In my 15+ years of Investment Banking, face to face meetings (“F2F”) have been a key and necessary step for both M&A and Investment transactions. Covid-19 has necessitated a change around F2F meetings due to safety concerns.
Q2,2020 saw the full impact of the Pandemic on transaction activity. We saw a steep decline in global software M&A activity in Q2 2020; a drop of 43% in deal volume from Q2 2019 per White & Case. VC Investments also dropped by 30% in the same period.
There were a number of reasons for the decline including:
- In recent history, businesses have not seen disruption of this nature. Businesses were caught flat-footed and were focused on fire-fighting mode with some of the primary concerns being around employee safety and maintaining productivity while working from home (“WFH”). Collaboration and security tools were quickly leveraged and now businesses, especially “office workers”, have acclimatized to WFH. During Q2, 2020 given the disruption a lot of businesses scaled back from M&A.
- Investors went full-gear into portfolio preservation mode focusing on ensuring their portfolio companies had 12–18 months of cash runway to weather the storm and in the event they did not, they were quick to rationalize the business. This led to them being less focused on making new investments, particularly earlier stage companies where business models were not proven.
A good portion of buyers and investors were not sure about how they could do M&A or Investments if F2F meetings were not possible. However, M&A and Investments still happened for companies in sectors which were COVID-19 beneficiaries or mission-critical. Some of the sectors which were positively impacted are listed below and these sectors were relatively active compared to the broader segment.
We were fortunate to have had clients providing mission-critical technologies, and as a result, were able to close transactions 100% virtually. Below are some takeaways from our deals and also from our conversations with GP’s at VC and PE funds about closing deals virtually during COVID-19.
The bar for transactions is higher as buyers and their respective Boards manage the fallout from COVID-19. As a company, if you are benefitting from the Pandemic or seeing an uptick and the Buyer is doing well in the Pandemic it helps tremendously.
Transactions are slowing down due to distractions and the inability to meet in person. F2F is particularly important for new prospects, where there is no prior relationship, in the case of our transaction the buyer made an exception as their significant need for our client’s product offerings accelerating their roadmap superseded their desire for F2F meeting and they felt digital interactions would suffice.
Our client offered to fly to meet the buyer F2F but luckily the buyer declined for company mandated safety reasons and offered to do every aspect of the M&A virtually. This included the kick-off meeting for half-day which covered various aspects of the business presented by our client team. Deep-dive into Technology was covered in separate calls and also involved sending source code to a third party for open-source scans and having the buyers team spend a lot of time interacting with the technical teams virtually. All aspects of the business (customers, financials, HR matters, and other matters) were covered into smaller groups of meetings virtually. An important benefit of doing this transaction virtually was there was tremendous amount of time saved not having travel-related logistics. In addition, we had daily calls with the buyer checking in on open items and we were able to close the transaction successfully in short order.
Below are some good practices to keep in mind to ensure the process goes smoothly.
I spoke with a General Partner (GP) of a Billion dollar fund who recently completed a majority investment in a company they never met during the process. They had spoken to the company for a while and were planning to set up an in-person meeting for the first time but given COVID-19, decided to replace it with virtual meetings. The GP told me they got comfortable in doing the negotiations and diligence virtually and felt this was an opportunity they did not want to miss over needing to do a F2F meeting. Also, another fund which is doing a majority investment on a deal did over 95% of the deal virtually and in the final stages took a one-day on-site meeting as their Limited Partner (LP) Agreements required them to visit the site of the company they invest in. Needless to say per both sides it was stressful but they managed it well and broke the team into small groups and managed social distancing with masks.
A seed-stage VC where a lot of the investment thesis is around the founding team, their conviction and their vision and less around the commercial traction making F2F meeting even more important is asking the companies to meet them outside for a walk being socially distant but also using this as a way to get to know each other. They are then continuing the rest of their investment work virtually and electronically.
In addition, talking to other investors, they will do so as long as there is some level of trust. This can be built if they have met with the company before, or if the deal came through someone they trust. Building trust with investors and the ability to execute during COVID-19 will make it much more likely that your deal will close 100% virtually successfully.
Going forward into the future quarters of 2020
Clarity on Revenue and Outlook will help:
Now that businesses are operating like this is the new normal and PE / VC firms have largely gotten their portfolio issues in control, we expect that M&A and Investments will increase and a lot more deals to happen virtually. It is important to keep in mind that now buyers and investors will expect you have seamlessly adjusted to WFH. They will also expect that after an initial dip in activities and bookings, beginning with the end of Q2, 2020 and continuing into Q3, 2020 outlooks are less impaired than originally thought and will now closely evaluate your new pipeline and check closely to see if they are progressing like normal or even faster.
Effective Video Conferences (VC):
A key benefit of F2F meetings is the ability to develop trust, pick up nuances, monitor facial expressions, resonance and chemistry on the interactions and opportunity to have sidebar meetings and conversations. The current set of video collaboration tools do not fully enable this and we expect that over time there will be more innovation in this area. There are tons of resources available online to ensure how you can make the best of VC. We would encourage getting these techniques pat as part of your deal-making process. Just as a good in-person meeting can be effective in moving the deal forward being cognizant of good techniques on VC will help. Some of the basics include keeping your background “clutter-free” and if needed a lot of VC providers have elegant backgrounds, appropriate lightning, and suggestions on facing the camera at the right angle. Also important to keep your VC on during meetings so buyers and investors can see you visually and important to take the VC in a quiet spot.
We wish the best of luck in closing your transaction 100% virtually!
Gaurav Bhasin is Managing Director with Allied Advisers, a global technology-focused boutique advisory firm headquartered in Silicon Valley (with presence in Los Angeles, Tel Aviv, and Mumbai) focused on Investment Banking for Entrepreneurs and Investors.