INSUBCONTINENT EXCLUSIVE:
Ajay Chopra co-founded Pinnacle Systems in his living room and grew it to a multi-billion dollar public company before becoming a venture
capitalist with Trinity Ventures. More posts by this contributorAbout 13 years ago I faced an excruciating decision: whether to sell my
company, Pinnacle Systems, to a private equity firm or to another large public company
I felt that both suitors would treat my employees well (and I negotiated hard to make sure that was the case), and both offered a good
asking price well above our value on NASDAQ.After raising what at the time felt like my first child, born in my living room and nurtured
into a publicly traded entity, I was ready for it to take its next step and for me to take mine
I ultimately opted for the strategic sale, but I left the process intrigued by what was already an evolving dynamic between private equity
firms and tech exits.In years past, stigma often accompanied private equity sales
I know I felt that way, even under strong deal terms
Plus, private equity exits were only available to companies generating substantial annual revenues and often profits, making this exit
option inaccessible for many startups
Today, private equity buyout firms can provide a solid (and on occasion excellent) exit route — as well as an increasingly common one,
accounting for 18.5 percent of VC-backed exits in 2017.Private equity firms are investing in a broad array of technology companies,
including highly valued unicorns, but also early- to mid-stage profitable and unprofitable companies that a few years ago would have been
unable to secure interest from these buyout firms.In addition, the lines between venture capital and private equity are increasingly
blurring, with more private equity investments in tech, and several-late stage VC firms creating large, billion-dollar plus late-stage
Further blurring the lines, some of the late-stage VC firms are taking controlling interests in startups, a strategy typically associated
Recently, one of our portfolio companies received an investment from a late-stage VC firm that acquired a majority stake by providing
liquidity to some existing shareholders and investing in the company, utilizing a strategy typically associated with PE buyout firms.The
rise of private equity buyouts within the tech sector presents a viable exit option for founders, given the reality that most startups
(According to PitchBook, only 3 percent of venture-backed companies in the last decade eventually went public.)If an IPO is not a realistic
long-term option, the remaining primary exit option has typically been a sale to another company (a strategic buyer, in venture parlance)
However, in the past few years, private equity firms have become aggressive buyers of private companies, sometimes bidding as high as or
higher than strategic buyers
With one of my portfolio companies, a private equity buyer placed the second highest bid ahead of all but one strategic buyer and helped
raise the final price from the strategic buyer just by being in the bidding process.Founders who find themselves in negotiations with
strategic buyers should also reach out to PE firms to optimize the outcome. Silver Lake, Francisco Partners, Thoma Bravo and Vista are
a few technology-focused PE firms, and PitchBook’s annual liquidity report lists other firms
Vista has been especially active, acquiring many technology companies, including Infoblox, Lithium and Marketo
Not all PE firms are the same, just like not all VCs and strategic buyers are the same.Years ago, when private equity buyouts were typically
only large deals, new management teams were almost always brought in to tweak the edges of already successful companies
Today, each private equity firm has its own strategy — some only buy large profitable companies, others focus on mid-size acquisitions and
some only buy early-stage (typically unprofitable) companies, which brings us to the next point.Even early-stage startups can explore a PE
exit, especially if things are not going wellWhile most readers are familiar with private equity buyers at later stages, what’s new is the
emergence of PE activity at early stages
These firms acquire majority stakes in startups that have only raised early-stage investments but are having trouble scaling or raising the
next round.After a buyout, these private equity firms typically provide value by adding the missing elements, such as marketing or sales
know-how, in order to kick-start the business and achieve scale
Their goal is to increase the value of the underlying asset by augmenting founder teams with the buyout firm’s own operational experts,
sometimes combining newly acquired assets with already existing assets to create a stronger whole, or doubling-down on promising products
(while shedding less promising offerings) to unlock potential.Typically, these PE firms then sell the company to another company (usually a
strategic buyer) for greater value
In some cases, these early-stage PE firms sell to another PE buyout firm further up market
In some of these acquisitions, founders can maintain minority ownership in the company (though not a controlling stake), which they can
carry through to their “next exit.”Unlike PE buyouts at later stages, PE buyouts at the earlier stages are not usually high-value exits;
they are mostly an avenue to provide the founders some return for their hard work, rather than the disappointing returns they can expect
from an acqui-hire or, even worse, a shutdown
If negotiated correctly, a private equity deal can give founders an opportunity to play another hand to the next exit.Few founders create
companies in order to flip them
Strong entrepreneurs create companies to transform their missions into reality and positively impact the world
Steve Jobs said, “I’m convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure
perseverance.” An acquisition — particularly to private equity — may not have been the original goal, but it may fuel the continued
pursuit of the founder’s mission
Or, perhaps it will enable the pursuit of a new and worthy mission.
