So You Want To Raise Money Now?! — Financing and M&A During a Pandemic
By Jim Tholen, Managing Partner
It’s no question that COVID has upended lots of things — our lives, our livelihoods, our economy.
It has also upended how, certainly in tech, companies and sources of capital get financing deals done, and how acquisitions get done.
In fact, financings and acquisitions are a bit of a microcosm of what is going on overall in our economy.
Here are a few of my observations:
- Financings and acquisitions are getting done. In certain areas perhaps even more robustly than pre pandemic;
- Like the contrast of the level of the stock market to the headwinds of the overall economy, valuations in tech have remained robust;
- But the processes and sequencing have changed given the need to keep people healthy and the virus in check;
- As with lots of the rest of our lives, much of the process of financing and acquisitions have gone virtual;
- Certainly the sudden demands of dealing with a pandemic have highlighted just how important tech is to the functioning of our economy;
- An interesting question will be post Covid what will become the new normal and what activities will revert to closer to our pre pandemic world?
I think about our old BroadSoft days. As part of our strategic planning process, we would identify key product areas and technologies we wanted to acquire. We worked a short list of plausible targets, and we hit the road meeting face to face with as many of the target companies as possible. We narrowed our list with a combination of face to face and virtual sessions, and once we had a deal in our sights, we descended on the target with a (for us) large team for confirmatory due diligence and final negotiations. It was an article of faith that face to face wasn’t only crucial, it was an unquestioned requirement throughout our process.
The new reality is most of these efforts have gone virtual. Those first ‘intro’ meetings with possible targets have all moved to Zoom or equivalent. As have the follow up meetings and due diligence efforts.
Several of our M&A advisor friends have observed that there are even some of this transformation that seems to be more effective than our old ways:
- Certainly we all spend lots less time on airplanes. We can accomplish more (say meeting with a series of target companies) much more efficiently virtually. It’s been more effective than many of us would have predicted.
- Classically, one of the more intensive parts of due diligence has been the big due diligence organization meeting kick off, usually offsite very near the acquiree’s headquarters, with key management members of the acquirer’s and acquiree’s teams, an army of legal, accounting and financial advisors, etc. These meetings made for long days.
- In the virtual world, these sessions often have been broken up into separate sessions with only a subset of needed folks involved. More efficient, less lots of folks sitting in rooms waiting for their focus area to come up. Again the observation is that this virtual incantation is pretty effective — maybe more effective, than the old face to face model.
I think rightly the F2F touch, and even the F2F confirmation around fit is still important, but difficult given the exigencies of the health crisis.
- On the M&A front, the consensus among our advisor and investor friends is that most deals still seem to require some kind of on site meeting — all socially distanced. It is just that that meeting happens at the end not the beginning of the process. That is of course hard. And the associated travel has limited at least some investors from buying or investing internationally — the health logistics are just too daunting.
- At BroadSoft we put a lot of weight on people and cultural fit as part of our M&A process — we still think F2F both in formal and informal settings greatly helps this. This again makes M&A in the context of COVID complicated.
- On the financing front, this F2F requirement seems to have been more readily relaxed. One venture partner told me — “hey — we aren’t going into our own offices — most of us are not even living out the pandemic nearby — so not inclined to go to travel to someone else’s office — it all seems to be working fine…”
So what happens post pandemic? Once we have a vaccine, do we go back to our old ‘just jump on an airplane’ world?
We suspect it will be a mix. Like with commercial real estate, where the new normal may well be a hybrid of work from home and office meetings, acquisitions and finance will evolve to a post covid hybrid.
- Virtual is of course here to stay. Much of our current pandemic driven processes will remain — meetings with potential target companies, much of due diligence, etc have all been shown we can do these effectively without having to jump on airplanes;
- Certainly due diligence, data rooms and priorities in due diligence checklists will evolve to this new normal;
- But F2F is still important. Such meetings may remain closer to the end then the beginning of a process but buyers and sellers, investors and companies looking for investment will all want to bring back the informal and formal benefits of personal interactions. As I mentioned, there is no substitute for F2F in trying to ensure people/culture fits are right.
We think it has been impressive how, like elsewhere in our society, acquisitions and financings have adapted to, and sometimes prospered in spite of, the reality of Covid. We look forward to getting to our post Covid world soon. It looks to us like our new normal will be pretty different from a pre Covid world.