VC Exit Through M&A - Aleksey Krylov

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VC EXIT MA 101
September 20, 2023 Tialma www.tialma.com
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Aleksey Krylov

• 20 years of experience
• Tialma, Lead Consultant
• FTERA Advisors, Managing Director
• Last 6 years, strategic CFO for VC- backed
  private/public companies with focus on strategic
  transactions (fundraising, MA, JV)
• 12 years with 4 different family offices VC,
  LBO, structured and distressed investing 25
  deals,
• 500M invested
• Started career in investment banking
• MBA Columbia Business School, BS Babson College
• aleksey_at_tialma.com

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Arete Labs case study
Exit Options MA
TOC
BOD
LOI Alternatives Valuation
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Disclaimer
The numbers presented in the deck and the model
are not the actual historical numbers nor they
are projected numbers reviewed or endorsed by the
company
This exercise is for illustrative and educational
purposes only
This is not a sale or solicitation to buy the
companys securities or its services/products
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Case Study Arete Labs (AL) Business
At-home blood-testing with patient-centric data
analysis Focus on preventative care, early
detection, chronic disease monitoring Subscript
ion-driven business model
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Case Study Arete Labs
Frank Far launches and invests 50K (pre-seed,
SAFE)
1M Series A
50M Purchase offer / MA exit
May 2020
Dec. 2022
Feb 2020
June 2021
September 2023
150K SAFE (seed)
6M Series B
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AL Financial Snapshot
40,000,000 Steady growth
35,000,000
30,000,000
Historically profitable
25,000,000
20,000,000
Gross profit 30 as with investments in
cost-down, can reach 60
15,000,000
10,000,000
5,000,000
0
Clean balance sheet/no debt/no convertibles
2020A
2021A
2022A
2023E
2024P
2025P
2026P
(5,000,000)
Revenue
EBITDA
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Arete Labs MA Offer
Frank had drinks last night with Peter, VP of BD
for a strategic buyer, Ripe Aid They are
interested in submitting an unsolicited offer to
buy the Arete Labs today for 50M Frank has
called a Board meeting later this
afternoon Should the Board sell the company?
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Arete Labs case study

• Exit Options MA
• TOC

BOD
LOI Alternatives Valuation
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Exit
MA
IPO
Merger Strategic acquisition Secondary sale (PE,
block trade) LBO/MBO Rollup Going private
Direct listing Traditional underwritten IPO Recap
Reverse merger SPAC
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IPO

• Some securities are listed on an exchange

• Most commonly common stock
• Can be debt or other securities
• Automatic conversion
• Holders sell at will
• All prefs go into common
• Upside The stock may run up further post-IPO
• Downside
• Execution risk
• IPO flat or down
• Automatic conversion ONLY in qualified financing
• events (e.g., size or valuation triggers)
• 11

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Arete Labs case study
Exit Options MA
TOC
BOD
LOI Alternatives Valuation
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MA

• Acquiror (buyer) takes over control of the
• Target (seller)

• More likely to be a private / non-transparent
• process
• With VC-based companies, trigger
• liquidation preferences
• Vesting of options for employee/execs/BOD

• Depending on the offer (cash vs. stock), locks
• in the return

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Strategics
Private Equity

• Synergies / higher growth opportunities
• Corporate identity / mission
• Long-term perspective
• Access to resources
• Likely premium in the acquisition

• Financial managerial expertise
• Capital
• Flexible deal structure
• Leverage may be available
• Focus on growth

• Integration challenges
• Loss of independence
• Inflexible deal terms
• Regulatory hurdle / clearance risk

• Short-term focus / limited horizon
• Likely loss of control
• Exit pressure
• Reorganization / cost cutting / layoffs

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MA Complex Ecosystem
Regulatory/legal/compliance/documentation Diligen
ce Process
Financial valuation
Operations Post-deal integration
Others?
Structuring
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Legal / Special Counsel
Players
i-bankers
Acquiror BOD Lenders Investors
Pubco arbs Target Mgt team
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• Value of the seller

