Description
In challenging times, many start-up companies consider their realistic economic options. Whereas an economic downturn has its impact on companies in all industries, the influence on early stage, venture-backed technology companies is unique, and the potential consequences on their strategies going forward differ from those for traditional turn-around management.
19200 Stevens Creek Blvd., Suite 200, Cupertino, CA 95014-2530 O 408 873 3400 F 408 873 3404 www.thebrennergroup.com
In challenging times, many technology start-up companies need to carefully
consider their realistic economic options.
April, 2009
Options for Distressed
Technology Companies:
Turnaround, Sale or Liquidation
2
19200 Stevens Creek Blvd., Suite 200, Cupertino, CA 95014-2530 O 408 873 3400 F 408 873 3404 www.thebrennergroup.com
Strategic Options for Technology Companies
In challenging times, many start-up companies consider their realistic economic
options. Whereas an economic downturn has its impact on companies in all
industries, the influence on early stage, venture-backed technology companies is
unique, and the potential consequences on their strategies going forward differ from
those for traditional turn-around management.
Technology Companies are Unique
Venture-backed technology companies differ from companies in traditional
industries in a range of ways:
1. Financing: These companies are predominantly financed through equity,
with very little debt financing. The equity is mostly provided in multiple
series of preferred shares with unique rights.
2. Development Stage: Privately held technology companies are often at an
early stage in their corporate development. Some may have reached the
stage of generating third-party revenue; others may still be in the research
stage.
3. Workforce and Management: Depending on the stage of development, the
senior management and the workforce are usually only partially complete.
Senior management often consists of founders, augmented with additional
management hired as the company matures.
4. Asset Base and Intellectual Property: Technology companies are further
characterized by their unique asset structure: they usually lack many of the
tangible assets inherent in more mature businesses such as substantial
amounts of property, plant and equipment, inventory, and receivables. Most
of the value tied up in technology companies is represented by intangible
assets such as rights, licenses, patents, software, relationships, partners, and
customer lists. The intellectual capital represented by the workforce is
substantial and not easily replicable.
5. Financial Condition and Profitability: Most early stage technology
companies are not yet profitable and many do not have sufficient investment
to reach break-even under their existing business plan. The companies that
are profitable usually have not yet reached their expected sustainable long
term profitability, but are still investing into corporate growth.
Look for Early Signals of Turnaround Assistance
The typical signal that turn-around assistance is needed is the looming brick wall
resulting from running out of cash and the perception that even the completion of
additional milestones will not lead to follow-on investments from current or new
investors. The turn-around process must begin but it has to be divided into two
distinct phases: the analysis phase and the implementation phase.
Venture-backed
technology
companies differ
from companies in
traditional industries
in a range of ways
3
19200 Stevens Creek Blvd., Suite 200, Cupertino, CA 95014-2530 O 408 873 3400 F 408 873 3404 www.thebrennergroup.com
Complete a Strategic Analysis and a Turnaround Game plan
Technology/Product
The company has made very specific assumptions about the feasibility and timing
of a technical development. Deviations from these assumptions can block any
strategy going forward (e.g., toxicity of a drug compound in human trials vs.
animal trials), some can be mended (e.g., limitation of target indications), and
others point more towards management issues (e.g., cost-overrun in software
development projects).
The analysis will focus on the stage of the development, reasons for any
development delays, and alternate monetization strategies.
Market
The company also made assumptions regarding the market size (both in the number
of potential customers as well as in the pricing of the product), the current and
potential competition, as well as certain market share and customer acceptance
metrics.
The analysis will question all of these assumptions. It will also identify any other
potential markets: whereas the initial risk-return assumption of the investor will
likely have directed the company to the largest possible market, a turn-around
scenario would also focus on smaller, profitable markets and markets that can be
penetrated more quickly.
Management and Workforce
Both management and workforce have been selected for the specific development
stage of the company. From the investor’s perspective, this happened either
directly by hiring the person or indirectly by investing in the company and thus
buying into the existing management.
The analysis will include an evaluation of management and workforce, especially
in light of the changed requirements of the company in its current state.
External Factors
There are a range of external factors that threaten the viability of an early-stage
technology company. Of most immediate relevance is the possibility that the
venture capital model for the company is broken: even with validated assumptions
regarding technology and market and management hitting all relevant milestones,
investors decide not to invest. It may be that investors are focused on a select few
companies that currently provide a better risk-return ratio, or it might be simply
that investors are constrained by their limited partner’s retreat from venture capital.
Goal of the Turn-Around Strategy
Part of the analysis also needs to take into account the different goals of the
different stakeholders, as well as the fiduciary duty that is owed to each of them.
