How to help portcos prepare for M&A

Venture capital success is directly tied to that of your portfolio companies (portcos). Investors play an essential role in helping founders and portcos navigate market dynamics while making growth and exit strategy decisions that best align with their vision. 

In this article, we’ll explore how VCs can use data and their network to support portcos as they prepare for and explore mergers and acquisitions (M&A) opportunities.

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Key takeaways

• Nurturing strong relationships with business partners in M&A sets portcos up for future deal success.
• Helping portcos understand the differences between M&A and fundraising can better prepare them for the M&A process, including building pitches and preparing due diligence materials.
• Relationship intelligence and analytics tools, like Affinity, help VCs better support portcos so they can go on to raise future rounds or achieve a successful exit.

Strengthening relationships with M&A partners

The value of your network as a VC goes far beyond sourcing opportunities and securing limited partners (LPs). Who you know can also give your portcos a leg up when it comes to building their companies and deciding on an exit strategy. 

By developing relationships with investment bankers and M&A partners, you can help connect portcos with the best exit opportunities—whether that’s finding strategic buyers or keeping a pulse on the current selling climate. Often, those relationships already exist within your firm’s collective network. It comes down to being able to unlock the right introductions. 

The Portfolio Growth team at Sapphire Ventures uses Affinity to surface the right connections for every situation.

"We're able to identify if someone within our organization—and it may even be the most junior person—is connected to a very senior leader at a company,” shares Charles Guo, VP of Business Development. “That's how we're able to leverage Affinity for the discovery of our network and to try making introductions or setting up advisory sessions with different parties."

With modern technology able to harness communications data, nurturing and maintaining strategic relationships is easier than it has been in the past. CRMs, like Affinity, use relationship intelligence to identify your strongest relationships and help you maintain real-time, actionable insights on the ones that are most important, so no relationship goes cold.

This is important when effective M&A requires you to build relationships long before a transaction takes place. Relationships with M&A partners and deal management teams can be mutually beneficial. Bankers can turn to you to understand early-stage growth trends and how to build strategies for future buyers as more companies become available. And M&A partners can offer better insight into the buyer landscape. 

Take the time to create value for your partners and foster relationships that encourage insight and information sharing. Keeping relationships and connections your company has with different firms up-to-date means you’ll also know what those firms specialize in and who you can call. And when an opportunity arises in their M&A pipeline, you'll be among the first VCs they think of.

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Telling the right story: M&A vs. fundraising

Facing uncertain IPO markets, founders are increasingly considering different opportunities for their ventures—whether that’s follow-on fundraising or a sale. While they’re two sides of the same coin, the paths are drastically different and each path also requires portcos to craft different narratives in order to be successful.

The story that your portcos need to tell to potential buyers may be different from the story they tell to potential VCs. Investors tend to focus on the strengths of the team and people behind a company, whereas buyers might be more interested in product-market fit, profitability, and financial optimization, or how easily the company’s value can integrate into their current processes and teams. 

Woodside Capital Partners provides M&A and capital raising financial advisory services and uses Affinity to sync all emails and events to visualize their relationship with potential buyers in their network.

“[Without that central repository], we don’t know where to focus resources and it’s hard to imagine operating without it,” shares Rudy Burger, Founder and Managing Partner. 

Reports are shared with companies directly, so they understand exactly who might be interested in an acquisition and who may have passed to better understand what gaps might exist. Automated reporting has saved Woodside 40-60 hours a week, so they can focus on adding value for clients and companies elsewhere. 

Affinity Analytics and Industry Insights can also help benchmark a portco’s readiness, valuation, and buyer fit against comparable businesses using enriched firmographic, funding, and growth data. These additional insights can help portcos reframe their story and adjust value creation based on how other companies may have been positioned and their outcomes. 

Laying the groundwork for an exit

M&A and exits aren’t always top of mind at the earliest stages for many portcos. But as a VC, it’s important to encourage founders to think about potential strategies early in the process. 

"We encourage companies that want to IPO to remember that, at the end of the day, if they need liquidity, there are other options,” says Jonah Surkes, Private Equity Investor at Generation IM, in a recent Affinity webinar. “If they need financing, there are other options. We're seeing more companies looking at things like debt, convertibles, secondary opportunities, tender offers, etc. They're all available options."

Having these conversations helps portcos to proactively set the stage for different scenarios, so they aren’t scrambling or forced into suboptimal decisions down the line.

