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During a recession, it’s common for industry watchers to wonder what will happen to startups looking to get off the ground.
MySpace CEO Chris DeWolfe told Reuters companies are knocking on the leading social network’s door to get bought. Startups worth between $200 million and $300 million six months ago are now running out of money and willing to sell themselves for $20 million or $30 million, he said.
Conversely, some companies that were once candidates for acquisition are going it alone. For example, Digg CEO Jay Adelson told BusinessWeek Digg’s goal is to build an independent business that reaches profitability as quickly as possible.
Clearly some companies are suffering and seeking exit strategies. TechCrunch’s dreaded deadpool is beginning to thicken, a nasty stew of misery and shattered dreams. Others, such as Digg, are moving forward.
This means companies that don’t go under are ripe for the picking, right? Not necessarily, according to a panel of corporate development experts cobbled together for the Venture Summit Silicon Valley 2008 show in Half Moon Bay, Calif., Dec. 2.
Moderator Richard Hanley, a principal at KPMG, asked executives from Microsoft, IBM, Sun Microsystems, Google and Symantec if the M&A experts have changed the way they evaluate target companies in the last few months.
Claudia Fan Munce, managing director for IBM’s Venture Capital Group, said price tags for companies plummet when their banker’s call to make a quick sell. As long as Munce feels IBM can reap the level of revenue it is comfortable with regardless of the economic climate, the target has a shot at a lifeline.
However, vendors such as Sun take its own declining business into consideration when looking at acquisitions, Sun’s Brian Moriarty, vice president of corporate affairs, said. He added:
“The environment for targets right now is very dislocated, and so when you talk to a company about their projections and what they think they can do, it was a little suspect but now it’s even more so. That makes pricing and having a principle discussion and negotiation much more difficult. We’re being a lot more selective, the hurdle has gone up for us. “
However, he said companies that are well funded and have a good business don’t have to sell and are less inclined to do a deal at a time when their valuation will be lower because of the recession. Digg, which banked $28.7 million in new venture capital this past September, fits this description.
Advice for Companies Looking for an Exit
Moriarty said discussions with solid companies become much more difficult in a recession. On the flip side, he echoed DeWolfe’s comments, noting that companies that need cash will sell at a depressed value. David Lawee, vice president of corporate development at Google, agreed that the valuation exercise becomes a lot harder because there is little or no visibility into future earnings for targets.
However, he said targets aren’t necessarily cheaper because “there is a big difference between something being lower value and being cheaper. You need to have some sense of the intrinsic value.” Of course, an acquirer of Google’s stature is challenged with reconciling what a CEO thinks his startup is worth with what Google might think.
Google, Lawee stressed, is looking for companies with “breakout technologies,” such as Android, which formed the basis for Google’s mobile operating system, or Keyhole, which led to Google Earth.
Google is also looking for companies that have hit “escape velocity,” such as YouTube. These companies, he said, didn’t come cheap. Indeed, YouTube cost Google $1.65 billion. For more advice (and bearish comments on the market) from Lawee, please see this post on Google Watch.
Dan’l Lewin, corporate vice president of Microsoft, seems to face a great challenge.
In addition to the 12 or more billion-dollar businesses within Microsoft looking to make purchases, Microsoft has 800 computer programmers working to innovate in Microsoft’s Research Lab. There is a gap between the developers and the business people where there are “build or buy analyses going on,” Lewin said.
However, startups be warned: Lewin promised the economy won’t force him to either shy away from buys that make sense for Microsoft’s business. He added:
“The buy more and save model isn’t going to work. The calls we get like everyone else here… ‘it’s available and it’s available now and it’s a good deal’… It’s typically not a catch that we’re going to make even though we may be looking.“
What can startups take away from all of this advice? Don’t sound desperate, because businesses are only going to buy you if it makes sense. Lewin said companies in this tough climate are attractive in solid climates, so the “shotgun approach” won’t work immediately.
He asked VCs not to make nine different phone calls to people at Microsoft because the decisions all go through the same few people. Also, Lewin said companies seem destined to succeed or fail, regardless of the economic climate.
In short, there is no magic bullet, magic wand or magic anything VCs can do. If the fit is right, your client could get bought, lower valuation or not.
The panelists have much more to say, so check out the Webcast recording here. The panel is titled “Corporate Buyers: Where is the action for 2009?”