In July 2022, Grata hosted a webinar on the topic of getting deals done in an economic downturn.
To kick off the conversation Nevin Raj, COO and Co-founder of Grata set the tone: “We're not here to make predictions. We're not here to talk doom. We're here to talk about solutions and how deals are actually getting done in 2022.”
The macroeconomic factors can be found in daily headlines, but what often gets overlooked is the opportunity for dealmakers. Four major trends impacting dealmakers, specifically in the middle market are:
The panelists Arra Malekzadeh, Partner at Craft Ventures, and Reed Phillips, CEO of Oaklins DeSilva + Phillips, shared their expertise from a growth/venture capital perspective (Craft Ventures) and middle market investing (Oaklins D+P).
Craft Ventures invests in early to growth stage SAAS companies. Malekzadeh started her career at JP Morgan in investment banking, was the head of operations and strategy at a venture-backed startup called BuildZoom, and has been with Craft for the past three years.
Oaklins DeSilva + Phillips specializes in certain segments within investment banking including media, marketing, information businesses, and recently, software and technology. Phillips started the firm in 1996 which has grown to a team of 25 full-time people and is a part of an international organization called Oaklins.
Arra Malekzadeh: The first big obvious elephant in the room is that valuations have come down. More importantly, you've seen investors take their time with diligence. I've seen processes be, in general, less rushed. Investors are paying more attention to things like unit economics and really scrutinizing the health of the business and the quality of the customers. Paying attention to things such as burn multiple.
Arra Malekzadeh: Honestly, I'd say my general perspective on investing hasn't changed. We're always looking for the best companies and always believe that great, breakout companies can be formed in recessions and can thrive in recessions. I'm always looking for products and companies that are painkillers, not vitamins – tools who for their customers are a need to have not a nice to have. So I'd say from a general Craft perspective, we've always metrics-focused versus narrative focus. We're looking for proof points. So I'd say in general, that hasn't changed this year.
Reed Phillips: I've been an investment banker for more than 30 years. I've been through a number of downturns. Typically, when there's a downturn, It takes six to eight months to be fully felt by middle market M&A. That's what we're seeing right now.
Reed Phillips: One of the deals we just closed recently was the sale of Advertising Week to Emerald Holding. We found that coming out of COVID, (well, I should say hopefully coming out of COVID), that buyers were becoming more active and more deals were getting done.
A lot of companies were approached by buyers and that was the case with Advertising Week. They were approached by Emerald who was very interested in acquiring and when we were hired Advertising Week already had a buyer at the table ready to discuss a potential purchase price.
So when we were brought in it wasn't to scan the marketplace and talk to a hundred different buyers, it was to focus on getting a deal done with Emerald and really vetting the buyer to make sure that they could bring the capabilities to Advertising Week that they were looking for in a partner.
Their objective wasn't to sell 100% of the company today, it was to sell part of the company, and for the owners to continue to be rewarded over the next few years by the growth of the show. They felt there was a lot of growth potential with regional events, international events, and they've embarked on a strategy of providing content and learning experiences for their audience. So all those were growth initiatives and they wanted a partner to buy-in and commit to funding those so that the business can become much larger in the next 3-5 years.
Nevin Raj: That's interesting. And the theme I'm hearing is this is all about the long term mindset. It's going to be not just 1 year, not just 2 years, it's going to be 3, 5, or 10 years. And therefore aligning incentives to that mindset is what helps you clear a deal between buyers and sellers.
Arra Malekzadeh: Getting to know companies and founders earlier. I'd say when I'm speaking to companies, I'm not necessarily looking for immediate gratification with the deal. Sometimes it takes a couple rounds for it to be the right timing for both parties to work together. Deal making in venture markets is as much art as it is science.
Reed Phillips: The thing that I am seeing that's changed since the beginning of COVID is that we're finding buyers to be more aggressive in approaching potential sellers. In the past, maybe they waited for investment bankers to bring them opportunities, but now they're going out and aggressively talking to companies. It's pretty rare right now when we take on a new assignment that our client doesn't say, ‘I've already been approached by five buyers in the last six months.’ We're still seeing buyers actively knocking on the doors of sellers and saying, can we have a conversation?
Reed Phillips: You want to try to differentiate your firm and your capabilities from the other investment banks that are pitching for the deal. The way we typically do it at our firm is all of us are former operators before we became investment bankers. So for the most part, my colleagues have a deep understanding in the industries that we're in. They know a lot of the people in the industry already, and they know how the businesses work. That's very comforting for entrepreneurs who have started businesses– we really understand what they're doing and appreciate what they're doing.
Arra Malekzadeh: I think it certainly helps to be able to empathize with founders that we're talking to, but it also helps develop a deeper understanding of the day-to-day operations and what happens at startups. We are better able to advise them and better relate to them and the other teammates. In addition, I think some things we like to do is put out a lot of content and democratize access to information around what we're looking for: tools that companies can use to track their own metrics.
One example is we have this tool called SAAS grid and we basically productize the SAAS metrics that we run on every company that we look at. So we are putting out this type of information, as well as getting on these webinars and social media platforms and talking about advice for founders. I think it really helps us stay top of mind and develop that trust and relationship even before a deal's, um, about to be done.
Arra Malekzadeh: Having a thesis–areas where you focus as a fund or as an individual–really allows you to spend your time in a more focused way.
Rather than trying to boil the whole ocean or reach out to every startup in the universe, it helps if you're focusing on a particular area. Also for me, I know I learned so much just by talking to founders in a given area day-to-day. So I’m constantly accumulating knowledge at a high level that helps to see trends. This helps us win deals.
Founders want to be in a portfolio of other like-minded founders. It's not just about the relationships between investor and founder, but also the relationships founder the founder underneath the Craft hood.
Reed Phillips: Most private equity firms are becoming more and more specialized.
That's actually a good thing for us because it's easier for us to then target the right private equity firms with the companies that we're selling. If the firms were more generalists, then we would go to firms and they would say, ‘That's not for us. It's not in our sweet spot.” But now we pretty much know exactly what the sweet spot is because so many of the private equity firms have moved towards becoming more specialized.
I was just speaking with a private equity investor and he was extremely focused on a couple of different markets and felt that that gave them a big advantage closing deals because they know the space really well, and they can move faster than their counterparts.
Grata is a deal sourcing platform that helps dealmakers unleash the true potential of the middle market with smarter search, relevant intelligence, and automated technology. With access to the right data at the right time, firms that leverage Grata uncover new investment opportunities, fill their pipeline with promising companies, and unlock the middle market. Sign up for a demo today.