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The State of Fundraising and M&A in 2024: Transcript

On January 29, 2024, Ravix Group sponsored a panel hosted at Morrison Foerster’s beautiful downtown San Francisco office, “The State of Fundraising and M&A in 2024. Our co-sponsor, Flagstar Bank joined us with banker Calina Thompson.

The panel included:

Lindsey Mignano, SSM

Theresa Tate, MoFo

Danny Lopez, Orrick 

Francesca Ruiz, Gunderson-Dettmer

Michelle Edwards, Perkins Coie 

You can listen to the audio here.


Lindsey Mignano 00:00
Bev headquarters here in SF, I am happy to be here today. These are some of my most excellent colleagues and I rely on them to shoot the shit about the industry all the time. So I’m happy that you’re here. I’m happy that we’re here. I hope everyone had a wonderful dry January if you practice it. I’d love to thank our hosts today for this event for our state of venture and m&a event, a Bree and Calina, can you come up and say a few words about your firm’s or your bank and what you do and who you help?

Bree Hanson 00:31
Hey, thanks for having me. Thank you all for coming. I think it’s really important. We start building community back in San Francisco. So give yourself a round of applause for coming out. I know it’s hard. It’s a Monday night. i With rave X group and we are an outsourced CFO, firm accounting and wind down m&a services for startups, anywhere from pre seed all the way up to Series B. C, beyond up till IPO. So we are glad to be sponsoring this event. And I will pass it on to Kalina. Hi,

Calina Thompson 01:05
everyone, thank you for coming. Kalina Thompson with Flagstar Bank. We’re a private bank that services, both private clients on the consumer side, corporate clients, both on the venture and on the startup side. More to come with us. There’s a lot of things happening on the background, and I’m sure you’ll see it very soon. Thank you.

Lindsey Mignano 01:32
and dispose of these are our food and beverage sponsors. If you’re drinking and eating well tonight, right here, and we of course have our family sponsor MoPhO. And I would like to have Theresa, kind of kick off our introductions of our panelists who you are where you we know you work. And I guess Look, do a fun fact. Fun fact, fun.

Francesca Ruiz 01:58
Come on what you’re looking forward

Lindsey Mignano 01:59
to in 2024.

Theresa Tate 02:03
I’m looking for a lot of forward to a lot of dark things happening in 2020 Wars. I don’t know how to come back for that. But hopefully it’s not going to be as dark as I think it’s going to be. I’m Teresa Tate, I’m a partner at Morrison Forrester. It’s a full service multinational law firm. You are in our headquarters.This is our first office. It’s been around for over 100 years. And I am in the emerging companies and Venture Capital Group and also in our mergers and acquisitions group.

Francesca Ruiz 02:34
I’m Francesca Ruiz. I’m a partner in the m&a group at Gundersen. For those of you who may not know Gundersen, we are a firm focused on the venture capital and startup ecosystem. So our clients, we represent companies from inception all the way through their life cycles and the VC funds that invest in them. I’ve been at Gundersen for about two and a half years before that I was a partner at an international firm doing m&a and commercial transactions. at Gundersen, my practice is a mix of, of buy side and sell side work. Maybe not surprisingly, technology focused. And sort of our our a common flavor of transaction for me and for most of the folks in our group would be sale of a VC backed tech company to a public serial technology acquirer.

Michelle 03:30
Hi, I’m Michelle, I’m an attorney with Perkins. Kui, I also am in the emerging companies and Venture Capital Group at my firm. So my practice is pretty split and a 5050. Between working with startups on financings and day to day corporate matters. And then the balance of my practice is focused on m&a. And I primarily work on the sell side space, so representing private companies as they’re being sold, either just strategic buyers or, you know, financial PE players. And I’ve been with Perkins going on three years now.

Danny Lopez 04:11
I’m Danny Lopez. I’m a partner in the m&a group at auric, which is another 100 plus here, a San Francisco based law firm as well. Thank you, Teresa for allowing me in the field that really pointing out where you guys are. I do m&a, almost exclusively mid market private equity, mostly buyouts, but some minority kind of growth transactions as well.

