Answer: selling your company (stock) at the right time to the right buyer. Getting an exit timing right gets some really angry with us.
TLDR: Exit options are limited as capital gets expensive. Yet, who is buying and how they are financing it tells us that options have shifted.
Numbers
A quick recap of how we ended up here. Legalcomplex started collecting companies that impact the legal industry. Our collection is broader than the companies that serve only legal professionals. We started with tracking the total amount of venture capital invested. We added mergers, acquisitions, investors, and the number of employees. Along the way, we made many friends. Apparently, we also made some rich, and influential enemies.
Those enemies reside in two camps: we don’t like how you classify our ‘legal tech’ and we don’t like you…period. We have an ongoing positive debate with the first camp. That last camp wants me to not exist. Why is all this relevant? Well, we got a reaction to our insight on successful exits by legal tech companies. By the way, I keep saying ‘we’ because I represent a community. A large yet less vocal one. One that believes in numbers, loves how we display data, and supports why we do it.
Let’s start with the numbers and, we’ll get to the anger. We started looking at who, and how behind acquisitions. Here’s what we found:
- 901 in deals where 892 were unique and 16 changed hands more than once;
- $59.1 Billion paid out to targets (adjusted for inflation);
- 11.9 average age in years.
This is our third analysis on exits, and I recommend checking The Study section for the one we did with Law360. This new analysis will highlight the backdrop of acquisitions.
Narrative
Why the anger? There is no free money, so it is a lousy time in tech to look for an exit. Who’s looking? Founders and their investors. One is chill. The other one, not so much. Why? Well, big payoffs are off the table for the moment. Investors overloaded unprofitable companies with capital. Now, the people backing investors want their cash back. Why? An economy in recession is going to incinerate wealth. Specifically, the wealth created when banks gave near-zero interest-rate loans also known as free cash. This wealth was never supposed to exist.
Where did that free money go? If you were good at spreading dopamine, you could get a lot of free dollars. In general, that isn’t a bad thing if one of these bets pays off big. But here’s the problem: big payoffs happened in a bubble of excess capital. That bubble popped after 2021. As energy costs keep rising, people will be spending less. This drives down demand for all goods and services. All companies eventually suffer because there is little growth. Yes, everyone, including those that operate in the legal industry. Some will suffer less and, it depends on which area of legal you operate. There are still areas of brittle growth.
What do the numbers tell us? We can pick several angles to find growth. In the video, we see the popular areas. Another angle can be revenue, but let’s not get greedy. Let’s pick the average age of an exit after the company started. For geeks: the median age is 11.6 years. Now guess which type of companies lie below this median? Has the age increased or decreased over time compared to the average? Bottom line: what (type of) company will earn you a big and fast return? One which operates in areas with naturally fast growth.
Names
It is our policy to be careful using names. We have empathy for those who build a business because it is really hard. Bootstrapping one is even harder. But bootstrap gives a bigger return to founders. Venture Capital (VC) backed companies offer a faster return. VC ventures artificially power growth, while bootstrap relies on organic growth. Now that growth is scarce, we see how VCs act when they’re off their medication called cheap capital.
Enter Private Equity (PE) firms that offer early retirement to founders. Specifically bootstrapped ones because they show evidence of organic growth. Of course, there are clever companies bargain-hunting for attractive tech and talent. All this pushes VC big payoffs further into the future as founders opt out early. So what options do companies have? Here are the possible exits, we have seen in no particular order:
- IPO
- SPAC
- Acquisition by a Public Company
- Acquisition by a Private Company or Law Firm
- Acquisition by VC-backed Company
- Acquisition by PE
- Acquisition by PE-backed Company
- Merger
Each option has a fingerprint that reveals what made the exit happen. And the smoking gun is how they actually pay for a purchase. We reported that acquisitions by private companies or law firms, usually do not disclose the transaction sum. One reason is that it’s a bargain buy of tech and talent. Another is that buying a revenue-generating company is really expensive. Blame this fact on all the fake capital floating in our economy. It caused to inflate the value of companies. An inflated value calculated from expected exponential growth. Exponential growth, calculated using artificial growth.
Now
So are big exits impossible? Nothing is impossible, the question is big, for whom? Using the above framework, we’ve seen which exit happens more often. Which exit has the highest outcome? We can also track who is likely to acquire, looking to get acquired, or merge. In reality, few businesses are able to finance an acquisition from their balance sheet. That’s why we recently noticed a shift in two directions: where capital is coming from and where it is ending up. Ultimately, companies with low operational and capital expenses now get some breathing room. A room with fewer dope dollars and artificial growth. The space where we can spot true organic value.
Because we smell the burn from miles away, we can more accurately calculate the distance to the fire. Even though the reaction was needlessly vicious and inaccurate, we empathize with the anger. We do it out of love.
Editorial note
Usually, we load our analysis with hyperlinks to additional information.
This analysis has only one link.
Almost forgot:
The video above contains 1241 easter eggs.
One is about the future of our company and one is about the Marvel Universe. The other eggs tell the story of every single company that raised a disclosed amount of capital.
Stories made possible by true love.