LaBarge Weinstein Quarterly, Winter 2011
Tiny bubbles…as we head out into the great post-GFC unknown, it seems everyone is obsessed with the little innocent globes floating in the air like vague memories of your recent New Year’s Eve celebration.
Canada’s Bank of Canada Gov, Mark Carney, seems to be back to tending goal as in his Harvard days (fronted at the time by our defenseman partner Randy Taylor, by the way), warning Canadians not to succumb to the lure of cheap credit and suffer the hamstrung national fate of our poor economic cousins to the south. Closer to home, we hear bubb-rumblings throughout the venture sector, most notably and publicly from Union Square’s Fred Wilson, lamenting term-sheet toting investors courting the country’s hot recruits with something approaching reckless abandon.
What do we think? Certainly there’s a limo waiting for the chosen few rock stars out there, and we encourage any of you to jump in if you get the chance (they only happen once every decade or so, after all). But things are humming for those driving themselves around too, especially for clients like Protus who have modestly toiled over the last decade to arrive at a $200M exit this past December. As important, for clients like Montreal-based Anomalous Networks or Ottawa’s shopify, it seems as easy as ever to pick up the necessary passengers (angels, talent, institutional investment, etc.) on the road to a key licensing win or exit event. If we can assist you in building the foundation for celebrating your next great success, please contact any of our partners and we’d be happy to help, and to be the first ones to pop the bubbly when you get there.
Unfriending the Public Markets…
The recent announcement that Goldman Sachs closed a $1B private investment in Facebook has Wall Street (and the SEC) grumbling about the new reality of the tech industry’s sweethearts shunning the high school dance in favour of invite-only house parties (no US residents were let through the red velvet ropes for regulatory reasons) – think of the entire offering as the ultimate ‘finals club’ that Zuckerberg and his team controls in the last laugh on his former Harvard social tormentors (our partner Randy assures us he had nothing to do with it). Coupled with Twitter’s similar high-valuation deal in December among a syndicate including Kleiner Perkins, Facebook’s decision to continue to spurn retain investment has spawned both a philosophical and regulatory debate on the accessibility and transparency of a secondary market in such securities, as well as the have and have-not divide among our leading companies. On the one hand, the uneven success rate among IPO hopefuls this past year hasn’t suggested an overwhelming, unmet demand for those new offerings – Thomson Reuters reports that 121 companies aiming to raise $46B in the United States pulled plans to go public in 2010. By comparison, the combined implied market value of the top 11 private companies has increased by 52% since June 2010. As important, at least for industry darlings such as Facebook, Twitter, Zynga and Linkedin, the emergence of secondary market intermediaries such as SecondMarket and SharesPost have facilitated unprecedented liquidity for private investments – and they should continue to be relevant even If the SEC ultimately blows up those “pooled funds” organized for the limited purpose of keeping the companies’ shareholders below 500 (the magic number that would trigger public disclosure of their financial statements). Time will tell whether “ringing the bell” will again achieve its previous lustre among tech high fliers, and in the meantime if you would like our thoughts on your engagement of the public markets in this continued uncertain environment, please feel free to contact us and we would be happy to assist.
They’re coming to get you, Barbara…with cheques…
Not many of you will likely get that 60s zombie movie reference, and it would be equally easy to sleepwalk through the last few years of reasonably modest M&A activities and miss some key trends which suggest that corporate development interest might be headed toward a bubble of its own. First, just take a look at the “innovation calculus”, a phrase coined by Allegis Capital’s “Mr.No” Robert Ackerman in a recent interview with PE Hub. In 1981, he highlights, over 70% of industrial R&D in the United States took place at companies with 25,000 employees or more. That fell to just over 37% by 2005. At the same time, companies with fewer than 5,000 employees accounted for just under 40% of all employers in 2005, up from just around 10% in the early 1980s. Second, take a look at the balance sheets of some of the big buyers out there. Howard Silverblatt’s recent report on public company’s asset health notes an overall healthy market with firms holding approximately 10% of their market value in cash, with the figure for information technology companies topping out at a whopping (at least for this stat) 16%. When you factor in a climate of pretty substantial trend and usage shifting, especially among mobile technologies, it adds up to a pretty rich field for budding management teams to sow. For a deeper look at some of the recent trends and deal terms, please see Debbie Weinstein’s take on the market, and of course please contact any of our partners if we can assist you in fending off the corporate development folks looking to tear your doors down and get inside the house.
