How would this work? If you are a private equity firm and you want one of your portcos to purchase another company, you give the money and tell them to do it (or do it yourself, rather).
Say you are a VC and you, as well as other VCs, are invested in the same company. Let's say for ease of example that each VC has a 20% stake, and the owners have a 40% stake. Now, say you notice there is an adjacent company (that for ease of example is founder owned) that is almost identical to the current investment, that you would like to buy simply because you want to expand market share.
How would you go about initiating this M&A activity? Would you do this by voting on the board? Isn't that the duty of management, however, and not a duty of board governance? Would you present your idea to the other VC investors who, alongside you, collectively have majority stake?
Thanks. Interested in how this would work.
talk to the god damn ceo
Really though? Would the other investors not see that as going behind their back?
Pitch idea to ceo. Ceo then pitches idea to other major investors.
Put it this way if the vc all talk first then go to ceo then it makes your ceo feel likes he’s not in charge. The other ceo chose to invest in him for a reason.
So you advice ceo. If he has the cash to do the deal then he can go do it. If he doesn’t then he talks to his current investors about raising more if it makes sense.
Or he tells you that you are an idiot and the competitor has crap tech and he will crush the guy in 18 monthsZ
Ah this makes sense. Thanks for the explanation.
There should be more mergers among venture - backed companies. It's happened successfully in the past (think Elance+Odesk=Upwork & Letgo + Wallapop). I've never really hard great reasons for why it doesn't happen more often, but here are a few:
1) By the later stages of a venture investment, the founding team, the lead investor in the most recent round, and any past lead investor that had taken their pro-rata all own roughly equal amounts of the company. Whomever suggests the merger has to convince the other board level stake holders it's a good idea BEFORE approaching the other company's board.
2) VCs, esp early stage ones, back management teams and it takes a lot of inertia to admit to a founder that a competitor's manager should run a combined business.
With this said, it should probably happen more. It would save a lot of funds a lot of write-offs. It's also just good business sense.
Thanks, this was a great analysis. This is really exactly what I was looking for.
One clarification -- when you say competitor's manager, you mean competitor's startup management or board management?
So, a hypothetical example. Say VC #1 owns Startup A. VC #1 wants to acquire Startup B from VC #2. They want to do this to merge Startup B with Startup A.
1) Would VC #2 exit their investment in Startup B and just sell their share outright? 2) What if VC #2 said "We won't sell it, but we're into combining the companies and both retaining some ownership, how would that work? Who gets how many shares? How do you decide that?
I guess, in general, where do I learn all this stuff? I seem to be asking one off questions on WSO, and I never learned this stuff in school comprehensively, so where do I go to learn everything about VC? Should I be asking these questions to the people I've networked with in VC?
And what do you mean about saving VCs a lot of write-offs? As in, instead of writing off a bad investment, they could sell it to another VC? Why would that be the case? If it's a bad investment, why would another VC want to add a bad investment?
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