The goal of the turn-around process will be different and conflicting for the
different stakeholders, such as creditors, equity holders, the board of directors,
management and employees, as well as customers and suppliers.
The strategic analysis
needs to take into
account the different
goals of the different
stakeholders
Strategic Options for Technology Companies
4
19200 Stevens Creek Blvd., Suite 200, Cupertino, CA 95014-2530 O 408 873 3400 F 408 873 3404 www.thebrennergroup.com
Depending on the situation, the company may implement its work-out plan in
court (e.g., with a Chapter 11 bankruptcy filing) or in an out-of-court settlement.
Out-of court work-outs are often faster, more cost effective, and more
predictable, but will need the agreement of all affected parties.
If no turn-around strategy can be developed that keeps the company – or parts of
it – as a going concern, the company will need to assess different liquidation
scenarios, be it an Assignment for the Benefit of Creditors (“ABC”), a Chapter 7
bankruptcy filing, or an orderly corporate dissolution.
Then Implement the Turnaround Strategy
The implementation of the strategy developed from the foregoing analysis can
be divided into short-term and long-term plans. Short term measures consist
mostly in immediate efforts to conserve cash and to provide enough time for the
implementation of the longer-term strategy. These can include dramatic
reduction in expenses, furloughs or reductions in force (“RIF”), reduction in
inventory through aggressive sales, repositioning of facilities, and others.
The turnaround plan will usually consist of an operational and a financial
restructuring plan.
The operational plan for a technology company will include a trade-off between
short-term survival and long-term value creation; e.g., the company may forgo or
reduce certain target markets, customers, and geographies, and limit product
features and application areas in order to extend the runway.
Other aspects will include the renegotiation of contracts (e.g., with landlords or
service providers), the monetization of intellectual property, and the sale of non-
core assets. The company’s strategy and product portfolio needs to be
reassessed in terms of the core element that should continue to be provided by
the company as opposed to ancillary parts that should be outsourced or that can
be provided by partners. Reductions in employee headcount need to be done
early and decisively but keeping in mind that the value of the company is to a
large extent represented by the team the company is able to retain. The ongoing
motivation of key contributors must be assured. This holds true even in the
event of liquidation: the proceeds that can be gained by liquidating intellectual
property are usually much higher when it is accompanied by key personnel that
can support and maintain it.
The financial restructuring usually includes a more or less aggressive
restructuring of the balance sheet. The company may be able to leverage assets
such as receivables, inventory, or property, plant and equipment for debt
financing. If the company can show an attractive investment case given the
altered strategy, investors might provide equity; the terms may be highly dilutive
for non-participating current investors, leading to diverse implementations of
“wash-out” scenarios or a complete restructuring.
If no turn-around
strategy can be
developed that keeps the
company as a going
concern, the company
will need to assess
different liquidation
scenarios
Strategic Options for Technology Companies
19200 Stevens Creek Blvd., Suite 200, Cupertino, CA 95014-2530 O 408 873 3400 F 408 873 3404 www.thebrennergroup.com
External Advisors Can Make the Difference
External advisors play a significant role in both analysis as well as implementation
of a turn-around or liquidation. They support the current management and the
board of directors with their particular skill set and provide an independent
viewpoint. They can come in as a Chief Restructuring Advisor, or can serve as a
mentor to the current management and guide them through the process. They help
the company to implement the unpopular decisions, lead contentious negotiations,
and serve as a buffer for the different relationships – be it with employees,
creditors, or investors. The existing management often has lost credibility with
current creditors and investors that an independent advisor can help to restore. The
turn-around team will need to regain trust by providing transparency and meeting
expectations.
Additional financial analysis and valuation work is needed in the different phases
of the restructuring: to analyze different scenarios for the different stakeholders,
value the company as going concern or in liquidation.
Specific transaction support is needed to monetize non-core assets such as ancillary
patents or software in a turn-around situation or to find a buyer for the company
and its assets in a liquidation scenario. This may include acting as assignee in a
liquidation involving an Assignment for the Benefit of Creditors.
After a successful sale of its assets, the wind-down operation will last for well over
a year, ensuring that all creditors are satisfied, all filings are properly made, taxes
are paid, and tax clearance certificates are obtained. These tasks are usually
performed by external resources.
Conclusion
Many technology companies fail to realize the severity of the situation soon enough
and make insufficient plans or changes, until the point at which the only possible
option becomes the liquidation of the company. At the first sign of trouble,
complete a thorough business analysis, forge a turnaround plan and implement it
expeditiously. Seek qualified external advisors early on to assess the situation,
provide counsel, and identify options that can keep the company as a going
concern.
Experienced
restructuring
advisors are an
essential ingredient
to success---and
get them engaged
early on to help.