Lindsey Mignano 04:37
Awesome. And one of the reasons why I love these kinds of panels is because SSM is almost exclusively like 95%, early stage. So I’d love to hear what’s happening upstream from us. And these big law firms certainly have the clients and deals for it. So thanks so much for coming. I’ll be giving a little bit of an overview of precede through series A B as the early stage counsel on the panel. All and we invite you to have questions or ask questions. If you’re online. I know there are a number of you, please drop the questions into the chat or the q&a. We’re going to have some time afterwards to go ahead and answer and get through your questions, Khan’s going to moderate that. And we will, hopefully, you know, try to answer as much as we can, while we go through the panel. But we’ll take the panel and stages we’ll go from like, just all the way through and we’ll talk a little bit about other topics like that along the way. So precede and see what’s new. Generally speaking, it does take about 10 to 14, sometimes longer months for public market volatility to affect the early stage. And we do see that now, um, seed was down about 57.6% Based on the current state of startups 2023. If you look at the PitchBook data from nbca, quarter for 2023, and we’re seeing about 2.8 billion deployed across 1176 deals, all of 2023 We’re seeing 14 point 6 billion deployed, which is down 10 billion from 2020 to 24. Point 2 billion again, PitchBook nbca. Carter, these are great stats to look at in terms of like how people are getting funding, what they’re getting funding on. The precede deal size is roughly the same and so is the seed we’re seeing medians at 600,000 average of 1.3 seed median of 3 million average of 4.4. That is pretty consistent with what we’re seeing at SSM I will say I would define seed of anywhere from one to 5 million with a tipping point being around three ish when we start seeing a series seed priced round. Otherwise, we’re seeing a lot of predominantly at our firm mostly safes. ycombinator. Post money safe, astute investor preference. As far as statistics safes are still outnumbering convertible notes at this stage, with post monies being, you know, less advantageous for startups, but still being the preferred vehicle de jour. The percentage sold at price seed is usually around 20%, according to carta data, but one of the biggest questions we get asked from our pre seed and seed clients are what is it the valuation cap out, which is kind of a fun game of theory to play. For safe rounds under 250,000, the median valuation cap in California in New York is 6 million from 250 to 500, you’re saying 8,000,500 to a million, about 10 million safe round 1.2 to 2.4. We’re seeing medians at 12. This is kind of where most of SSMS clients are in this bucket. So we’re seeing raises of anywhere from one to three, usually on safe notes. And so I would say that’s pretty consistent. The pre money valuation at seed, at least according to Carla’s data not at PitchBook data is sitting at like 13.3. So about the same 1213. If you’re talking about like really big, bigger than big avocado seed rounds, 2.5 to four, 5 million, hefty safe round is what Peter Walker calls it. I don’t know if he’s here, but thank you, as always, Peter, if you are watching online, we’re seeing 18 million as opposed to money cap, and 5 million, which he calls the jumbo we’re seeing 30 million caps in California, New York. So that’s the lay of the land. Obviously, in other jurisdictions, you’re going to have lower or higher, usually lower numbers there. But that’s what we’re seeing here. Anecdotally, at least at what we’re seeing at our firm is that most of the investors at the pre seed or seed stage are not coming from like big VC, these are smaller VC shops, maybe one to five person shops, they’re deploying it pre seed or seed, they’re cutting checks of anywhere from 150 to 500k. And they’re investing in a limited number of verticals. So it’s your five person shop that only invests in enterprise AI. Those are the ones those are the deals that we’re seeing. Most commonly, we are seeing the Y Combinator post money safe with a valuation cap as being the most common or and or with the cap and discount. And those tend to be statistically also the the most used instruments. Most of our clients understand the founder level dilution risks on this here. But in this economy, when the pendulum swings towards really savvy angels and VC funds, it’s less negotiable. And so we’re finding a lot of people just going that route. I’m also seeing that angel investors and savvier VCs from the smaller shops are asking for really low capsulated the amount of the raise and so a lot of our job is counseling the founders on what might be an appropriate cap given their vertical and given their size of their raise. And then of course, we’re seeing with some very, very smart angels, a slight preference towards convertible note deals, which are debt deals at the end of the day, and so that has been up statistically from like, like 2% This past year rather than like the previous years. I do think that that’s something that we’re going to see more and more from really savvy angels. We’re also seeing a little a lot of alternative forms of financing. Our firm has partnerships with a number of crowdfunding sites and we have been asked for referrals to crowdfunding sites like we funder or Republic. We’ve seen bridge or extension rounds after price seed rounds going towards Series A. And we’re still seeing about statistically And anecdotally about a two year wait between series seed and series a longer obviously you’re starting at the pre seed level. And of course, sadly, we are seeing a lot of fail rates. And this could be as a result of founder Fallout team, product service level not being where it needs to be. We’re seeing quite a bit of dissolutions restructurings and some bankruptcies. And then we’re seeing a number of not so great sales, maybe generally asset sales of platforms with maybe the two or three head honchos of that company being, you know, golden handcuffs styles working for maybe six to 12 months for the wire, just to integrate that software. So again, not great news, but not the worst news at series A or B. This is somewhat hopeful data from Carta, when you’re looking at 25th 50th and 75th. percentile at Series A, we’re seeing 5.6 10 and 17. These are great numbers for Series A, it’s still showing the median at 10 million, which is a good market. I will say there are other sources out there that are saying that there are you know, it’s coming closer to six to seven I don’t I would love to hear anecdotally what other people are seeing, I have had a client with less than a 10 Million Race. So I think that’s environment is ripe for that. That series be using that same spread 25th and 75th percentile we’re seeing 9.1 20.7 and 31.3 pre money valuation series A being 40 series beefing 90. So again, time between the series A and Series B we are still seeing about two to 2.5 years, that’s not totally abnormal. In an environment like this, it’s not it seems pretty on par with with a. And we’re still seeing about 20% median of equity being sold at series A about 17% of Series B. Generally speaking our clients who are at series A and who are going for a series B, because we have been in operation since 2016. And so we had a number of early stage clients that we took back then that did well enough and now are climbing the ladder, we’re seeing you know, kind of do more with less. It’s a fun, it’s a fun game to play. At the series a level and Series B level we’re seeing in 2021, we saw 87 billion deployed across almost 6000 deals, if we’re exact numbers 5997. Now we’re seeing like almost half in that 39.5 across pretty much the same amount of deals. So 5004 to 21. That’s pitch books data. So we’re seeing the similar number of deals, and just less money per deal. And carta stats are quite similar. So series A is down at point 1% Since 20.2, Series B at 5.5%. Down. So I think this is a if you’re looking at the data, if you’re looking anecdotally we’re seeing, you know, same number of deals at this stage, just less per deal and being asked to do more with the money that’s been given. For companies who just can’t raise another round. Or just don’t want to strategically, there’s this kind of if you can wait it out wait it out, talk that’s on the streets, if they’ll go out of business. Down rounds are up people know that series A 16% of all 2023 rounds were down rounds. At the B level we’re looking at 14%. So people are very aware of that founders are aware of that. Most of them are waiting it out if they can 40% of all series a financing this past year were bridge rounds 36% at the series B level. So this instrument of bridge rounds, convertible safes, usually saves. It’s something that people are doing, they’re raising little chunks now because they can’t get to the big the big next step. Anecdotally, we are seeing that our Series A founders are finding it more difficulty to reach the milestones, they promised only because of the fact that they have now less less runway and less staff, there’s usually been some layoffs. So there’s been some people cut. And so it’s actually much more difficult to get where you said you were gonna get by the time you were supposed to get there. Given the lack of funding and the runway, right? We’re seeing longer time time frames between milestones. So existing investors now have this more of this kind of extra time to say like, Hey, let’s talk about that product. Let’s talk about product market fit. Let’s talk about how much you’re spending on legal. Let’s talk about your sales, business development and partnership efforts and how that’s reaching your ARR goals. Right. There’s there’s just a lot more time for a lot more meetings, which is so fun. And and as counsel we get to be on here all that sometimes on board meetings, which is also fun. And of course these bridges and extensions, obviously if your investors from your series A are going to give you a bridge or an extension, whichever you call it, and come in with more money. It’s just an obvious validation of that the company’s doing well they believe in it. It’s great. It looks great. I think the problem is is now we’re seeing some friction there as to Whether or not those investors are going to continue to pump money into that company, right, and that becomes problematic in terms of optics and funding. We’ll be talking a little bit more about venture debt later with Teresa. And that is some of the things that some of our clients who can actually qualify for venture debt competitive on that, too, are looking into right now. So I wanted to pose this question to Michelle at Perkins. So, anecdotally, you know, I gave you a kind of an idea of what what the stats are seeing, and what we’re seeing here at SSM would love to hear hopefully, if you have any better takeaways, what are the biggest struggles for startups at this stage, at least that you’re seeing? And if you had to give any, like, you know, advice, nuggets of wisdom, what would it be? Sure,

