When Wisr exited North Coast Ventures' portfolio last year, it interestingly was bought as part of a private equity sponsored acquisition.
"That's certainly something we're seeing more of," says North Coast Ventures Managing Director Todd Federman. "In that particular case, it was a Vista (Equity Partners)-backed company, so you're working with an acquirer that has the muscle memory for doing acquisitions every day. And on some hand you have to be careful because the dealer knows how to play poker very well and you have to ensure that we have our team and our focus and our plan, but on the other your odds of getting the deal done go way up when you're dealing with a super professional team that does this all the time."
There has been a trend in the broader market of PE firms making more downstream investments, which has introduced more competition at that level. Federman says he's seeing private equity and hedge funds making such moves, mostly because there's a lot of money in the market and that puts pressure on everyone.
"That said, private equity is still such a different animal than venture," he says. "The risk orientation is not there. Most of the PE firms we talk to and deal with are still looking for companies of a certain profile, a certain level of maturity. They're not going to do seed deals."
He says most private equity funds that his firm engages with are not feeling the pressure that growth equity or hedge is feeling, where they've got to reserve something for later. PE needs to get a foot in the door, so they're willing to be part of a several million dollar seed round.
This, however, isn't happening much in the Midwest. But on the coasts, where there are more proven teams or relationships with people who've had multiple exits, are seeing that. The biggest difference for North Coast Ventures is seeing more private equity interested in B2B SaaS as potential acquirers, either to own or drive a company, or to plug it into a platform.
"That's really been a big change for us over the past several years," he says. "Whereas previously we might have expected 90 percent of the exits to be to a true strategic, now it could be almost half where there's a potential private equity in play. We've seen that a couple times just as companies are going through processes and we're talking to bankers, and I think it's something they're all seeing too because in the decks that we're getting, there are so many private equity-backed companies that are viewed as viable acquirers. It's exciting to see."
Federman spoke at last year's Cleveland Smart Business Dealmakers Conference about the deal year for early-stage companies, as well as the trends he's seeing on that end of the M&A spectrum. Hit play on the video above to catch the full conversation.
Todd Federman is one of more than 50 dealmakers on the host committee helping to plan this year’s Cleveland Smart Business Dealmakers Conference.
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