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VC Exit Through M&A - Aleksey Krylov

VC Exit Through M&A - Aleksey Krylov

Aleksey
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VC Exit Through M&A - Aleksey Krylov

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  1. VCEXIT:M&A101 September20,2023 Tialmawww.tialma.com

  2. AlekseyKrylov • 20+yearsofexperience • Tialma,LeadConsultant • FTERAAdvisors,ManagingDirector • Last6years,strategicCFOforVC-backedprivate/publiccompanieswithfocusonstrategictransactions(fundraising,M&A,JV) • 12yearswith4differentfamilyoffices:VC,LBO,structuredanddistressedinvesting:25deals, • $500M+invested • Startedcareerininvestmentbanking • MBAColumbiaBusinessSchool,BSBabsonCollege • aleksey@tialma.com 2

  3. 3 AreteLabscasestudy ExitOptions:M&A TOC BOD LOI AlternativesValuation

  4. Disclaimer Thenumberspresentedinthedeckandthemodelarenottheactualhistoricalnumbersnortheyareprojectednumbersreviewedorendorsedbythecompany Thisexerciseisforillustrativeandeducationalpurposesonly Thisisnotasaleorsolicitationtobuythecompany’ssecurities oritsservices/products 4

  5. CaseStudy:AreteLabs(AL)Business At-homeblood-testingwithpatient-centricdataanalysis Focusonpreventativecare,earlydetection,&chronicdiseasemonitoring Subscription-drivenbusinessmodel 5

  6. CaseStudy:AreteLabs FrankFarlaunchesandinvests $50K(pre-seed,SAFE) $1MSeriesA $50M Purchaseoffer/M&Aexit May2020 Dec.2022 Feb2020 June2021 September2023 $150K SAFE(seed) $6MSeriesB 6

  7. ALFinancialSnapshot $40,000,000 Steadygrowth $35,000,000 $30,000,000 Historicallyprofitable $25,000,000 $20,000,000 Grossprofit~30%as–withinvestmentsincost-down,canreach~60% $15,000,000 $10,000,000 $5,000,000 $0 Cleanbalancesheet/nodebt/noconvertibles 2020A 2021A 2022A 2023E 2024P 2025P 2026P ($5,000,000) Revenue EBITDA

  8. AreteLabsM&AOffer FrankhaddrinkslastnightwithPeter,VPofBDforastrategicbuyer,RipeAid TheyareinterestedinsubmittinganunsolicitedoffertobuytheAreteLabstodayfor$50M FrankhascalledaBoardmeetinglaterthisafternoon ShouldtheBoardsellthecompany? 8

  9. 9 AreteLabscasestudy ExitOptions:M&A TOC BOD LOI AlternativesValuation

  10. Exit M&A IPO Merger Strategicacquisition Secondarysale(PE,blocktrade)LBO/MBO Rollup “Goingprivate” DirectlistingTraditionalunderwrittenIPO Recap ReversemergerSPAC 10

  11. IPO • Somesecuritiesarelistedonanexchange • Mostcommonlycommonstock • Canbedebtorothersecurities • Automaticconversion • Holderssellatwill • Allprefsgointocommon • Upside:Thestockmayrunupfurtherpost-IPO • Downside: • Executionrisk • IPOflatordown • AutomaticconversionONLYinqualifiedfinancing • events(e.g.,sizeorvaluationtriggers) • 11

  12. 12 AreteLabscasestudy ExitOptions:M&A TOC BOD LOI AlternativesValuation

  13. M&A • Acquiror(buyer)takesovercontrolofthe • Target(seller) • Morelikelytobeaprivate/non-transparent • process • WithVC-basedcompanies,trigger • liquidationpreferences • Vestingofoptionsforemployee/execs/BOD • Dependingontheoffer(cashvs.stock),locks • inthereturn 13

