Ten years ago, private investor Allison Finkelstein was on the ground floor of what is now Rev1Ventures.
She helped put together the first investments for TechColumbus — private money from local businesses and public money from Ohio Third Frontier. Then the Great Recession hit.
The good news was the funding was immediate, she says. The bad news was the horrendous environment raised questions about long-term investing.
“That solidified the need for milestone investing, making sure that people were doling out the money as they’re hitting milestones because we’ve got to create some discipline,” Finkelstein says. “Make sure they understand there’s not an unlimited tap of money coming through here and just really encouraging people to be very creative on how to get that next round.”
That mentality should persist today, she says. Startup founders need to understand it’s not always a case of ramping up a great idea and selling it to Google. Sometimes it’s focusing on how to achieve reasonable growth to get the next round of funding.
Finkelstein, who has been an angel investor for more than 20 years, shared her perspective at the 2018 Smart Business Dealmakers conference (formerly ASPIRE).
Now that you’re investing your own capital, what strategies do you follow for finding deals?
It’s got to be a compelling technology that someone else doesn’t have — but most importantly that there is a need for it and we’ve identified the need. I’ve been involved with companies where it’s a great technology but the market is not there, and it costs a lot of money and takes a lot of time to get the market or to get people to recognize you need this product. I’d rather not put capital in a company like that.
Management should be experienced going through the cycles, so they know when they see an opportunity to grab it and not get greedy, which is an issue. We all want to make money, but there’s nothing worse to a cap table than it being overvalued and you’re trying to get the next round of money. Everyone’s going to end up being upset in a scenario like that.
They need to be thinking about how everyone is going to get money out of this. Are we going to be selling to a strategic or to a private equity firm? What are the logical places for it and, again, not just saying, ‘Oh, I think one of the big tech companies will buy it’? But really thinking about how would it fit in with the potential buyer and how do we start making those overtures and relationships?
What’s a deal killer for you?
If I want to make an investment in a small startup, for example, I go back to the cap table — who’s on it, what do they want out of it? We’ve got to have a congruence of everybody’s motivations, from the founder through the different rounds that are on there. If they’re not focusing in the same direction and if we’ve got different levels of investment and valuations, it’s going to be ugly to the bitter end. So, I would probably avoid that.
After such a long expansion period, are we running out of great companies to acquire and invest in?
No. I don’t think so. A couple of factors — one, there’s obviously a big push, certainly in Central Ohio, but also in other places, for entrepreneurism that generates new opportunities. Older companies looking for growth are going to be looking for these new opportunities to either bolt on or take them into new directions.
I also think you’re going to continue to see a lot of public companies continue to shed businesses that they’re not interested in as they refocus in different directions. You have fewer publicly listed companies now, but you have more private companies that have been VC- and private equity-backed. Those are going to continue to provide opportunities for acquisition. You’re also going to see continued crossborder deals into the U.S. as well as U.S. companies looking at other places. There are some geographical regions they’re not going to look for, but I think we’re going to continue to see aggressive acquisitions as a means of growth.
What’s something that could change this optimistic outlook?
Liquidity is the key. That was one of the major factors in the 2007 crash. Concerns led to liquidity drying up. The last man standing is the one that loses out.
Why would a venture-backed company prefer to sell to a public company?
To me, the bottom line comes to who’s the most interested and who’s the most motivated to make the acquisition.
One typically thinks a public company is going to be moving a little bit slower, but I’ve had a couple transactions over the last couple years where publicly traded companies moved fast. One of the buyers did the deal in five weeks — that was amazing, I don’t think I’ve ever seen a publicly held company do a deal like that. But they were motivated; they wanted it.
I did another one, this was not a publicly traded one, but it was a privately held company and, again, they did it in four weeks.
It comes down to who’s got the motivation. If you’re a small company and you’re differentiating between a private buyer looking at you — maybe it’s a private equity firm that’s doing a roll-up — they may or may not be able to move faster. They may or may not have the best valuation. It’s really, in my mind, who’s the most motivated to acquire you.