With trillions in capital available, it’s a great time to be a dealmaker

Prior to 2008 and 2009, many Series A investors were acting like seed or angel investors, Hackbarth says. Now, they are sticking to their role, looking for more market validation before they come in, which leads to a healthier investment climate.

Acquihires

The capital for Central Ohio deals still primarily comes in from the coasts. But as buyers — especially those in the technology sector — snap up companies primarily for their people, the trend of acquihires is gaining ground in the Midwest, says Mark Kvamme, co-founder and partner at Drive Capital.

Mark Kvamme

First popularized when Google used acquihires to build Google Maps, the practice has long been common in Silicon Valley. With unemployment basically at zero in Silicon Valley, companies bought firms in other parts of the country to grow and fill in pieces. Today, it’s a growing trend in Ohio and around the Midwest.
“In the past, it was a lot more of a capital purchase,” Kvamme says. “But now, especially in the knowledge industries like technology, they’re really focused on how they grow and retain the existing talent in the companies.”
In July, Boston’s DataRobot bought Columbus-based Nexosis, an automated machine learning startup.
“Nexosis is only eight or nine people, but my understanding is they’re going to build a 100-person office here around Nexosis because they see that as the seed, if you will, to build a big operation here in the Midwest,” Kvamme says.
But that’s not to say all of these types of deals come from the coasts. Cincinnati’s Roadtrippers, a web-based software application and mobile app that helps travelers plan road trips, was acquired by Indiana-based Thor Industries, which manufactures and sells RVs through its subsidiary brands like Airstream, Jayco, Keystone and more.
“Who’d have thought that a motorhome manufacturing company would buy a digital mapping and technology company,” Kvamme says. “I think the folks here are realizing in order to stay up to date, they have to do that.”
It’s important to focus on the value of human capital, ensuring whatever investors do with whatever they buy retains the talent there, he says.
However, the valuation on acquihire deals can vary greatly. Kvamme says it depends on how many people the company has and what are the other assets of the company.
“In the Valley, I’ve heard terms as high as a couple million dollars per engineer, but it can be all over the place,” he says.
Richard S. Langdale, managing partner of NCT Ventures who has seen the same trend of acquihires, finds less middle ground for sellers today, especially those that aren’t high growth and data driven.
He says there’s greater bifurcation in the market between a splashy exit with great multiples and a great return for that entrepreneur, like Cover My Meds, and acquihires, which are good businesses with good direction, but typically have lower values.

Scale, syndication and shared values

Ten years ago, the venture capital industry’s statistical average for an exit was $30 million. Today, it’s $250 million.
Langdale says it takes more time and money to grow businesses for an exit — that’s the macrotrend.

Richard S. Langdale

“For companies to deploy larger and larger amounts of capital successfully, they need to make larger and larger acquisitions, and that has pushed up the valuations a little bit. But it’s more about the companies getting to more revenue, more scale, approaching bigger markets — that drives the value more,” he says.
Central Ohio venture firms are doing a better job of matching national investment terms and there’s more capital than ever, but entrepreneurs often still look outside of the region.
“You can find a local partner now to lead your deal and to be your local partner, but you still need to syndicate on a national level,” Langdale says. “And the terms that are being set here allow for a strong, healthy syndication. We’re seeing that every day now, across companies here, in the region. They’re able to get local capital and then attract national capital in a healthier way.”
Because businesses require more money to scale, they need a diverse enough set of investors with enough funds to sustain the vision.