelihood of real value creation. There are various ways an acquirer might attempt to reduce the earn-out through manipulating future performance or financial reporting.

Venture Capital Panel (including representatives from Battery Ventures, You.i, BDC and Mistral Ventures)

Canadian Advantage – Lower cost and less competition for Talent: Not surprisingly, a couple of commentators made the observation that costs in Silicon Valley are at least double those in Ottawa and the rest of Canada – especially when you consider the cost of good developers, real estate and other expenses. We have also been hearing a lot about how competitive it is in Silicon Valley and how much you have to pay for good talent. But one consequence raised by our panel we hadn’t considered was the concept of employee churn that is really impacting tech companies in the valley – as developers get bid away to bigger tech companies and small companies find it much harder to retain good talent.

While Ottawa has clearly become more competitive for talent, it is definitely better than the valley where those costs have completely exploded. In addition, when you combine these lower costs and more sticky employees with the government incentives that are available (like SR&ED, IRAP, etc.) you have a real competitive advantage that can appeal to capital providers, including US VC’s.

Extended “Bootstrapping”: A by-product of the “Canadian Advantage” has led to longer “bootstrapping” periods and delayed venture capital funding as founders can stretch their dollars and subsidies their own funding, concepts completely foreign to their peers south of the border.

But minimal Local VCs?: Despite some attractive elements for entrepreneurs, it’s not all smooth sailing in Canada. Many of the panelists commented on the fact that there is significantly less VC capital available to Canadian companies than their US peers. In fact, one of the commentators commented that “Canadian VCs suck”. We have heard this a lot from many of our clients that Canadian VCs can’t write the sort of checks that US venture capitalists can – our advice is to take advantage of the weak Canadian dollar and the government subsidies and raise capital in the States – but only when the time is right!

Initial Public Offerings Panel (including representatives from Halogen Software, New York Stock Exchange, Toronto Stock Exchange and UBS in New York)

Tech IPOs Will Return: While the tech IPO market (and the IPO market in general) has been slow this year versus the last few years the panel indicated that trend is likely to change. Specifically, Brad Miller Global Head of Syndication for UBS based in NYC, cited that recent performance of IPOs has been pretty good with most of them giving investors healthy excess returns over the broader markets. As such, IPOs as an “asset class” have been working and are likely to lead to more companies coming to market.

Inverted VC Valuation Curve: Brad also noted that the “draught” of tech IPOs has been exasperated by the competitive capital from VCs. Essentially, the availability of private capital on public terms means companies are staying private longer than they ever have before. But the by-product of competitive private capital is an inverted VC value curve. As you combine the additive nature of VC valuations with extended private timelines, the VC value curve will naturally meet and exceed the values supported by public markets. This has been evidenced by recent tech IPOs at “down round” valuations, like Square, Box and Hortonworks.

“Walk-the-Walk” before you “Talk-the Talk”: Pete Low the CFO of Halogen had some great tips for companies preparing to go public. Firstly, well ahead of their IPO they operated like a public company including preparing MD&A scripts each quarter and keeping to a public company schedule on reporting. They also made sure they had the right public company accounting experience in-house early so they were familiar with the inner workings of the company.

About the author

Ed Bryant is the President and CEO of Sampford Advisors. Ed started Sampford because he wanted to provide world-class Investment Banking and Strategic Advisory that large companies have been accustomed to, to small and medium sized businesses. Ed has over 20 years of experience including over 16 years in Investment Banking with Deutsche Bank and Morgan Stanley in Hong Kong, Singapore and New York. In that time, Ed raised in excess of $20 billion in equity and debt capital and completed over $10 billion in M&A transactions.

Visit us at www.sampfordadvisors.com

Ed Bryant