  14. Strategics PrivateEquity • Financial&managerialexpertise • Capital • Flexibledealstructure • Leveragemaybeavailable • Focusongrowth • Synergies/highergrowthopportunities • Corporateidentity/mission • Long-termperspective • Accesstoresources • Likelypremiumintheacquisition • Integrationchallenges • Lossofindependence • Inflexibledealterms • Regulatoryhurdle/clearancerisk • Short-termfocus/limitedhorizon • Likelylossofcontrol • Exitpressure • Reorganization/costcutting/layoffs 14

  15. M&A:ComplexEcosystem Regulatory/legal/compliance/documentation Diligence Process Financial:valuation Operations: Post-dealintegration Others? Structuring 15

  16. Legal/SpecialCounsel Players i-bankers AcquirorBODLenders Investors Pubco:arbs TargetMgtteam

  17. Valueoftheseller • Whatisintrinsicvalue? • Discreteviewsonthevalue • Valuationanalyses* • DCF • Comps(trading,deals) • LBO • Sumofparts • Historicalmultiples • Step-up • Premium<>Synergies • Structuring 17 *Notanexhaustivelist

  18. Publicvs.Private Acquirorvs.Target Shareholder approval? Financinginplace? Regulatory approvals? Duediligence Proxyandshareholdervote Tenderoffer,thenacquisition TargetBOD AcquirorBOD Targetshareholders Friendly Hostile Fiduciaryduties/liabilities 18

  19. 3DChess:Regulatory/Legal/Compliance Securitieslaws(federal) Statecorporatelaws(e.g.,Delaware)Exchangerules(e.g.,Nasdaq20%)Common/caselaw IRSregulation/taxation HSR(anti-trust) Othergovreviews:CFIUS+industry-specific 19 Hart-Scott-Rodino CommitteeonForeignInvestmentintheUnitedStates

  20. 20 AreteLabscasestudy ExitOptions:M&A BOD TOC LOI AlternativesValuation

  21. DirectorsHaveFiduciaryDuties PhotobyAlexanderGreyonUnsplash

  22. Reviewandassessthe offer Respondtoit(silenceisaresponse) Documenttheprocess andresolutions(ifany)

  23. $50,000,000 PhotobyAlexanderGreyonUnsplash

  24. DoestheBODneedadvisors? • Legal • Banker • Consulting/accounting/technical • (lesscommon) • Director’sPersonalLiabilityManagement 24

  25. Theformatoftheofferdictatesthe response… • “Let’smeet”–nospecifics • LOI/TermSheet(non-binding):someitemsareclear(e.g.,price,time,process) • Firmcommittedoffer:yay/nay • response 25

  26. 26 AreteLabscasestudy ExitOptions:M&A BOD TOC LOI Alternatives Valuation

  27. LOI • Dividends • Debt • BOD • Operations • Conditionstoclose • Governinglaw • Otherprovisions • Structure • Dealvalue • Earnout(?) • Agreements • Timeline 27

  28. Assessingthequalityoftheoffer? • Structure:Cashvs.stock • Contingencies • Valuation 28

  29. 29 AreteLabscasestudy ExitOptions:M&A BOD TOC LOI Alternatives Valuation

  30. Alternatives • Donothing • Anotherbuyer(strategic)/termsheet • Anotherbuyer/investor(privateequity) • •IPO(S-1/S-4) CanBODquicklygenerateany? 30

  31. $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 SeriesB $6M Seed $150K SeriesA $1M Exit???

  32. Preparednessforalternatives RecapPE/VC M&A IPO fundraising • BusinessPlan/Strategy • Pitch • Historicalfinancials(audited) • Projections • Compliance(IP,regulatory,etc.) • Dataroom 32