Michelle 15:46
I think the most challenging issue I’m seeing for startup companies I work with, is having to keep their eye on the ball and run the business while at the same time engaging in these fundraising activities. Because you can really have the CEO having to perform, you know, to jobs, right, and it’s a little bit of a catch 22. Because in order to raise money, you’ve got to be like, able to present the right story. So the investors, you know, have the right product that solving the right problem, you know, be able to talk about what’s the route to, you know, to one day to, to profitability. So I think sort of juggling those competing responsibilities can be, can be challenging for four founders. In terms of, I guess what I would say an advice, I would say, one, if you can raise money in this market, I would not be overly focused on valuation, if you’re early stage, I think it’s more important to me, I think, to survive to fight another day. Another thing to think about is, if you’re looking at investors coming in, you know, it’s not necessarily apples to apples at the top line valuation number. And my preference is always for a company to do what I call a clean deal, as opposed to a messy deal with structure that gets them a slightly higher top line valuation, because when you’re early stage, you’re setting precedents for the next round. So let me give you an example. You get a term sheet that’s say, you know, okay, 10 million pre money, 1x, liquidation preference, etc, etc. And then you get a term sheet that’s maybe you know, okay, 14 million pre money, but there’s a 3x liquidation preference. And if you ever want to sell the company, this particular investor has to consent, you know, forever. So I think founders, right, I mean, it’s so so founders really, you know, think about what you what terms do you want to live with, because I guarantee you, when you go from your seed to your series, A, what’s in your seed, the series A is gonna look at it and say, we want that too. So it can be right, have a longer issue that you have to live with. The other thing I would say is very important. When you’re looking at investors coming in at the early stage one, you want to be targeting the right investors. So you know, do your research, who are the funds that are in your space that are investing in your stage, think about where they are in the fund life, are they going to have, you know, dry powder for the next round, to continue to support you look for people who, when they join the board are going to add value on the commercial side. And really, you know, building those relationships are so important. And it’s so you know, valuable to have that advice and build that long term funding. I would also say and this will be my last, my last tip, when you’re raising, if you do talk to investors who aren’t, you know, ready for you yet? Maybe they want your company to mature a little bit more, you know, stay in touch. Because if your company does well, I mean, I think in my experience, when investors say come back to us, when you have this milestone, if you then hit that milestone, you kind of already have that, you know, entree and they’ll, you know, kind of know who you are, and it makes it easier to do that to do that next round.

