Exit – Making Sure Tech Drives Value, Not Risk

 

The funding market remains difficult, and VCs are still quite picky when it comes to new investments. As a result, startups face lower valuations, and those who did a bridge see it running out within the near future. If you can’t secure fresh cash, the only option on the table could be selling your company. When it comes to an exit, you want to make sure you are best prepared — also from a tech perspective.

After all, when moving towards an exit, founders and existing investors want to achieve the best possible valuation. If you have a good understanding of the tech assets within your company and their strengths, you will be in a better position when negotiating with potential buyers. You can ask yourself: Is your tech proven to be innovative, scalable and low-maintenance, and does it provide growth and efficiency gains through automation? Then it is a true value driver.

What to Expect from a Tech Due Diligence During an Exit

‍Before selling your company, you should think about how you are going to structure the whole process. Unless you have agreed on exclusivity, you will have several due diligence streams with two to three interested buyer parties at the same time. Founders often underestimate the effort this takes. It can literally keep a company on its toes for weeks or months.

Doing a Vendor DD in advance by the selling party to address some or all of the issues that will come up later on, can help. However, buyers usually have a healthy distrust of Vendor DDs. Therefore, make sure your Vendor DD is truly objective and find a partner who is really unbiased. If this is the case, it is less likely that the buyer will insist on a DD of their own. This in turn reduces the complexity of the sales process overall.

Since we do Tech DDs in both venture capital funding and M&A contexts, we know: These are two very different scenarios from a founder’s perspective. Buyers coming from the corporate environment are more risk-averse, so they want a much deeper assessment. They also oftentimes have higher expectations in terms of standards for documentation, compliance, data protection, security, and (open source) licenses. This is another issue founders tend to underestimate. Equally, they often oversee the way in which technical debt can pose a risk for the development, operation and maintenance of software.

Aligning Tech Assets With Buying Interests

When it comes to an exit, compatibility matters. As a founder, you need to know the strategy of the buying company: What do they see as the real assets? Should the company continue to exist stand-alone or be integrated? Do tech landscapes match, and are there synergies?

Investors with a build-and-buy strategy, such as private equity, have similar considerations: Can we turn several companies into one and create a value chain? Does the tech platform offer the necessary interfaces? Knowing the answers to these questions helps founders successfully navigate through a sales process and set their priorities right.

In addition, in our work, we regularly see a misalignment between the equity story and the story that tech tells. This needs to be anticipated and reviewed upfront. For example, is it wise to present Artificial Intelligence as the main value driver when it is only in a prototype phase and there is hardly any AI expertise in engineering? Your tech should be able to back up your equity story at all times.

Tech DD Dry Run: Well-Prepared For Your Exit

To identify your strengths and weaknesses and anticipate the assets potential buyers might value, you can do an early Tech DD Dry Run. It reduces the risk of unpleasant surprises, both in terms of delays in the sales process and in terms of valuation. If you do this early on, you have the time you need to elevate your tech stack to a higher level and close security gaps. Technical debt or issues that can’t be resolved in time can at least be addressed, and solutions can be outlined in a roadmap. This can make a significant difference, having a positive impact on the willingness of the investor to buy and the valuation they are willing to accept.

In addition, the data room can already be set up properly, and the engineering leadership team can be trained for the real case. If you clarify all these issues in advance, you are well-prepared, strengthening your own negotiating position during the exit.