In my 15+ years of investment banking, face-to-face meetings have been a key and necessary step for both M&A and investment transactions. COVID-19 has necessitated a change around face-to-face 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 flatfooted 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 face-to-face meetings were not possible. However, M&A and investments still happened for companies in sectors that were COVID-19 beneficiaries or mission-critical. Some of the sectors that 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 general partners 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 and/or are 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. Face-to-face is particularly important for new prospects, where there is no prior relationship. In the case of one of our transactions, the buyer made an exception, as their significant need for our client’s product offerings accelerating their roadmap superseded their desire for face-to-face meetings, and they felt digital interactions would suffice.
Our client offered to fly to meet the buyer face-to-face, 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 a half-day, which covered various aspects of the business presented by our client team.
The 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 buyer’s team spend a lot of time interacting with the technical teams virtually. All aspects of the business (i.e., customers, financials, HR matters, and other matters) were covered into smaller groups of meetings virtually.
An important benefit of doing this transaction virtually was that there was a tremendous amount of time saved from not having to deal with 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.
How to Create a Frictionless Process During the Pandemic
- Provide thorough information throughout the process (i.e., marketing materials, data room).
- Set up team members with conferencing abilities and ensure comfort with video calls.
- Engage with and monitor acquirer/investor interest and reactions very closely; this is a bit harder in video calls.
- Keep business momentum ongoing (“If you build it, they will come”) and supplement with adequate PR.
An Investor’s Perspective
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 doing the negotiations and diligence virtually and felt this was an opportunity they did not want to miss over needing to do a face-to-face 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, for both sides, it was stressful, but they managed it well, broke the team into small groups, and managed social distancing with masks.
In another case, a seed-stage VC where a lot of the investment thesis is around their founding team, making face-to-face meetings was even more important. Instead, they’ve been asking companies to meet them outside for a socially distant walk, while 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.
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.
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Going Forward into the Future
Clarity on Revenue and Outlook Will Help:
Now that businesses are operating like this as the new normal and that PE and VC firms have largely gotten their portfolio issues in control, we expect that M&A and investments will increase and a lot more deals will happen virtually.
It is important to keep in mind that now buyers and investors will expect you to have seamlessly adjusted to WFH. They will also expect that after an initial dip in activities and bookings, 2021 outlooks are less impaired than originally thought. Buyers and investors will now closely evaluate your new pipeline and check to see if they are progressing like normal or even faster.
Effective Video Conferences:
A key benefit of face-to-face meetings is the ability to develop trust, pick up nuances, monitor facial expressions, resonance, and chemistry on the interactions and the 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 video conferencing. 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 video conferencing will help. Some of the basics include keeping your background “clutter-free,” and if needed, a lot of video conferencing providers have elegant backgrounds, appropriate lightning, and suggestions on facing the camera at the right angle. It’s also important to keep your camera on during meetings, so buyers and investors can see you visually, and don’t forget to take the video conference in a quiet spot.
Illustration by Christy Lundy