Lindsey Mignano 19:10
Yeah, I love that advice. I actually have a bunch of clients who will follow up once a quarter once every four or five months when they hit their milestones, hopefully successfully. And that’s it’s always been good. I feel like that isn’t done enough and the simple boomerang that can easily be accomplished. So I love all that advice. Anyone else want to add? on the early side? Awesome. Well, late stage and late stage is defined by pitch book and BCA Series C or D. I know we’re throwing out a lot of these terms. Like what do these like what does this really mean? I tend to think of series A is like 10 million of a raise Series B is like 20 or 30 million of raise. We’re talking Series C and so that’s considered late stage I’ll let I’ll let the group get into recent Michelle as to exactly what they’re seeing anecdotally and statistically, but quarter for 2020 Three PitchBook report we’ll say there’s 16 point 4 billion deployed across 1000. A little bit over 1000 deals, pretty no surprise, sluggish exit activity, declining valuations, all the things you probably have heard top line media to discuss, I will say it’s a pretty drastic fall off from 2021, which is the height of the market. So if you look at Carter’s 2023 data, and you compare 2021, which was all of our heyday, to currently, Series C, median, 60 million raised to 350 million pre money valuation. So you see in 2023 26 million raised at 170 million pre money valuation. So quite, quite different. This this capacity or series D media numbers again, 92 point 2 million raised 804 point 5 million pre money valuation, that’s 2021 and 2335. Point 6 million raised Twitter 20 223, post money, pre money valuation. So again, we’re seeing steep drop offs in those stats. So I guess this goes to Teresa, as well as to Michelle, what are you seeing at this stage? Are you seeing these startups, you know, employ tactics? Like, for example, raising smaller trenches of capital or extensions right now? Just to bide their time? How are they? How are they making do? And then obviously relatedly? What are the most common legal or, or business questions that you’re getting when counseling these companies?

Theresa Tate 21:29
So I guess, Michelle, you might have a different view. But so 2023 was challenging, obviously. And I think a lot of kind of companies that fall within this later stage, kind of bracket, a lot of them use these strategies already to get through 2023, unless they had a really massive raise, which you know, that there’s some group of them that can are able to kind of hold over one more year, a lot of these companies are gonna have to bite the bullet make these hard choices this year, if they didn’t do anything in 2023. So I think what it comes down to, and we actually did a panel at the end, like what are our predictions for 2023? And I was like, it’s gonna be horrible, and it was horrible. Everything.

Danny Lopez 22:13
You say it’s good, the Navy? Yeah.

Theresa Tate 22:20
No, so like, it’s, I mean, it’s still going to be quite murky. So I think holding your breath and hoping 2024 is going to be better is probably not the best strategy. And I think some of these, I mean, these, these are really getting pretty stingy. Like, the whole idea of like supporting these early stage companies, that works great when you’re doing these small checks and small valuations, where you’re saying, well, like these bigger checks for these more established companies that haven’t had an exit or not, like looking like they’re gonna have an exit anytime soon, like in the next couple of years? And then what are they going to exit to? Like, is there going to be an IPO market? Is there gonna be one? So you know, so there’s not really a whole lot of upside that folks are looking at. So I think it is they are being stingy with their tracks, and maybe they want to take place bets on other kinds of investments, rather than kind of dig back in it kind of like and go back into go back to that? Well, I think the choices are pretty much the same. You know, there are some draconian control rights that you’re seeing, we’re seeing pay to plays, we’re seeing what else down rounds are pretty do, you know, kind of the financing du jour. We’re also seeing some companies, though, that I think fall into the other bracket that have raised like enough capital in 2021 2022. But they’re kind of looking out and they’re seeing the valuations kind of drop off a cliff. And for those folks that actually have some good cash management strategies, and actually have a decent amount of capital in their on their balance sheet, those folks are actually looking like really attractive m&a targets. So what we’re starting to see is some competitors, like some investors have been like, Look, I’ll put money in if you acquire a company with a balance sheet, and maybe some products, and maybe we can kind of get some traction that way. So you’re kind of starting to see a little bit of that, which hadn’t seen in a while. So buying for a balance sheet is not something I’ve seen it a bit. So let’s maybe something will happen in 2020 for I don’t know, Michelle, do you have a Yeah,

Michelle 24:14
I mean, I think we’ve seen kind of the same, the same trends at our firm for my later stage. Clients, when they’re, if they need, you know, they can’t kind of hold out they need to raise more money now. They’re largely looking kind of at investors, existing investors around the table, and the conversation they have about me who’s willing to step up and you know, save the company and support us for this next year. Whoever that is, is definitely going to get their pound of flesh. It can be you know, as Theresa mentioned, you know, control rights, it can be super liquidation preferences and other you know, other goodies warrant coverage, but they’re also you know, the the people who are coming in to put money in At this point are saying, you know, to those investors who aren’t putting money in, you know, we want to do a pay to play, you guys are not going to stay where you are today, if you’re, you know, done supporting the company, so we’re really seeing after these new sort of pay to play rounds get done, you know, kind of very dramatic changes to the capital structure of board control. And you know, kind of who’s calling the shots, at least at a board level, day or day to day. And

