Divestitures are nothing new, and not unique to tech.
Just this week, the second-largest bank in the world by fees, Goldman Sachs, said it’s contemplating the sale of its loss-making wealth management business. Telecoms companies have been shedding non-core assets to offset the 5G investments they’ve made in the last few years.
But over a year into the venture funding slowdown, we’re beginning to see a number of scaleups sell parts of their business to create some liquidity too.
At the beginning of the month, Hopin sold its core events product to US cloud communications company RingCentral; and Babylon has shed its US business to try and fend off bankruptcy.
Founders and investors tell Sifted that several other startups are looking to sell loss-making products and their associated teams right now. Possible buyers? Other startups or enterprise software companies looking to pick up new capabilities on the cheap.
An improved investor pitch
This means scaleups are looking at partial sales for two reasons: to free up cash where they can’t raise external equity amid a tougher fundraising environment; and to streamline their business to appeal to more discerning investors right now — so they can raise more capital.
“A lot of companies will value one part of the business higher than the other, and when you put the two parts together that brings down the average value,” says Lawrence Kilian, corporate development principal at Speedinvest. “So this is where investors will fix the value. But if you lose the part that’s weighing you down, you’ll be able to raise funds quicker.”
With consolidation expected in several tech sectors like fintech and consumer, investors are on the lookout for companies that can focus on the product that differentiates them from others. And they’re being quite opportunistic too, lawyers say.
“The really smart investors are maximising on the current downturn to get really good valuations,” says Jennifer Chimanga, partner at Clifford Chance. “So they will go to businesses and say, ‘We think that this aspect of your business is very attractive for us, does it make sense to sell it to our portfolio business at a good price?’”
This way, investors are able to maximise the value of their existing portfolio by buying assets from other startups that are in need of cash to fund their core business — but at a lower price than if the portfolio company were to build it out themselves.
Chimanga says she’s seeing the most partial sales currently play out in the fintech and gaming sectors, and across all startup life stages. The deals she’s seen are so far a combination of tech stack sales as well as so-called ‘acquihires’, where a startup sells a team to another startup to work on the same function.
Smarter cash deployment
As well as extending runway, selling parts of a startup can also free up more time for a CEO to focus on their core revenue streams, says Joe Lewin, CEO of startup M&A marketplace platform Foundy.
“Some founders may choose to sell parts of the business that are more vulnerable to risk and knowingly require significant capital to scale,” Lewin says.
Money made from the sale of one asset, for example a startup’s IP, can then be reinvested into other parts of the business that promise higher future revenues.
Lewin says that Foundy’s platform has had an influx of startup founders wanting to sell assets and shares lately, and he expects the number of startups selling assets on the platform to double in September compared to August.
