1Mby1M Virtual Accelerator Investor Forum: With Seksom Suriyapa, Partner at Upfront Ventures (Part 3)

Sramana Mitra: What role does valuation play in whether an acquisition happens or not?

Seksom Suriyapa: This is a tough one. The reality is that it tends to be the issue of whether a deal happens or not. Very professional corporate development teams are highly disciplined around how they value deals. Similarly, in the case of venture-backed companies, they have investors that are looking to maximize investor returns.

That constant tension between the two causes these deals to be valuation-driven when, in fact, there are a lot of other factors beyond valuation that are important. If I turn to the seller side, it’s often very difficult for minimally-capitalized ones because there is often an asymmetric advantage that buyers have. Sellers are selling their first-ever business. Buyers are doing this all the time.

The thing that I would advise sellers is that in order to have a successful sales process, you have to have credible options that allow you to create pricing tension. You never want to have potential buyers. You want to have several that are viable that you are moving along at a pace parallel to one another. When you get to the end and you only have one potential buyer, you don’t have a lot of flexibility in terms of pushing value. If there is tension, this is what allows you to achieve better prices.

The last point is similar to my point of using your network. If you don’t have sophisticated investors, you want to make sure you are leveraging people who are savvy in the tech world who understand or have sold businesses.

Sramana Mitra: What are the drivers? How do you value deals that would be helpful for the entrepreneur on the sell side to be aware of?

Seksom Suriyapa: A couple of things. One is if it’s an acquihire, what is most typical is that companies will value those businesses purely on a dollar-per-product headcount multiple. The reason that may be relevant to an entrepreneur is that to the extent that you have a lot of commercial people around, you need to understand that an acquirer doesn’t value commercial people. It’s purely how many product and engineering people are onboard.

The other thing that’s important for any type of deal with a small private company is, buyers want to optimize for more money going to teams and employees than investors. I know we’ll get to this a little bit later. In a way, I’m speaking against myself as a venture capitalist. Buyers love the world where almost all the money goes to the entrepreneurs and the people who built the product. It’s a necessity in many cases, but it’s clearly a preference if it’s possible.

Sramana Mitra: Which is a good segue into bootstrapping to exit. We have had several bootstrapped-to-exit deals. What is that equation? If it’s a tech talent-based multiple acquisition price or an acquihire situation, what is the current thinking on that?

Seksom Suriyapa: The biggest leap in terms of valuation is whether it ends up being a tech-and-talent deal versus an acquihire deal. What you’re looking for is not just having a product, but to show a product-market fit. Acquihire tends to be finished the product but didn’t prove product-market fit.

Tech and talent deals have the potential to have higher multiples, are product complete, and have very early signs of product-market fit. If the company chose to raise another round, the buyer has the feeling that this company could continue to scale. In some ways, that’s where they start to pay closer to a company market multiple that is extrapolated from company comparables in the public space as well as private comparables.

The third variety, which is a more mature variety of it is where you’re having commercial success. Your metrics are scaling. You want to be selling at the moment where things don’t appear to be slowing down but are accelerating. Every time there’s acceleration, that’s when a company feels the pressure to pay up.

This segment is part 3 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Seksom Suriyapa, Partner at Upfront Ventures
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