Theresa Tate 25:29
to piggyback off what Michelle had said earlier, you know, what comes along with the reduced deal size in the venture world has also reduced numbers of active VCs. So I think there was like, what a 50% drop off on active VCs in the market in 2023. And they expect that trend to continue, we had open view announced in December, you know, after just raised its massive fund, that it was actually closing its doors. So I think you’re starting to see maybe these sort of microphones that are really specialized. If you’re not an AI or machine learning, then you know, it’s gonna be a road ahead of you. So you might be looking at, I think, what I’ve been telling clients that are not in the AI and machine learning space, even the ones that are take a really hard look at your investors, you know, like, where are they, you know, their funds, who’s backing them. And candidly, I hate to say this, because this isn’t representative of all the funds that we work with. But some of the funds that have seemed to see the most success in capital raising right now are the larger, more kind of established funds as so to speak, or maybe a smaller fund that’s really very, very targeted and very, very focused on one particular industry or vertical. So I think when you look at term sheets are kind of going out in their market, in addition to the do they want your firstborn child, it’s also like, Who are these people? And I mean, even if they love you and think you’re amazing, like are they going to be there, when the time comes. The crossover guys, especially for, you know, these later stage companies, it’s the crossover funds that you really care about. And those folks are really not active in the VC asset class right now.

Michelle 27:01
The other challenge, I would say later stage companies in particular are seeing is sort of employee incentives and motivations, particularly when they do these down rounds. So we’re getting like a lot of questions about, you know, reopening people and options, or what happens if the next round, the new series of option grants is at such a lower price? And you know, how do they write? How do they navigate that?

Lindsey Mignano 27:24
And so lots of discuss there, I really liked the the discussion about the VC mechanic behind the scenes, I think startups always forget that there’s the startup world, the startup world, tech world is tech world. And then there’s obviously the funding funding world that has to have has to be where it needs to be healthy in order for that ecosystem to thrive. Let’s take a quick turn into venture debt. This is one of the questions that you know is coming up more and more definitely, for the ones who can qualify for it. My clients are a little bit too early. But it is an important thing to talk about, especially in a down economy like this, a US venture debt activity fell 41 point 7 billion across through 2365 deals in 2021 To 30 point 2 billion across 1483 deals here in 2023, sourcing, less deployment, they’re specific to us tech companies, the figure was about 27 point 2 billion across 1229 deals. So late stage companies are receiving the bulk of these deals, as opposed to raising the next round, for example, but we are seeing, you know, if you look at Deloitte stats, you’re still seeing smaller deals, higher rates, and the qualifications are robust. So, you know, similar to venture finance, we’re just seeing more competition in this in this market, right for venture debt. And it was once viewed as like an alternative to Vc. And it seems like this alternative is, you know, becoming harder and harder to obtain. What advice would you provide a company seeking to procure this kind of capital in 2024?

Theresa Tate 28:55
So, I mean, post sVv, it’s still dark days, I did though, find us one good stocks, I looked really hard to find something positive. The Deloitte study said, you know, after four straight years of 30 billion plus, in the US venture debt activity, there was a dip and 2023 have an estimated 12 billion, they anticipate a partial bounce back. So their idea of a bounce back in 2024, is a rise from 12 million to 14 to 16 billion. So it’s up 25%, which is still like, let’s see, I’m not a math major, but that’s about half half of what we were looking at kind of in 2022. So, you know, there’s still options out there, but this isn’t the SBB you know, first republic kind of days. We’ve got bigger banks that are moving into this market. So they’ve got all of their qualifications there. And I think what people kind of forget is what made that sort of environment so special was it was an ecosystem that kind of fed off itself, right. So it wasn’t necessarily that they were qualifying the founder and the company and the idea there to kind of call it like, oh, you know, we know these investors, we can guarantee that these people They’re going back them. So it’s just like a whole mix of things and like social connections that kind of made it all work. So it’s harder for these bigger banks that are moving in to kind of step into those shoes and fill the gap. We’ve got some smaller, sort of more nimble non banks or quasi banks are kind of stepping in, I had one client sign a great deal with a company that, you know, they buy, they buy furniture, and like, it was capital intensive, capital intensive company. And so they buy their sort of machinery and equipment, and they lease it back to this company. So there are kind of creative folks out there that are doing different things. But by and large, I mean, the advice I tell these companies put AI and machine learning on your website. I also, you know, it’s the standard post SVB advice, right? Diversify, where you hold your money, and I have to, you know, you have to make sure you have payroll, but it’s also kind of keep your VCs really close, because, you know, it’s like, you’ve got to be able to show these banks that someone is going to back you. So historically, and I mean, you know, Teresa, like two years ago would cringe that I’m actually saying this out loud. But historically, I would tell clients, you know, don’t give information. You know, if you’re the company, don’t give your VCs too much information, or your stockholders too much information where you’re constantly like, sending these reports like, this is what we’re doing. And this is how we’re doing it. Because it always felt like a litigation risk, someone was going to come back and say up, you know, you missed your target. You didn’t do this, or you didn’t give this information to this person, but you gave it to that person. But I think, you know, I’m sort of rethinking that in this climate where the companies that I’ve seen do really, really well through these rough patches have kept their primary investors pretty well informed of what’s going on with the company, not to go too crazy, or like do anything was like out of sorts, or like legal risks and give your look, keep your lawyers up at night. But stuff where like, people feel like they know your business, and they kind of can trust you that to manage their funds well, so that they can feel good about continuing to deploy capital in vacuo, when you know, the JP Morgan’s are asking for references.