• What is intrinsic value?
• Discrete views on the value

• Valuation analyses
• DCF
• Comps (trading, deals)
• LBO

• Sum of parts
• Historical multiples
• Step-up

• Premium ltgt Synergies
• Structuring

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Not an exhaustive list
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Public vs. Private Acquiror vs. Target
Acquiror BOD
Shareholder approval? Financing in
place? Regulatory approvals? Due diligence
Target BOD
Target shareholders
Proxy and shareholder vote Tender offer, then
acquisition
Friendly Hostile Fiduciary duties/liabilities
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3D Chess Regulatory/Legal/Compliance
Securities laws (federal) State corporate laws
(e.g., Delaware) Exchange rules (e.g., Nasdaq
20) Common / case law IRS regulation/taxation H
SR (anti-trust) Other gov reviews CFIUS
industry-specific
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Hart-Scott-Rodino
Committee on Foreign Investment in the United
States
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Arete Labs case study
Exit Options MA
BOD
TOC
LOI Alternatives Valuation
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Directors Have Fiduciary Duties
Photo by Alexander Grey on Unsplash
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Review and assess the offer Respond to it
(silence is a response) Document the process and
resolutions (if any)
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50,000,000
Photo by Alexander Grey on Unsplash
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Does the BOD need advisors?

• Legal
• Banker
• Consulting/accounting/technical
• (less common)
• Directors Personal Liability Management

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The format of the offer dictates the response

• Lets meet no specifics
• LOI/Term Sheet (non-binding) some items are
  clear (e.g., price, time, process)
• Firm committed offer yay/nay
• response

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Arete Labs case study
Exit Options MA BOD
TOC
LOI
Alternatives Valuation
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LOI

• Dividends
• Debt
• BOD
• Operations
• Conditions to close
• Governing law
• Other provisions

• Structure

• Deal value
• Earnout (?)
• Agreements
• Timeline

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Assessing the quality of the offer?

• Structure Cash vs. stock
• Contingencies
• Valuation

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Arete Labs case study
Exit Options MA BOD
TOC
LOI
Alternatives
Valuation
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Alternatives

• Do nothing
• Another buyer (strategic) / term sheet
• Another buyer / investor (private equity)
• IPO (S-1/S-4)

Can BOD quickly generate any?
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35,000,000 30,000,000 25,000,000 20,000,
000 15,000,000 10,000,000 5,000,000 0
2020A
2021A
2022A
2023E
2024P
2025P
2026P
(5,000,000)
Revenue
EBITDA
Launch 50K
Series B 6M
Exit ???
Seed 150K
Series A 1M
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Preparedness for alternatives
Recap PE/VC
IPO
MA
fundraising

• Business Plan / Strategy
• Pitch
• Historical financials (audited)
• Projections
• Compliance (IP, regulatory, etc.)
• Data room

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Arete Labs case study
Exit Options MA BOD
TOC
LOI
Alternatives
Valuation
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Opening Offer 50,000,000
2022 2023 2024
Revenue Rev multiple 12,803,000 3.9x 17,667,800 2.8x 22,304,400 2.2x
EBITDA/CF _at_30 CF multiple 3,737,050 13.4x 5,439,730 9.2x 7,062,540 7.1x
EBITDA/CF _at_50 6,401,500 8,833,900 11,152,200
CF multiple 7.8x 5.7x 4.5x
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Source https//finviz.com as of September 19,
2023
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Unreasonable ask?

