Hard yards are crucial before a buyer calls

‘I don’t think of it as an exit; we were moving on to a different stage of investment’

There’s been quite a lot of soul-searching over the multibillion dollar sales of some of the UK’s most innovative tech companies, like Magic Pony, Skyscanner and ARM Holdings. At the same time, in the US, there has been much fanfare over the float of Snap Inc, the owner of Snapchat, and whether its success might herald a full reopening of the IPO market.

Last year I wrote about how investors looking for a quick flip would be better off finding a burger joint. Preparing a company for sale, I argued, is a long, hard journey. It’s not simply a case of throwing some cash at a company for two to three years, while a queue of willing buyers starts sniffing at the door.

At Highland Europe we have been able to achieve a number of exits in the last year – Photobox, Privalia and myOptique have all exited for a combined value in excess of $1bn (£770m). While in February, Social Point, the Spanish mobile games developer, was sold to Take Two Interactive, the US developer behind Grand Theft Auto, for up to $270m.

When founders take growth capital, they have to accept that they are en route to exit. Nevertheless, this is not a quick and easy journey.

Once Highland is involved, we like people to build as though they are going to go public. Yet fewer than 10pc of companies will actually achieve this. My reasoning is that when you put the pillars of a strong business in place potential buyers will eventually offer an appropriate price.

Kevin Cornils, chief executive of MyOptique Group, knows what I mean. We worked for eight years before MyOptique was sold to Essilor.

Kevin recalls that when the business shifted from growth to profitability, he became more a company cheerleader and salesman, which often meant meeting bankers and private equity investors. This ended up in a trade sale – but that was six years in the making.

“There is a perception that selling is a bad thing – that you are selling out – but we sold to one of the world’s largest players in our segment,” Kevin says. “We are now part of the winning team and this gives us countless advantages that we didn’t have before. I don’t think of it as an exit; we were just moving on to a different stage of investment.”

As Stan Laurent, the president and chief executive of Photobox when it was sold to private equity group Exponent, says: “Selling is a financing event rather than an exit. You are getting people excited about where the business will be in five years’ time.”

Even in a trade sale, the buyer company buys out prior investors and management but often with a retention package for executives and employees linked to the forward plan.

Preparation is everything, agrees Gajan Rajanathan, an angel investor who advised Skyscanner on its £1.43bn sale to Ctrip and Swiftkey on its sale to Microsoft. He says: “A lot can happen when preparation meets opportunity…. There are a lot of ways that you can build visibility. However, you never want to be selling when there is a need to sell.”

We are coming to an interesting time in the investment cycle in the European tech market. More capital has enabled some major fundraising rounds that have helped businesses to continue scaling on a stand-alone basis, instead of selling out too early.

Fast-growing companies have chosen to stay private longer because private investors have valued them at a premium to public valuations.

Another factor is the large amount of cash on the balance sheets of tech sector leaders such as Apple, Microsoft, Alphabet (Google), Cisco, and Oracle. They acquired more than 50 business over the last five years.

Now more money is flowing from South America and Asia. There are approximately 150 unicorns (companies valued at $1bn or more) in the world with roughly $600bn of private capital tied up. I expect that the pressure to “swap shareholders” will only grow, fuelling the IPO and M&A and private equity buy-out markets for the next three to five years. I hope that in five years we see 2017 as the beginning of one of the most prolific exit – or shareholder swap – periods in two decades.