Strategic Options for Technology Companies
doc_276891021.pdf
In challenging times, many start-up companies consider their realistic economic options. Whereas an economic downturn has its impact on companies in all industries, the influence on early stage, venture-backed technology companies is unique, and the potential consequences on their strategies going forward differ from those for traditional turn-around management.
19200 Stevens Creek Blvd., Suite 200, Cupertino, CA 95014-2530 O 408 873 3400 F 408 873 3404 www.thebrennergroup.com
In challenging times, many technology start-up companies need to carefully
consider their realistic economic options.
April, 2009
Options for Distressed
Technology Companies:
Turnaround, Sale or Liquidation
2
19200 Stevens Creek Blvd., Suite 200, Cupertino, CA 95014-2530 O 408 873 3400 F 408 873 3404 www.thebrennergroup.com
Strategic Options for Technology Companies
In challenging times, many start-up companies consider their realistic economic
options. Whereas an economic downturn has its impact on companies in all
industries, the influence on early stage, venture-backed technology companies is
unique, and the potential consequences on their strategies going forward differ from
those for traditional turn-around management.
Technology Companies are Unique
Venture-backed technology companies differ from companies in traditional
industries in a range of ways:
1. Financing: These companies are predominantly financed through equity,
with very little debt financing. The equity is mostly provided in multiple
series of preferred shares with unique rights.
2. Development Stage: Privately held technology companies are often at an
early stage in their corporate development. Some may have reached the
stage of generating third-party revenue; others may still be in the research
stage.
3. Workforce and Management: Depending on the stage of development, the
senior management and the workforce are usually only partially complete.
Senior management often consists of founders, augmented with additional
management hired as the company matures.
4. Asset Base and Intellectual Property: Technology companies are further
characterized by their unique asset structure: they usually lack many of the
tangible assets inherent in more mature businesses such as substantial
amounts of property, plant and equipment, inventory, and receivables. Most
of the value tied up in technology companies is represented by intangible
assets such as rights, licenses, patents, software, relationships, partners, and
customer lists. The intellectual capital represented by the workforce is
substantial and not easily replicable.
5. Financial Condition and Profitability: Most early stage technology
companies are not yet profitable and many do not have sufficient investment
to reach break-even under their existing business plan. The companies that
are profitable usually have not yet reached their expected sustainable long
term profitability, but are still investing into corporate growth.
Look for Early Signals of Turnaround Assistance
The typical signal that turn-around assistance is needed is the looming brick wall
resulting from running out of cash and the perception that even the completion of
additional milestones will not lead to follow-on investments from current or new
investors. The turn-around process must begin but it has to be divided into two
distinct phases: the analysis phase and the implementation phase.
Venture-backed
technology
companies differ
from companies in
traditional industries
in a range of ways
3
19200 Stevens Creek Blvd., Suite 200, Cupertino, CA 95014-2530 O 408 873 3400 F 408 873 3404 www.thebrennergroup.com
Complete a Strategic Analysis and a Turnaround Game plan
Technology/Product
The company has made very specific assumptions about the feasibility and timing
of a technical development. Deviations from these assumptions can block any
strategy going forward (e.g., toxicity of a drug compound in human trials vs.
animal trials), some can be mended (e.g., limitation of target indications), and
others point more towards management issues (e.g., cost-overrun in software
development projects).
The analysis will focus on the stage of the development, reasons for any
development delays, and alternate monetization strategies.
Market
The company also made assumptions regarding the market size (both in the number
of potential customers as well as in the pricing of the product), the current and
potential competition, as well as certain market share and customer acceptance
metrics.
The analysis will question all of these assumptions. It will also identify any other
potential markets: whereas the initial risk-return assumption of the investor will
likely have directed the company to the largest possible market, a turn-around
scenario would also focus on smaller, profitable markets and markets that can be
penetrated more quickly.
Management and Workforce
Both management and workforce have been selected for the specific development
stage of the company. From the investor’s perspective, this happened either
directly by hiring the person or indirectly by investing in the company and thus
buying into the existing management.
The analysis will include an evaluation of management and workforce, especially
in light of the changed requirements of the company in its current state.
External Factors
There are a range of external factors that threaten the viability of an early-stage
technology company. Of most immediate relevance is the possibility that the
venture capital model for the company is broken: even with validated assumptions
regarding technology and market and management hitting all relevant milestones,
investors decide not to invest. It may be that investors are focused on a select few
companies that currently provide a better risk-return ratio, or it might be simply
that investors are constrained by their limited partner’s retreat from venture capital.
Goal of the Turn-Around Strategy
Part of the analysis also needs to take into account the different goals of the
different stakeholders, as well as the fiduciary duty that is owed to each of them.
