Per the Pareto Principle, 80% of results come from 20% of our efforts, but in the world of VCs they call this the Power Law. Every VC is a unicorn hunter and in order for them to continue generating outsized returns for their investors usually one or two of their portfolio companies will carry the bulk of the performance of their returns and enable them to raise fund after fund. But what happens to the 8/10 or 80% of the port co's that aren't able to raise follow-on rounds? Are they all failures? Are they all doomed and set for the intellectual property scrapyard? No, no, not at all.
Just because a company isn't able to raise a follow-on round does not a failure make. Perhaps the market opportunity (TAM) was done in an optimistic and superficial top down manner, instead of showing the GTM strategy and building it logically from the bottom up. Perhaps something unexpected happened, but this extraneous variable of what went wrong is not the point of this article. What we're wondering, is what happens to those 80% of port co's where things don't go to the top right? Yes, some portion of that 80% will need to shutdown, but there is still gold left in that cohort. Perhaps the company grew but not at a rapid enough speed that VCs need, what happens with those? Well, the CEOs of those companies still may have something viable on the table, their cash flows might in fact be healthy, they might just be hampered by reach and scale.
In today's economic landscape, growth at all costs is simply reckless for all involved, but the CEOs or founders of those companies with healthy cash flows are still very fortunate, granted you might not be the next billion dollar unicorn, but you are still employing a competent team, your company has a product or service with proven demand. In this bracket of existence, CEOs are able to build and grow organically to the point where they can even create generational wealth for themselves and their team members. So what are the options here in this small to mid-size market cap?
Meat and potatoes section:
So what are the options for such CEOs? Well, a reliable income and reliable company is not so bad is it? But you want more. Next course of action, hire an exit planning expert, get your revenues straightened out, button up your agreements, improve your accounts receivables, and more, all in preparation for, and fingers crossed a strategic acquirer to come knocking on your doors. What's more realistic? You reaching out to investment bankers at Goldman and asking them to write up a CIM and take you on the road to see who is interested. Since we're on this theoretical journey together, let's say the CIM circulates and nobody bites, nobody's interested, is all hope lost? No, not at all, in fact, this is where roll-up funds shine.
Roll-up funds are corporate containers where several firms (Firm A, Firm B, Firm C, etc) are acquired and taken public for the sake of multiples arbitrage. The firms inside the roll-up are generally speaking in the same industry (Constellation Software), but there are exceptions to the norm, for ex: Andrew Wilkinson has successfully executed this with Tiny.com's portfolio.
What will being acquired by a roll-up enable you as a CEO to do? There are a number of benefits that all of the sudden are unlocked for you as compared to rolling solo. Here are a few of the benefits:
You meet talented CEOs from Firm B, Firm C and Firm D and so on and you are now partners in crime. Best practices are shared, you learn from each other, motivate each other, you build a hive mind together and you help each other succeed, pretty amazing stuff.
You get access to lower cost professional services from the shared services central of the acquirer.
You still get to operate your own company and take it through to completion in terms of the vision you had, but now you have access to more resources and talented people all of the sudden to be able to do so.
Depending on the approach of the acquiring roll-up fund, you might have even been offered a mix of cash and equity instead of all equity and you know what that means? That means you get access to a level of equity performance that you would never have been able to access had you simply continued operating alone. Hopefully you didn't accept all cash and are able to enjoy the upswing together with your other high performance CEO neighbors.
Access to new markets and new networks that you previously wouldn't have been able to conceive.
The world can quite literally become your oyster in a roll-up fund. So as you can see, lead CAN be converted into gold.
Stay Tuned for next week's article: "How to improve the odds of getting acquired".