Just because there’s a pandemic, doesn’t mean companies can’t raise equity. But for those companies looking to fight through a challenging time to tap into private equity (PE) investment dollars or pursue an IPO, a little creativity, a bit of experience and a forward-looking vision can go a long way.
Those were the takeaways of a recent Oracle NetSuite Business Forward discussion with venture capitalist Deborah Farrington, co-founder and managing partner of StarVest Partners, which backed NetSuite early and helped take it public in 2007.
Farrington had a portfolio company that was set to sell an 80% stake to a private equity firm in February, but the first stages of the pandemic killed the deal. Rather than give up, the company decided to focus on its future, zero in on its work and continue to generate value. A few months later, the private equity firm came back with a compelling offer for 51% of the company instead.
“Deals are being done creatively,” Farrington said.
Still, Farrington said there’s no question that there’s a lot more uncertainty than there was six months ago, especially when it comes to exit strategies. Not knowing when or if a big payday will come has private equity investors taking a more cautious approach.
Wanted: Fast Data
What does that mean for CFOs and finance teams who are searching for equity?
“Getting data faster than ever could not be more important and having a pulse on liquidity could not be more important,” Farrington said.
She also stressed the increased importance of scenario planning, especially as the specter of a second wave of the pandemic looms.
Given this combination of needs — fast access to accurate data for the purposes of scenario planning and determining liquidity — Farrington said companies running on NetSuite are better able to deliver the information PE investors need to feel comfortable backing them.
Much of Farrington’s perspective points back to her own COVID-19-era investment philosophy, which isn’t all that different than her typical approach.
For instance, “anything that is faster-better-cheaper generally deserves a look,” she said.
She also looks for companies that have referenceable customers, as well as founders who possess not only a combination of experience and passion, but who take in others’ views. Ultimately, her investment decisions often come down to who has the best distribution, and whose solution integrates most seamlessly with other solutions.
For instance, she’s particularly interested in human capital management solutions that attempt to look ahead and consider problems that workers will eventually confront. She’s also looking to invest in solutions that apply data analytics to improve the work experience.
“We have to be ready for the next pandemic,” Farrington said. “I like to see people who are thinking about problems in that fashion.”
Buoying Boards With Diversity
Given that she sits on the boards of 10 entities across the public, private and academic sectors, it’s not surprising that Farrington places a lot of stock in who sits on the boards of her portfolio companies. And she fully understands that boards evolve with the companies they oversee.
When she worked with NetSuite on its IPO, there was a desire to choose board members who would be willing to stand up to and argue with management. But while that might have been desirable then, she now looks for more collaborative boards, preferably with varied backgrounds.
Individually, she’s likes seeing board members who posses key expertise in critical or emerging areas, or who can articulate opinions effectively.
But, in keeping with the times, the single most important characteristic she said PE investors are looking for in boards is diversity. Farrington said she used to be opposed to policies dictating diversity, but now she thinks it’s become important, especially as state and city pension funds require more diversity among their PE investments.
It’s taken a while for this to become a focus in Silicon Valley, but Farrington said the time has arrived.
“I’m pleased to see it’s finally taking hold,” she said.
But progress in one area isn’t enough, and Farrington advises companies to be purposeful in building a diverse board and management team.
“Look for people who might not be who you would have interviewed a few years ago,” she said.
Consider a Special Purpose Acquisition Company IPO
Farrington also suggested taking that outside-the-box perspective to a company’s equity strategy. While many companies tap private equity as a launching pad to an IPO, Farrington stressed the option of a Special Purpose Acquisition Company (or SPAC) IPOs as an alternative to traditional IPOs, especially in a tough IPO market that’s not expected to bounce back any time soon.
“It’s a much easier and faster way for a company to go public,” she said.
To do a SPAC IPO, a company must eye a particular acquisition that it can make happen within 24 months and convince investors to back the deal. SPAC IPOs typically fall in the range of $300 million to $500 million, unfold in 10 to 12 weeks (instead of six to 12 months), cost about 5.5% (instead of about 7%) in direct expenses and indirect costs, and require far less bureaucratic hoop-jumping than an IPO does.
Perhaps best of all, they’re somewhat immune to a pandemic. All that really matters is the logic and value of the proposed acquisition.
“IPOs are dependent upon market conditions at the time,” said Farrington. “SPAC IPOs allow companies to control timing.”
And if there’s one thing companies can use about now, it’s a little bit of control.