  33. 33 AreteLabscasestudy ExitOptions:M&A BOD TOC LOI Alternatives Valuation

  34. OpeningOffer $50,000,000 2022 2023 2024 34

  35. Source:https://finviz.comasofSeptember19,2023 35

  36. Unreasonableask? Askformarginscredit(synergies) Askformarketmultiples(15x–20xCF) $80,000,000– $150,000,000 36

  37. ValuationFootballField $167 CFC50%EBITDAx15$133 CFC50%EBITDAx18 $159 $201 CFC50%EBITDAx21 $186 $234 CFC30%EBITDAx15 $82 $106 CFC30%EBITDAx18 $127 $98 CFC30%EBITDAx21 $148 $114 $0 $50 $100 $150 $200$250 Notanunreasonablecounterorvaluationask 37 Currentoffer

  38. StakeholderWaterfall $150,000,000 $150,000,000 $9,000,000 ($2,000,000) ConsiderationCOH Fees $157,000,000 $ (9,366,904.11) SeriesBPref $80,000,000 $147,633,096 ($1,181,260) SeriesAPref ConsiderationCOH 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) SeriesSAFEPreferredCommonstock PreferredBasconvertedPreferredAasconverted Options $50,000,000 $87,000,000 $(9,366,904.11) SeriesBPref ConsiderationCOH Fees $50,000,000 $9,000,000($2,000,000) $77,633,096($1,181,260) SeriesAPref $57,000,000(9,366,904.11) $ 76,451,835.62 SeriesBPref $ SeriesSAFEPreferred$Commonstock$PreferredBasconverte$PreferredAasconverte$ (1,694,923.11) (35,593,386.55) (28,234,196.13) (8,474,613.51) $47,633,096 ($1,181,260) SeriesAPref $46,451,835.62 Options ($2,454,716) SeriesSAFEPreferredCommonstock PreferredBasconvertedPreferredAasconvertedOptions $(1,029,828.64) $(21,626,402.13) $(17,154,986.89) $(5,149,141.95) ($1,491,476) $(0.00) Available 38

  39. StakeholderReturns $150,000,000 2/15/2020(50,000)$ 9/20/2023 57,239,027 $ Founder IRRROI 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 SAFEInvestorsIRR ROI $ 130% 16.23x Founder IRRROI 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 SeriesAInvestorsIRR ROI $ 2/15/2020(50,000)$ 9/20/2023 18,155,169 253% 17.42x SAFEInvestorsIRR ROI $ 89% 8.47x Founder IRRROI 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 SeriesBInvestorsIRR ROI 5/15/2020(150,000)$ 9/20/2023 772,371 2088% 10.58x SeriesAInvestorsIRR ROI $ 172% 9.66x SAFEInvestorsIRR 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 SeriesBInvestorsIRR ROI 1003% 6.27x SeriesAInvestorsIRR ROI 126% 6.33x 12/15/2022 $(6,000,000)$ 9/20/2023 26,521,891 SeriesBInvestorsIRR ROI 599% 4.42x 39

  40. PathForward?

  41. WhatShouldtheBoardDo? • Rejectoffer? • Engageinnegotiationtoimproveoffer? • Explorealternatives(otheracquiror?IPO?) 41

  42. ScalingInitiatives • Sales&marketing • Costdowninitiatives • Productlineexpansion • R&D,proprietaryproducts • Geographicreach • M&A • AI Theseusesofcashcreates“drag”onprofitability,sometimeoverthelongterm Quickandsteadyturntoprofitabilityisunusual,especiallyforhigh-growthpotentialbusinesses 42

  43. AnOpinion • Untappedpotentialforthebusiness • Notimetoscale • Incentivesforsomestakeholderstotakethe$whileothersmayprefertostayin • Benefitfromlongertrackrecordofexecution • Approachtonegotiation: • “Goshop”: • Seekalternativebidsfromstrategics • Seekprivateequitypartnerandstructureapartialsalethroughasecondaryandpossiblynewcapitalinvestment • Ofstrategic,aggressivevaluationask(e.g.,$150M)butflexibleontiming • /terms(e.g.,$70Mcashupfront,earnout$50Min2024,$30Min2025) 43

  44. M&AEXIT September20,2023 Tialmawww.tialma.com AlekseyKrylovhttps://alekseykrylov.com

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