Falling on Your Liquidation Preference Sword…
Despite the buoyant M&A and investment market out there, we also recognize the continuing need for portfolio cleanup among institutional investors (think of the VenGrowth portfolio alone, recently fought over by surviving LSIF fund managers Covington Capital and GrowthWorks). As a result, we thought it worthwhile to provide some words of caution for boards of directors considering acquisition alternatives at valuations at or near the firm’s aggregate liquidation preference amounts. The Delaware Chancery Court’s decision in Re Trados, Inc. (July, 2009) provides some tough guidelines for shaping a board process, and identifying and addressing conflicts, in this challenging situation. In that case, the company’s board (which was controlled by nominees from the holders of preferred stock) approved an acquisition for $60 million, with a $7.8 million management carve-out and the balance being paid to the company’s preferred stockholders. In a motion to dismiss a post-merger action by the holders of common stock who stood to walk away with nothing, the Court confirms three things. First, there is no “obvious alignment” of the interests of common and preferred stockholders when considering a potential acquisition (in other words, it may not be enough to defend the company’s process to maximize value in connection with the acquisition). Second, where the interests of two groups of stakeholders diverge, the board may actually have a duty to prefer (or at the least, set a very high bar for ignoring) the interests of the common stockholders over those with special rights such as liquidation preferences. Finally, in such a situation, the directors nominated by the holders of preferred stock may be conflicted by virtue of a combination of the underlying nomination rights and material benefit deriving from the transaction. All in all, pretty much a minefield for Canadian venture-backed firm boards…especially in so-called “fire sale” settings or among those issuers with a ladder of liquidation preferences resulting from multiple rounds of financing. Tread carefully, and If your management team or board needs a fresh look or some help in navigating these waters as you look forward to a potential disposition in 2011, please feel free to contact any of our partners and we would be happy to assist.
Blogs & Other
After camping out for the better part of the year with the Mantella Ventures, Chango and Pushlife teams, our Toronto office has moved a few blocks east into new digs located at the First Canadian Place (check out our website for the particulars). We look forward to continuing to build on a terrific first year in the region, and to building upon our terrific beachhead among private and publicly traded tech companies in the GTA. Let us know if we can assist you in your venture in the area.
Continuing our recent newsletters’ obsession with Facebook, are you curious as to who actually owns its shares? You’ll be surprised that it has made U2’s Bono even richer, check out this link for a terrific overview (Sean Parker is officially the luckiest guy in the universe).
For our Waterloo- and other southern Ontario-based clients, the federal government is finally ramping up its angel investment “matching loan” program to support digital media ventures in those regions. While they haven’t placed any funds yet, the commitments are rumoured to be structured as unsecured, non-interest bearing loans, with pretty modest payment triggers at the time of exit. Stay tuned, and if you’d like any more information on the program and how it might complement your seed fundraising activities, please feel free to contact James Smith at firstname.lastname@example.org and he would be happy to assist. Just a hint as a teaser, be very careful before you sign that term sheet if you want to access the fund.
Lastly, for you bootstrappers out there, check out this terrific lean startup business modelling tool passed on to us from friend and client Paul Doyle, founder of Montreal-based Fabric Technologies Inc.
Here is a sample of the publicly announced transactions that our lawyers have worked on over the past several months:
- Acquisition of Protus IP Solutions by J2 Global Communications
- IMRIS US$55M US IPO and NASDAQ listing
- Peraso Technologies $8M follow on investment
- Shopify $7M Series A investment from Bessemer and FirstMark
- ZIM acquisition of assets of Torch Technologies
- Blackberry Partners investment in Anomalous Networks
Events & Calander
A sample of the LaBarge Weinstein hockey club (journeyman goaltender James Smith and rangy forward Paul Amirault) hosted and took part in a spirited couple of hours of pre-CiX pickup hockey (and after party) down in Toronto in early December, and for an account of the action, check out this link. Our lawyers can be found at startup and tech-focused public company events throughout the country over the course of the month, including the Canadian Financing Forum in Vancouver in early February. Look forward as well to a series of events featuring the head of our licensing group, Michael Morgan over the course of the winter and early spring, in each of Ottawa, Toronto and Waterloo, focusing on the practical challenges of managing your firm’s export control obligations (for Michael’s latest publication focused on ongoing open source challenges, check out the attached link). If you are looking for any other events to attend, check out the following for the winter’s networking calendar:
- OCRI Event Calendar
- Communitech Event Calendar
- TMX Group Event Calendar
- The Ottawa Network Event Calendar
- York Technology Association
- Startup North Event Calendar