Lindsey Mignano 31:58
And how often are you seeing that, that line of communication like once a quarter at board meetings, maybe call separately,

Theresa Tate 32:05
everyone’s been doing it a little differently, depending on the nature of the investors. I mean, you said this earlier, it’s like, some of these folks have a lot of dry powder, but they also museum a lot of free time on there. A lot of board meetings are just looking for things to keep them busy. So you get a lot of pinions and, you know, there’s some there’s something to be said about kind of calling through that and making sure you stay focused on mission instead of getting distracted by everybody’s little which opinion on something. But, you know, at least you know, least at every board meeting, I’d say probably monthly for these earlier for earlier companies, you know, and it doesn’t need to be generally preferred not to be an email, but you know, but you know, just something so that people feel like they’re, you’re accessible and you’re kind of being honest. So they know what’s going on. And so if you hit a rough patch, they can kind of see that it’s your turn.

Lindsey Mignano 32:57
I hear you that makes a lot of good sense. And at that early stage two we are also BCC it on some of our clients email blast to their investors here that had gone through legal before had gone out.

Francesca Ruiz 33:08
So just don’t even send it to me. I just don’t want to know. Where’s that disclaimer

Lindsey Mignano 33:16
exits, so fun or not, we’ll see. And 2023 we had 65 billion over 1129 acquisitions quarter for specifically, we had 4.9 billion over 125. So not as of a fun year for m&a as as it could be blocking factors were the FTC, non domestic litigation and regulation. Quarter for 2023. We saw buyouts 800 million across 48 exits. And I will have to read some data from the wall in an SRS because this is actually really interesting. You know, more and more. They’re seeing private and private m&a. And this is across all of their platform, not just their early stage, not just their late stage, but kind of everyone on their their platform deals closing in the first three quarters of 2023 had a higher prevalence of burnouts 1/3 as compared to 1/5 in the 2020, slash plaything to era. So earnouts were more likely to have multiple metrics, more than two thirds of the 2023 deals with earnouts compared to 58%. In 2022. There was a major shift in 2023 to all cash deals, nearly 80% of deals that closed in the third quarter of 2023 used all cash for consideration, which was similar to 2020 compared to only 74% of all deals in 2022 and 71% of all deals in the first half of 2023. So all cash deals. According to KIPP in his case, he statistically seeing a management rollover component as well. Buyers are more, you know, seeking more and bigger special escrows because of robust due diligence 36% of deals closing in the first three quarters of 2023 included a special So escrow MoPhO did a great report, m&a in 2023, and trends for 2024, where it talked quite a bit about minority stage investments. earnouts a CRM DVRs stock is consideration and carve outs, divestitures, and they give kind of like a lay of the land of where they see these terms going. There’s quite a lot to discuss here. Not such great news. But what I think is really happening is we’re seeing a lot of creativity or things coming back that were old, what’s old is once neat is new again. So when times are tough, companies might deploy more creative or flexible, possibly not new strategies to get deals done. What are the most common strategies you’ve seen in 2023? For exits?

Francesca Ruiz 35:44
Yeah, go ahead.

Danny Lopez 35:46
You know, and the PE side creative is like, how desperate can you get as a seller. And so like, you know, like you said, the report was saying, there’s just more or announced or now it is just to get money later, if you hurt if you hit milestones. But all that all that is just I think indicative of a huge valuation Miss mismatch that’s been there ever since 2021, hit 2021 was the biggest year in m&a history. And then I think you had a lot of people who were considering selling their companies a little too late, and still had, you know, either their bankers or lawyers, you know, their uncles, or whatever telling you how much your company was worth, and you look up, and it’s, you know, early 2023, late 2022, and realize that, because of a bunch of reasons, you’re not going to get that money anymore. And so I think that that was, you know, the the come to Jesus year was the 2022. And people started to realize that’s not going to happen, and then further happened in 2023. So yeah, to get to get stuff done, just more structure more, more earnouts. And then more installment payments, that kind of thing, the return of more buyer friendly, sort of just sort of indemnity deal turn terms. So for a solid two or three years, you could get a private company deal done, especially in the PE space on public company terms, you buy my company, give me all the money up front, and then just deal with the rep and warranty insurance policy. And I’m on my way, and that was the norm for the better part of five years, that that’s now kind of being eroded even at the sort of higher end of the mid market. So I think yeah, to, to get it done. I think you Yeah, you get used to those sorts of terms, which were standard for the better part of three decades beforehand. And then I think also, the thing that I’m seeing more and more is less hesitation to open yourself up to more diligence earlier, in hopes of a shorter exclusivity period and a faster deal. So that’s I’m seeing a lot of pre exclusivity, diligence, go like deeper and deeper and deeper, where that would have been unimaginable, like the past, you know, the two or three years before,

Francesca Ruiz 37:51
are you seeing the deals actually go any faster? Like last year? To me, it seemed like deals were going at a snail’s pace. No, it’s because they’re just sort of added diligence added scrutiny corp dev side or whatever, throughout the cycle of the deal, but it you know, call it term sheet says you’re gonna be done 45 to 60 days and it’s months later, you’re still negotiate Oh, yeah, no

Danny Lopez 38:15
much slower, much more retreats, but by buyers, because it’s just a it’s just a buyers market. But yeah, no, that’s yeah, to get it done, just be just be more desperate as a seller,