Some things VCs can do to help startups prepare for a future exit include:

1. Having regular conversations about exit plans.
2. Sharing insights on comparable businesses.
3. Building trust and understanding around what buyers may be looking for in the future.
4. Introducing founders to potential future buyers or business partners.
5. Helping founders build narratives for their business that can appeal to investors and buyers.
6. Expanding your firm’s network to include the right connections to scale your portcos.
7. Spreading the word to trigger interest and gather insight on buyer availability.

Affinity also allows investors to create curated lists of potential buyers and relationships in their network and share them directly with founders with Collaborator Seats so they can facilitate connections and nurture the right introductions at the earliest stages. Introduction Summary Reports can also help you keep track of the introductions you’ve made for your portcos and the quantifiable impact they’ve made on their growth goals.

Automatically surfacing over 43,000 organizations, Affinity has been key to unlocking opportunities for MassMutual Ventures (MMV)’s portcos.

MMV’s Head of Platform, Samantha Santaniello-Lawrence says, “The Affinity Pathfinder Chrome extension allowed them to see that we had connections to one specific company they wanted to get connected to,”. “We made the introduction, and they are now likely going to do business with one another."

Laying the groundwork early allows portcos to really understand the nature of the relationships in your firm’s network and decide which opportunities they may want to pursue when the time comes for an exit. 

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Preparing for extensive due diligence

M&A transactions, like most investments, can be risky business. Similar to fundraising, portcos should be prepared for robust due diligence in the M&A process where the buyer closely reviews everything from their financials to their operations. 

In most cases, M&A due diligence is more comprehensive than what they might have experienced while raising venture capital funds. And just like in the initial pitch, buyers may be looking for different signals in the due diligence process compared to VCs. Preparing portcos to effectively organize data rooms and navigate the M&A due diligence process will help them better negotiate and answer any questions to secure a successful sale. 

Building a scalable, data-driven M&A strategy for your portfolio companies

Even within M&A, there are different strategies that can impact deal structures and payouts for founders and investors. An M&A strategy outlines how portcos will pursue a merger or acquisition based on the specific outcomes they hope to achieve and the current market.  

When M&A is floated as a potential exit, VCs should partner collaboratively with founders to craft a strategy that positions the company as an attractive acquisition and engages the right buyers. Staying on top of the competitive landscape and current M&A trends allows portcos to focus on initiatives and metrics that drive strategic value. Insights and performance from previous successful and unsuccessful deals can surface potential M&A deals within your firm’s network, so you can introduce founders to the best buyer when the time comes.

Creating these successful M&A strategies at scale also requires the right tech stack, so you can evaluate the relevant data and meet the distinct needs of every portco. Deal-driven technology, like Affinity, uses automation and relationship intelligence to help you efficiently identify and create the right opportunities that lead to lucrative deals. 

Effective portfolio management starts with Affinity

From onboarding to exit, Affinity CRM harnesses data and the power of your firm’s collective network to help you support your portcos. 

With Affinity, you can support portco growth through:

• Warm introductions to high-value contacts, including investors, LPs, talent, and potential buyers. 
• Deal, relationship, and interaction data to identify the strongest growth opportunities. 
• Automated activity capture so you can eliminate repetitive tasks and focus on adding value.
• Data enrichment to help you and your portcos make deal decisions with confidence.

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Portcos FAQs

How do VCs help portfolio companies?

VCs help portfolio companies (portcos) in many ways beyond providing access to capital. VCs play an important role in providing founders with the networks, resources, and strategies they need to grow their business—and eventually raise future rounds or exit the business through an IPO or M&A.

Tools designed for private capital, like Affinity, can help VCs manage their relationships and use their networks to support portcos throughout their lifecycle.

How do you prepare for M&A?

You can prepare your portcos for an M&A by helping founders craft a strong M&A-focused pitch for the company, understanding the current selling climate, and introducing founders to potential buyers in your network. Centure capital firms (VC firms) and Private equity firms (PE firms) can also strengthen relationships with buyers and bankers in their network—even long before a potential M&A—to build trust and be top of mind when an opportunity comes up.

How do you develop an M&A strategy?

Developing an M&A strategy for your portfolio companies includes understanding their goals and objectives, researching the market, and identifying potential opportunities. Whether founders are looking for a quick exit or planning for future scenarios, portcos and VCs should work collaboratively to create an M&A strategy that best aligns with the vision for their company.