Thursday, January 31, 2013

2277 tech companies were acquired in 2012, but selling them is a tough way for an Angel to make a living.

 The 2012 Tech M&A Report from CB Insights, based on their private database, was released yesterday. CB Insights is the firm that worked with the Angel Capital Assn. to produce their recent Halo report on Angel Investing. This new report covers acquisitions of both Angel and VC backed private companies.

Conclusions, some surprising:

Globally, 2012 saw 2277 private technology companies acquired.  For deals with disclosed valuations, acquirers paid $46.8B with 30% of deals accounting for 80% of the value.

In a big surprise, 76% of tech companies acquired in 2012 had not raised institutional investment (VC/PE) prior to acquisition. While there were no bootstrapped or strictly angel-funded billion dollar exits (of which there are few in any case), it is clear that there are a lot of tech companies being formed and sold who sustain themselves on their bootstrapping  profits, angel (friends & family) financing, etc.

While there is much fanfare when the billion dollar exits happen, they represent 2.5% of all private tech company acquisitions in 2012 (translation: they don’t happen often). More than 50% of deals are for less than $50M and more than 80% of the acquisitions are less than $200M.

Google and Facebook were the most active acquirers, each doing 12 private tech company acquisitions in 2012. Five of Facebook’s acquisitions were talent acquisitions. Google and Cisco were most frequent disclosers of private company valuations.

California saw the most private tech companies acquired in 2012, not  all that surprising given that a majority of tech investment (both deals and dollars) goes to the Golden State. However, Cal’s dominance was something to behold as the state had more private tech companies acquired in 2012 than the next five states combined.

Massachusetts was not a top 3 destination for acquirers. Mass remains a top market for tech VC despite losing some of its mojo to NY which has now usurped the #2 spot. On the M&A front, Mass was somewhat surprisingly not in the top 3 as it got edged out narrowly by Texas.

Here in the Northeast, the number of companies acquired in each state were as follows:  MA-87, CT-14, NH-10, ME-5,VT-5, RI-3.   New York had 138, South Dakota had none.

Are these acquisitions really good for the investors?

Where the data was provided, the median raised was $16.6 million, the median acquisition price was $73.5 million.  For discussion let us assume that we could buy the median investment, much like an index fund.

At first glance one might assume that we can sell the company for about 4.4X our investment but this is incorrect. We didn’t purchase the company; we invested, so the founders and others also hold shares. Assuming that after investing our 16.6 million, perhaps in several rounds, we own 70% of the company. We then sell our stake for $51.5 million, or 3.1X our investment, possibly a good return.

An old time venture capitalist, such as Bill Congleton who negotiated the original investment in DEC for AR&D, would have been happy with a 3X return, as long as it took place in three years. (His target, 3X in three years, 5X in five years). Alas, an exit today can easily take seven to ten years with our rate of return diminished accordingly.

We are working with medians, so half of the time we can do better.  Alternatively, we can join the Lake Wobegon Angels, where all the women are strong, all the men are good looking, and all our investment returns are above the median.

An Angel’s Diary.  Three decades ago, Bill Congleton was looking at a company I had founded.  Boldly, I asked his partner, John Shane, what they might be thinking about pricing. “Bill can be tough on valuation,” replied Shane.  “After all, he once bought 70% of DEC for $70,000, and he likes his new deals to be better than his old ones.”

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