Francesca Ruiz 38:27
that’s my professional. Yeah, like putting out good people like, from, you know, the types of deals that we have one other thing and this doesn’t usually our sort of deals track pretty closely with the SRS data. But one thing that we saw a lot of in 2023, where there was, you know, a lot of stock consideration being offered sort of across the board, but this sort of style of stock deal called a merger of equals where, where, basically, you’re just sort of taking two maybe struggling, you know, private companies and trying to capitalize on, you know, operational resources when you’re cash constrained. And, you know, with this rosy idea of if you, if we get together, we’re going to be able to accelerate, accelerate growth and scale. And so we actually saw a lot of those in the in the private sector, they weren’t always, you know, true. 5050 equal valuation 6040 3070 And even, you know, in an all stock kind of mash up, you get Moe, like, terms when you’re, you’re it’s a 20 2080 kind of a kind of deal. I mean, sometimes they work and they’re great. I think that the success varies a lot in part because sometimes it’s not really clear who Who is driving the bus? When you’ve got sort of two parties that are more or less equally suited? You’ve got, you know, a CEO of each company, it’s not clear who’s going to run the the sort of post merger enterprise. And so, you know, I think the hit rate, a lot of people come to the table saying, here’s, here’s our idea. You know, maybe if I’m being optimistic, you know, maybe two thirds of them actually close and come to fruition.

Lindsay Mignano 40:34
Yeah, I’d love to hear the stats on this at a later stage, especially like, how are you seeing, like, also two thirds in your practice to hear?

Theresa Tate 40:44
Roughly, I actually have been reveling, terrible. I’ve been enjoying the return of the acid purchase. I’m not, I’m just gonna put it out there. I know, you’re not alone. Like, oh, you know, I can sleep well at night. I don’t care if we make it through this entire diligence request list, and they’ve stonewalled me for months. I’m good. We’re just gonna leave that all. So yeah, that’s been my, my secret favorite part of all this.

Lindsay Mignano 41:11
All right, well, I guess one less one more question. And we’ll, we’ll kind of open it up just for time. With the last 10 minutes or so, you know, we’ve got a lot going on right now, as a country as a world. We’ve got some current market economic uncertainty, we’ve got some geopolitics, we’ve got some aggressive regulatory scrutiny, and we have elections coming up this year. So hopefully, it’ll all come together. And we will all be very rich lawyers and lots of m&a activity. We’ll see. But what are you predicting? I guess, I guess, kind of as like a send off question, what are you predicting in your area, whether it’s venture m&a, or this 2024? Year? If you had to choose one, let’s be let’s be nice and optimistic? Because we

Theresa Tate 42:00
definitely get better as we go down? I mean, well, first off, I don’t think anyone is concerned about lawyers and 2024. So I think we can put that aside, Lindsey, concern for lawyers is probably nil.

Danny Lopez 42:14
Because she’s gonna just take our job.

Theresa Tate 42:16
I know, you’re gonna, like, Hang on just for this one more year, while we’re still relevant. But yeah, I guess I actually do think that this sort of, you know, the calling of the VC heard is actually maybe ultimately going to be a good thing for the startup ecosystem. I think it it’s, well, it’s, well, it’s kind of a bad thing, in some ways, like, are you feel bad for that happening? It is something that’s kind of like the natural way of the world. And I think, sometimes, it’s really tough as a startup and from a founders perspective, to kind of look at it and just like, gosh, you know, there’s layoffs, there’s these term sheets, there’s everything he kind of remember sounds like crabs in the barrel. That’s it all day, right, the, the VCs are going through the same things, too. They’re also trying to make money, if it’s really kind of dark environment. So I think kind of them having to kind of go through some of these pains to will ultimately yield kind of like a stronger ecosystem, and want to bring back SVB to so throw that out there. That’s my optimism ring back as we begin is full, former glory.

Francesca Ruiz 43:20
Um, I actually am pretty optimistic about tech m&a This year, I think, you know, we saw, like Andreessen increased volume, sort of in q4, and that momentum has definitely continued into the beginning of the year, which is a good trend. I think, though, that the deals are going to look a lot like they did last year, there’s going to be a lot of continued sort of pressure on valuations, and bridging those gaps with earnouts. Stock consideration for private companies, probably more than public companies, but TBD. But I do think that the on the on the public company buyer side, we’re going to see a lot more smaller acquisitions, just to stay under the radar as much as possible of the regulator’s so you know, maybe five or seven, tuck ins as opposed to one, you know, $2 billion mega deal.

Michelle 44:14
So just to echo that, I mean, I also think, for the private companies I’m working with there’s definitely more interest in m&a exits, going forward and doing something more in the short term. So I do expect kind of, you know, sell side m&a activity to increase and I think amongst, you know, startups in general, again, with the standard, let’s set aside AI, I think we’re gonna continue to see like a pretty high failure rate because I think they’re the companies who don’t have, you know, didn’t raise when they could and don’t have the runway now, to make it to the next milestone. You know, may, you know, may not See it through this cycle?

