In May 2024 I participated in an M&A seminar where I also gave a short presentation with the topic Investor and board actions and expectations in the acquisition. After the presentation I was requested whether I could write a blog post on these topics, especially on the market sentiment. I thought this was a brilliant idea as I had just stated that, even though the M&A market has been slow during 2022 and 2023, the first quarter in 2024 raised optimism as we started to see big tech company acquisitions in the US and there is more than 3.2 trillion USD of investors’ money in portfolio companies where the goal is to make an exit in the near future. And earlier, when the M&A market in the US opened a bit later the same has happened in the UK and then in Scandinavia.
The year 2024 went by, I participated in some M&A transactions and was following the market data but somehow this requested blog post did not start to materialize. At 5 am on the first day of January 2025 I thought that what could be the better time to wrap up some thoughts regarding the M&A market of 2024 and predict the outlook for 2025. As a middle-aged early riser, I was not finalizing my New Year’s party at this time but was up for the new day and started writing, from my own micro-level perspective.
M&A deep freeze melting
I had grown hope for the M&A activity of 2024 during the two previous slow years, when some M&A processes had been started and then dried up or failed entirely, some smaller deals went though and share swaps without cash consideration became too familiar. I have reasonable viewpoint to the Finnish M&A market via our funds with about 50 active deep tech and hard tech portfolio companies in different development stages, personal investments into few early-stage service companies and the advisor role of some M&A professionals who do M&A transactions constantly. During my career I have been involved in about 100 M&A processes, from gigantic ones like Nokia-Siemens merger to small ones like sale of my own stake in the sales-promotion-event company to a media company, and everything in between.
With our funds we had a triumphant exit year in 2021 when we closed half-a-dozen positive exits. But, as quickly as it had started it also ended. During 2022 and 2023 when interest rates rocketed and war in Ukraine created general uncertainty to the market, we were receiving some earnouts and escrow releases from previous exits, cleaned the portfolio with few anti-embarrassment deals and made two share swaps in which the results have not yet been great at all. Though, these still might turn out to be decent ones.
Now, on first half of 2024 we had made the first cash exit for two years with good multiples and at the same time one of my personal service company investments had been acquired by the PE fund in their buy-and-build operation and other sold to the Finnish large cap company. These exits added with the sale of a Finnish software company to the Fortune 500 company, where I was advising the deal maker, made me think that when it rains, it pours.
Then the biggest AI company exit in Europe took place – Silo AI was acquired by AMD in July 2024. I had only a spectator role in this transaction, as I know three out of four Silo AI’s founders and work with some of them constantly, but what an enthusiastic spectator I was. Being genuinely happy for the Silo AI team of this great exit, I was a bit surprised as one of the founders was not excited at all of the deal despite just receiving tens of millions to his bank account.
After all this, the second half of 2024 seemed inevitably to be an exit-extravaganza. And then, nothing. IPO market was still in deep freeze and, even though, some M&A service providers were seeing more activity in their virtual data room platforms than ever and smaller M&A deals went though, the pouring had not started after the rain. As I wrote earlier, VC business requires patience, but c’mon. Our first closed-end fund reached its 12th anniversary – congratulations – and fund investors in general have started to wonder is this best performing investment class broken. So there are indeed some investor expectations towards exits! Luckily, we saw a few big investment rounds right at the end of 2024 but now I am more interested in exits, as both types of transactions are needed to keep the show going on.
Preparing for the sale – Aligning interests
It is often said that good companies are bought not sold. Bull***t. Some really great companies might be bought not sold – as happened with Silo AI, I have been told – but most of the great companies and all good ones must be sold if you fancy an exit. Bad companies go bankrupt, so no buying or selling there.
As the M&A market is now melting from its deep freeze but still stiff from the cold and there is a need for exits, one needs to roll up sleeves and go to work. So, what actions can be taken to cultivate sales, i.e., exits?
Because closed-end funds – like us – have a fixed lifespan (usually 12 (10 + 1 + 1) years) and high return requirements, we need to assess also the exit opportunity when considering a new investment from our funds, despite the potential exit taking place in distant future and many things can change before that. For this assessment we have scoring tools and exit positioning matrix, we analyse what kinds of deals in this sector have been made and how do we see the market, trends and sentiment developing during our ownership period. As one cannot know the future, we prepare ourselves for different scenarios, revisit these during the coming years and commence exit discussions with the founders a few years before the actual exit process takes place.
Even though everyone involved with early-stage companies should focus on building a great company and not thinking of the exit too much too early, aligning exit targets with the portfolio company founders is more important than exit analysis made before the investment. We might have a right to trigger the exit and drag other owners along but in practice very few early-stage or growth stage companies are sold without founders accepting and promoting the deal.
