This episode of This Week in Venture Capital featured Michael Montgomery, president of Montgomery & Co.
If you don’t know Montgomery & Co it is one of the premier technology & media focused investment banks in the country (and as Michael corrected me they also have a strong Healthcare / Med tech practice).
For entrepreneurs who want to learn about how to work with investment banks, how to position yourself to be acquired and what the IPO markets look like this is the episode to watch.
Michael is a very accomplished corporate executive in his own right having run Sega Gameworks and helped IPO EuroDisney as well as having been on the founding team of DreamWorks SKG (where he helped them raise their first $900 million in equity). Shame they didn’t like his suggested name for the company: DreamWorks SKG-MM
1. The Montgomery Conference: one of the top technology events of the annual calendar in the United States and held every March. The importance of the conference is that it assembles most of the top privately held early-to-mid-stage technology companies in the country (and some globally) as well as most VC’s, growth equity funds and corporate development departments from large industry players looking at technology acquisitions.
You have to be selected to present and it is typically reserved for companies that have already raised early-stage capital and are well into revenue growth.
2. Should you use investment banks to raise venture capital? This process is normally known as doing a “private placement” and we agreed that in most cases you don’t want an i-bank involved in raising your first round of capital. That said, knowing people like Montgomery can be incredibly helpful because they know all of the VCs and large technology companies and if they think you have high potential they often help with introduction.
Michael argues (and I agreed) that when you’re raising expansion capital it can be particularly helpful for a variety of reasons:
- At that point you have a real business to run and capital raising can be distracting. A bank can help you balance fund raising with running your company
- Banks are particularly helpful with raising money from “strategic” investors, which often means corporate investors such as Intuit, SAP, AMD, Salesforce.com and the like. They have relationships that are hard for entrepreneurs to build
- They can also help raise larger rounds of capital and often at higher prices
Note: they will typically charge you a small retainer to work together but they make most of their money on a success basis by taking a percentage of capital raised. This is often in the 5-7% range.
3. How to investment banks help with the M&A (mergers & acquisitions) process? We talked about the two types of M&A: “buy side” and “sell side.” Buy side is when i-banks work for the corporate development department (or CEO) of a technology company to help scour the market and find companies to acquire.
The sell side (where Montgomery spends most of their time) is working with growing, privately help technology companies and helping them to find potential buyers. This is important because the kiss of death in selling your company is only having one interested party. 1 party = low price.
Michael’s view (full details in the video) is that right now there often aren’t multiple buyers for consumer Internet companies and prices often aren’t what people hope for going into the process. He said that there remains a very healthy market for “data oriented” software companies because the world is moving more toward measurability and software companies with differentiated IP often get a premium in the market. For example we talked about EMC’s recent acquisition of Greenplum Software (funded by Tim Guleri at Sierra Ventures and Leo Spiegel of Mission Ventures, who’s on a roll this year with some very nice exits) for hundreds of millions of dollars (actual number not released but I heard from a reliable source that this was a very good return for investors).
4. What does the market look like for IPO’s and is this likely to improve? Predictably Michael wasn’t bullish for the IPO market to come back any time soon for growth technology businesses. There are a lot of inherent costs and responsibilities associated with being public that make it not very attractive for entrepreneurs any longer. There are also regulatory issues as well as changes in research and commission structures that don’t favor a return of a robust IPO market.
Michael also discussed the problems of being public including our litigious society in the US and the time that CFO’s and executive teams need to spend on both shareholders and legal issues (for a CFO it can be up to 1/3 or half their time).
We also discussed the following deals of the week. Want to know our opinion on the deals? Watch the show! We covered ‘em all.
1. Thredup –
– Founded by James Reinhart out of Harvard Business School (semi finalist in annual business plan competition)
– Online clothing exchange for busy people looking to save money
– Allows mothers to be able to exchange children’s clothing when it they no longer fit
– Give up a box of clothes and receive one in the size you designate
– Raised $1.4 million from Trinity Ventures, Founder Collective, Highline Ventures, NextNew Ventures. (total funding $1.7 million) TechCrunch
-Online retailer of affordable “accessible luxury” designer fashion
-Features over 180 men’s and woman’s brands
-Sells only current season collections
-Attractive 800,000+ visitors/month
-Has 85 employees in London and Nottingham
-Board includes Nick Wheeler, CEO of Charles Tyrwhitt. Current round: $9mm Series-A led by Balderton Capital. TechCrunch
-Online clothing, accessories and décor retailer with focus on independent and vintage-inspired fashion
-Allows customers to select potential inventory through Be the Buyer program
-Founded in 2002 and expanded after founders graduated from CMU in 2006
-Has 150 employees and is opening a HQ in SF and a supply-chain office in LA
-Company plans to use money to expand inventory and distribution capabilities, and build more social features
Current round: $19.8mm Series B led by Accel with existing investors Floodgate and First Round Capital. TechCrunch
-Founded in 2007 by Oxford Univ. students
-Is a super-simple online management and admin tool for real-world groups
-Free for groups <250 and for student groups
-Company generates revenue via premium accounts, targeted ads and transaction commission
-Have 500,000 members and are planning to go international with the new capital
Current round: $1.3mm from Index Ventures and Dave McClure, Chris Sacca, Simon Levene, Meagan Marks, Ariel Poler, and Quincy Smith. Total raised: $1.3mm. TechCrunch
-Acquired by Amazon for $110m
-Woot was one of the first one-per-day item sales site with a humorous and not always PC content
-Founded by Matt Rutledge in 2004 and based in Dallas
-Revenue of ~$160mm in 2008
-Acquired by Disney, who also invested in Playdom, and will become part of the Interactive Media Group
-Tapulous developed music-oriented games for the iPhone
-Most popular game Tap Tap Revenge allowed players to tap to the rhythm of songs, and has been downloaded 35mm times
-Founder Bart Decrem and COO Andrew Lacy will join Disney as a senior VPs
-Tapulous had raised $1.8mm
-Developer of database software for business intelligence and data warehousing applications
-Raised $61mm from investors including Mission Ventures, Sierra Ventures, Sun Microsystems and SAP Ventures
-Clients include Skype, Equifax, T-Mobile, Fox Internactive Media
-EMC acquired in all-cash deal for undisclosed amount
-Will become foundation for EMC’s Information Infrastructure business
4. ITA Software
-Acquired by Google for $700mm in cash
-ITA provides essential flight information (fares, schedules, availability) to airlines, travel agencies, and online reservation systems
-Google wants to use the data to create new flight search tools
-Previously raised $100m Series A from Sequioa, Battery Ventures, and General Catalyst in 2006
(Cross-posted @ Both Sides of the Table )