Danny Lopez 45:03
I’m pretty, pretty bullish on m&a Generally, on the strategic and VC side, I think that a lot of these high valuations that we’ve been talking talking about are going to come to a head, and people are going to have to start selling companies are they going to be on great terms? Probably not. But that will be at the same time facing I think higher stock, like stock prices for bigger public, which use that as as currency to, you know, to buy companies that in the first three quarters of 2023, that wasn’t the case. And then the last quarter it was and then m&a spiked, and that was all just due to the uncertainty in the rate environment, it was public companies more, you know, not not really rate sensitive in the fact that they need to borrow, but more inflationary, sensitive, and then on the PE side, more rate sensitive because they borrow money to to, you know, to buy companies that skittishness has gone with the lack of the width, it’s been pretty clear that the rates aren’t going up. So I think that that has it’s just a general positivity. So I think that both types of buyers, both public companies, and PE, pe buyers will be out there trying to, you know, try to get deals done. And I think, yeah, I think I did, I was watching a panel the other day that said, and this never even dawned on me. But they tracked people who apply for rep and warranty policies as like a four to six month lag of like, that’s when deals are gonna get done. Because you do that for the early stage of an m&a deal. And that spiked huge, hugely in the last quarter, which shows that like this year, will, you know, will probably be resemble a little more 2022 than, you know, than 2023.

Lindsey Mignano 46:43
That’s all great. I like hearing that. At the early stage, I will say these things that I think we’re being more so demanded, after series A and towards Series B, these conversations are coming down and trickling down at an earlier stage at your seed level. So you’re having more of these early stage VCs really kind of drill down on like, know, for real, like, what’s your, what do you want to do here. And, you know, looking at the team, making sure that they’re coherent, seeing if the founder can actually lead sales, in some sense. Really, really having an understanding of the business and the product, I think it makes for better startups at the earlier stage. As almost exclusively early stage counsel, we have a lot of conversations with a lot of entrepreneurs and people who want to be entrepreneurs. And I think this environment is really shaking out the waters in terms of those people who might have a hobby loss, which I would love one day love to have, because it sounds really fun to throw money away. And people who actually want to have a financial or sellable company. And that is becoming quite apparent, especially in these times where like no one’s just getting money because it has AI in it. But it there’s been some more scrutiny being deployed, at least at this point in the game. So I kind of like, while not great for our companies on our docket. I kind of like that recalibration of the industry because that means that we eventually have better clients and more interesting legal, selfishly legal issues to deal with. But also that the the startup ecosystem is a little bit healthier we have, we have companies that are actually going to really go somewhere and not just get funded and shut down. So I’m hopeful for that. The silver lining of this. My name is Lindsay miniato. Thank you so much for having me. As the moderator one of the panelists, I wanted to thank again, the hosts Bri and Kalina, who are right here in the front row. And obviously Teresa, who is our space host. And I’d like to have the panel just as we wrap up, because we’ve only got just a few more minutes. Before we open up for questions. Do we have online questions? Okay, actually, you know what, let’s do that one first. And by the way, everyone, this is Khan Khan works at SSM. He’s here in Monterey. He’s monitoring the the online portion. Right.

Unknown Speaker 48:57
So this is a jump ball or any of our Series A advisors. Heather King has asked How should a founder think about how much equity to be willing to give up through their series a

Lindsay Mignano 49:14
Series A still coming at it statistically 20%, Series B at 17. And that’s usually the industry norm. Are you guys seeing something different in your practice? Recently? That’s about 20%. Right? Yeah. I mean, I’m saying that seed to series seed,

Michelle 49:30
is this also about 20%? I mean, I see maybe a little higher than that. In some cases, if you’re talking kind of a big, you know, particularly precede and the safes can be higher, particularly when they do the money. Yeah.

Lindsay Mignano 49:43
Because of the founder of them. Yeah, that’s makes sense. If she asked me for like a percentage cut or, like, what, what stats wise they were seeing or anecdotally,

Unknown Speaker 49:52
I think it’s just how much equity you saw, I think from a percentage. Yeah,

Lindsay Mignano 49:56
I think I think it was hardest and by the way, I spotted a lot of Deal data hear from a variety of sources. I believe that that was part is data, the 20% and the 17% number at series A and Series B. And that should be coming from their carta state of startups 2023 report, or also through Peter Walker at kartha. You can follow him on LinkedIn. He gives me really nice stats that I get to use when I speak to Thank you, Peter, if you’re walking watching online, I definitely dropped your company. He’s also did a LinkedIn post on that as well in quarter three. All right, so I didn’t go down the way because if people online that people in the room they want to connect with you, they want to ask you tons of questions for free, they’ll be great. So can we go this way, who you are, where you work, how you can be reached maybe LinkedIn email.

Theresa Tate 50:48
Teresa Tate at Morrison and Forrester and I have the best email ever. I’m t very memorable.

Francesca Ruiz 50:58
Francesca Ruiz Gunderson profiles, LinkedIn, on our website And my email is F

Michelle 51:10
Michelle Edwards at Perkins Kui, I have a long email address, Michelle Edwards at Perkins You can Yeah, on the website, and I’m also of course on LinkedIn.

Danny Lopez 51:22
Danny Lopez auric. And ever since they shut down my MySpace, it’s just convenient. Lop EZOR ic Not to be confused with a vacuum cleaner company or it would be

Lindsay Mignano 51:38
and I’m just Lindsay at SSM dot legal. I’m also reachable on LinkedIn. I have to Graham if you want to join me on Facebook as early stage users I was on since 2003. So my whole life is there. I’ve I’ve sanitized it for most of you. So nice to have you. Thank you for coming. We really appreciate you please stay for wine and to speak with our wonderful panelists.