We lightly stress this exit topic with the founders before the investment but once the seed stage company has matured and we start to understand better its market, position and exit potential, it is time to have a direct discussion with the founders on the exit targets of each party, what potential exit could look like and what is an acceptable end-result. These discussions have turned out to be appreciated by the founders and make our life much easier and once they are started it is valuable to keep up the discussion to stay on top of the topic. But we cannot turn the market if it is against the exit, even though we would have a lovely agreement with founders on how to make the exit.
When you don’t have the time pressure generated by the lifetime of a closed-end fund, you don’t have to worry about the exit so much. As the early-stage investments are more or less investments into the founder team, you can then focus on allocating the capital into right companies and supporting founders and entrepreneurs in their challenging tasks and not stressing the sale of the company. Business angels and investors operating without fund structure have this advantage compared to closed-end funds. Evergreen funds also do not have a set date when the investments of the fund need to be sold. However, I am not a great supporter of evergreen funds (seen those close), as those may offer an unwanted comfort zone for fund managers without the need to hunt returns for their fund investors.
Founders start the journey usually before investors join the company, and when the founders have spent seven to ten years with their company, turning the idea into real business, hunger for an exit usually comes from the founders. Same founders might have had entirely different thoughts some years earlier and during the first investment some founders are afraid that investors want to sell the company too early, which is very rarely the case. If investors, who have entered the case later than the founders, wish the founders to carry on year after year, it is important to offer the founders the possibility to cash a bit sometime during the run. I call this domestic peace funds for founders.
Finding the buyer and running the M&A process – Advisors
Sometimes owners want to do so called early (tech) exit. The company has developed a sellable product / solution / service and usually has some revenue, but the business is still in its prime. For deep tech companies these early tech exits may happen several years after the inception, so “early” does not refer to years spent but development stage of the company. Often in these early (tech) exits the buyer is a customer or business partner of the company or PE fund doing buy-and-build and the deal is initiated by the founders, who are in contact with customers and business partners.
In addition, early (tech) exit process is usually led internally by founders and investors. Sometimes an investment banker kind of advisor is assigned but their value compared to price is small when the exit is built on existing relationships. When we need to find a buyer or more potential bidders for an early (tech) exit, then investment bankers can be worth the price if they have relevant and real networks and contacts in the domain. Bigger service providers, investment banks or law firms, are not even interested in these smaller early (tech) exits nor can their fees be justified, but there are very good advisor alternatives available for smaller M&A deals if you need them and know the market.
For the exits of more mature companies, whose business is already growing, or bigger investment rounds have been made to the company, investment bankers can be more valuable. Again, their main contribution should be to find buyers or bidders. Investment bankers, with retainer and success fees, providing general process management only and not actually finding buyers or bidders can be expensive support. Many investors can provide this kind of general support and, anyway, lawyers are needed to run the actual transaction. The sales argument often heard is that in any case investment bankers can get better prices, but in my experience this is debatable.
Anyway, worst thing you can do is to use too much of founders’ time and capacity on the M&A process when their valuable time is needed to run the business. It is not unheard of that M&A processes fail and if the company has neglected focusing on its business during the failed M&A process, the result can be devastating.
In case the exit is made through IPO, certified advisors are needed to fulfil all requirements of stock exchange, and the process cannot be run only internally.
Land ahoy!
Not sure about exit-extravaganza but more players will place their bets during 2025. Even though there are growing geopolitical uncertainties, we have seen interest rates coming down, growing interest towards IPOs, still loads of investors’ money bound into companies that are ready for the exit and the new US regime might be more an opportunity than threat with this respect.
On micro-level, we have currently few exit processes ongoing, and I know my colleagues in other funds have similar things on their table, and there seems to be some interest on the buyer side. Some growth companies have implemented M&A strategies to accelerate their growth, and I am sure we will also see some nice IPOs even in Finland, which has worst performing stock market in Europe at the moment.
As I was surprised by the unenthusiastic mood of a Silo AI founder after they had closed the big exit, I started thinking that the biggest exits seem to be made by the founders and investors who are not interested in selling their investments. So, as we all want to have the best outcome and reward for the founders, and some decent returns for the investors as well, let’s not rush if the company or market is not ready. Instead, let’s do as rock stars from Down Under advised: “Keep a stiff upper lip.” Maybe not shooting from the hip but pushing towards in a disciplined manner and it will start pouring.
– Ville Heikkinen
Writer is the co-founder of Butterfly Ventures