The goal of the turn-around process will be different and conflicting for the
different stakeholders, such as creditors, equity holders, the board of directors,
management and employees, as well as customers and suppliers.
The strategic analysis
needs to take into
account the different
goals of the different
stakeholders
Strategic Options for Technology Companies
4
19200 Stevens Creek Blvd., Suite 200, Cupertino, CA 95014-2530 O 408 873 3400 F 408 873 3404 www.thebrennergroup.com
Depending on the situation, the company may implement its work-out plan in
court (e.g., with a Chapter 11 bankruptcy filing) or in an out-of-court settlement.
Out-of court work-outs are often faster, more cost effective, and more
predictable, but will need the agreement of all affected parties.
If no turn-around strategy can be developed that keeps the company – or parts of
it – as a going concern, the company will need to assess different liquidation
scenarios, be it an Assignment for the Benefit of Creditors (“ABC”), a Chapter 7
bankruptcy filing, or an orderly corporate dissolution.
Then Implement the Turnaround Strategy
The implementation of the strategy developed from the foregoing analysis can
be divided into short-term and long-term plans. Short term measures consist
mostly in immediate efforts to conserve cash and to provide enough time for the
implementation of the longer-term strategy. These can include dramatic
reduction in expenses, furloughs or reductions in force (“RIF”), reduction in
inventory through aggressive sales, repositioning of facilities, and others.
The turnaround plan will usually consist of an operational and a financial
restructuring plan.
The operational plan for a technology company will include a trade-off between
short-term survival and long-term value creation; e.g., the company may forgo or
reduce certain target markets, customers, and geographies, and limit product
features and application areas in order to extend the runway.
Other aspects will include the renegotiation of contracts (e.g., with landlords or
service providers), the monetization of intellectual property, and the sale of non-
core assets. The company’s strategy and product portfolio needs to be
reassessed in terms of the core element that should continue to be provided by
the company as opposed to ancillary parts that should be outsourced or that can
be provided by partners. Reductions in employee headcount need to be done
early and decisively but keeping in mind that the value of the company is to a
large extent represented by the team the company is able to retain. The ongoing
motivation of key contributors must be assured. This holds true even in the
event of liquidation: the proceeds that can be gained by liquidating intellectual
property are usually much higher when it is accompanied by key personnel that
can support and maintain it.
The financial restructuring usually includes a more or less aggressive
restructuring of the balance sheet. The company may be able to leverage assets
such as receivables, inventory, or property, plant and equipment for debt
financing. If the company can show an attractive investment case given the
altered strategy, investors might provide equity; the terms may be highly dilutive
for non-participating current investors, leading to diverse implementations of
“wash-out” scenarios or a complete restructuring.
If no turn-around
strategy can be
developed that keeps the
company as a going
concern, the company
will need to assess
different liquidation
scenarios
Strategic Options for Technology Companies
19200 Stevens Creek Blvd., Suite 200, Cupertino, CA 95014-2530 O 408 873 3400 F 408 873 3404 www.thebrennergroup.com
External Advisors Can Make the Difference
External advisors play a significant role in both analysis as well as implementation
of a turn-around or liquidation. They support the current management and the
board of directors with their particular skill set and provide an independent
viewpoint. They can come in as a Chief Restructuring Advisor, or can serve as a
mentor to the current management and guide them through the process. They help
the company to implement the unpopular decisions, lead contentious negotiations,
and serve as a buffer for the different relationships – be it with employees,
creditors, or investors. The existing management often has lost credibility with
current creditors and investors that an independent advisor can help to restore. The
turn-around team will need to regain trust by providing transparency and meeting
expectations.
Additional financial analysis and valuation work is needed in the different phases
of the restructuring: to analyze different scenarios for the different stakeholders,
value the company as going concern or in liquidation.
Specific transaction support is needed to monetize non-core assets such as ancillary
patents or software in a turn-around situation or to find a buyer for the company
and its assets in a liquidation scenario. This may include acting as assignee in a
liquidation involving an Assignment for the Benefit of Creditors.
After a successful sale of its assets, the wind-down operation will last for well over
a year, ensuring that all creditors are satisfied, all filings are properly made, taxes
are paid, and tax clearance certificates are obtained. These tasks are usually
performed by external resources.
Conclusion
Many technology companies fail to realize the severity of the situation soon enough
and make insufficient plans or changes, until the point at which the only possible
option becomes the liquidation of the company. At the first sign of trouble,
complete a thorough business analysis, forge a turnaround plan and implement it
expeditiously. Seek qualified external advisors early on to assess the situation,
provide counsel, and identify options that can keep the company as a going
concern.
Experienced
restructuring
advisors are an
essential ingredient
to success---and
get them engaged
early on to help.
Strategic Options for Technology Companies
doc_276891021.pdf