• Ask for margins credit (synergies)
• Ask for market multiples (15x 20x CF)
• 80,000,000
• 150,000,000

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Valuation Football Field
167
CFC 50 EBITDA x 15 133
CFC 50 EBITDA x 18
159
201
CFC 50 EBITDA x 21
186
234
82
106
CFC 30 EBITDA x 15
CFC 30 EBITDA x 18
98
127
CFC 30 EBITDA x 21
114
148
0
50
100
150
200 250 Not an unreasonable counter or
valuation ask
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Current offer
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Stakeholder Waterfall
150,000,000
150,000,000 9,000,000 (2,000,000)
Consideration COH Fees
157,000,000 (9,366,904.11)
Series B Pref
80,000,000
147,633,096 (1,181,260)
Series A Pref
Consideration COH Fees
80,000,000 9,000,000 (2,000,000)
146,451,835.62 (3,246,810.22)
(68,183,016.85) (54,085,684.38)
(16,234,047.15) (4,702,276)
Series SAFE Preferred Common stock Preferred B as
converted Preferred A as converted Options
50,000,000
87,000,000 (9,366,904.11)
Series B Pref
Consideration COH Fees
50,000,000 9,000,000 (2,000,000)
77,633,096 (1,181,260)
Series A Pref
57,000,000 (9,366,904.11)
76,451,835.62
Series B Pref

Series SAFE Preferred Common stock Preferred
B as converte Preferred A as converte
(1,694,923.11) (35,593,386.55) (28,234,196.13) (8,
474,613.51)
47,633,096 (1,181,260)
Series A Pref
46,451,835.62
Options
(2,454,716)
Series SAFE Preferred Common stock Preferred B as
converted Preferred A as converted Options
(1,029,828.64) (21,626,402.13)
(17,154,986.89) (5,149,141.95)
(1,491,476) (0.00)
Available
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Stakeholder Returns
150,000,000
2/15/2020 (50,000)
9/20/2023 57,239,027

Founder IRR ROI
608 1144.78x
80,000,000
5/15/2020 (150,000)
9/20/2023 2,435,108
2/15/2020 (50,000)
9/20/2023 29,880,327

SAFE Investors IRR ROI

130 16.23x
Founder IRR ROI
491 597.61x
50,000,000
6/15/2021 (1,000,000)
9/20/2023 17,415,307
5/15/2020 (150,000)
9/20/2023 1,271,192
Series A Investors IRR ROI
2/15/2020 (50,000)
9/20/2023 18,155,169

253 17.42x
SAFE Investors IRR ROI

Founder IRR ROI
89 8.47x
415 363.10x
12/15/2022 (6,000,000)
9/20/2023 63,452,588
6/15/2021 (1,000,000)
9/20/2023 9,655,874
Series B Investors IRR ROI
5/15/2020 (150,000)
9/20/2023 772,371
Series A Investors IRR ROI
2088 10.58x

172 9.66x
SAFE Investors IRR ROI
63 5.15x
12/15/2022 (6,000,000)
9/20/2023 37,601,100
6/15/2021 (1,000,000)
9/20/2023 6,330,402
Series B Investors IRR ROI
1003 6.27x
Series A Investors IRR ROI
126 6.33x
12/15/2022 (6,000,000)
9/20/2023 26,521,891
Series B Investors IRR ROI
599 4.42x
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Path Forward?
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What Should the Board Do?

• Reject offer?
• Engage in negotiation to improve offer?
• Explore alternatives (other acquiror? IPO?)

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Scaling Initiatives

• Sales marketing
• Cost down initiatives
• Product line expansion
• RD, proprietary products
• Geographic reach
• MA
• AI

These uses of cash creates drag on
profitability, sometime over the long term
Quick and steady turn to profitability is
unusual, especially for high-growth potential
businesses
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An Opinion

• Untapped potential for the business
• No time to scale
• Incentives for some stakeholders to take the
  while others may prefer to stay in
• Benefit from longer track record of execution
• Approach to negotiation
• Go shop
• Seek alternative bids from strategics
• Seek private equity partner and structure a
  partial sale through a secondary and possibly new
  capital investment
• Of strategic, aggressive valuation ask (e.g.,
  150M) but flexible on timing
• / terms (e.g., 70M cash upfront, earnout 50M in
  2024, 30M in 2025)

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MA EXIT
September 20, 2023
Tialma www.tialma.com
Aleksey Krylov https//alekseykrylov.com