Sell My Company or Buy Others? Navigating M&A and the Wave to Come

in online um I think we do actually have a a great panel for you um the premise here is is is basically dissecting um m&a in our industry which is which you know as you probably know is very very early but we've got uh for you three I think unique perspectives coming from Investment Banking um legal and also the Venture World um so so with that um I I guess I'll introduce myself and then I think each of us will introduce uh ourselves um I'm Tony scary CEO of emper Partners we are a crypto native Investment Bank um we're set up to have industry expertise in this space and help uh Founders and Executives uh navigate m&a in crypto um we've been in business since 2019 and we've done more deals in the space there are some people who uh maybe on this panel who don't believe any deals have happened but um I've got some evidence that suggests otherwise so um you know with that maybe turn over to Nick hi I'm Nick Carter uh I'm a bitcoiner at eth Denver uh but you know glad to be here and uh I uh I'm a general partner at a venture firm called Castle Island Ventures and I'm the crypto m&a skeptic on the panel because I would love for there to be more m&a in crypto but it seems to me the liquidity is primarily obtain via uh you know basically tokens uh and there seems to be much of a less of a focus on m&a to my immense chint to be clear I'd love nothing more than to be as optimistic as you guys um but yeah we we can debate it will happen hi everyone my name is Dario de Martino I'm a lawyer and an m&a partner at ano I focus my practice on crypto m&a including joint ventures uh mergers Acquisitions car outs divestures as well as very complex strategic and private Equity transactions uh I'm also the head of our fintech and blockchain practice we have about 6,000 people 30 offices 40 jurisdictions and we do uh work across the globe there's no such thing as a an m& transaction that only is limited to the United States crypto companies by definition are cross B and so it's great to have a platform that can serve clients across the the globe awesome hey everyone hope you guys are having a good evening Denver my name is Joyce Yang I'm the founder of global coin research we are a research and investment da and we've been in the space since 2017 uh I'll be your moderator today and I think even before this panel has started officially we already gotten into the debate of does m&a in crypto really exist I still have my skepticism being a venture investor as well similar to Nick so maybe we can have Nick who was you know actually no let's let's have Tony and this other gentleman here to share your experiences sorry about that um share your experiences first and what you've see in the space and then we can also have Nick kind of add on sure you want want me to start happy to start yeah go ahead um so I've been in this space since 2014 and initially to your point it was mostly about minority investments in crypto companies so I started representing some of the largest tech companies some of the largest financial institutions that had an interest in the space and just wanted to park some money to basically learn about the space but then as the industry started to mature we started seeing actual m&a and now uh most of these transactions are private to to your point there isn't a whole lot of data available out there there aren't a lot of public companies right that are being bought so where you can go in Edgar and find out all the terms but transactions are being done I mean that's basically all that we do in my practice and we've got hundreds of lawyers working every day on crypto m&a and I can give you some examples of some of the transactions that have happened and some of the trends that I see in the space so you know uh last year we saw a trend that I think is going to continue this year where there's going to be a lot of consolidation among custodians because you know compliance has comes with a lot of cost and a lot of custodians basically cannot afford to meet all this cost and so there's a lot of consolidation and Acquisitions in in the custody business to give you uh an example Ripple bought a Swiss custodian called Medico last year was a pretty substantial acquisition um there's also a lot of regulatory driven m&a sometimes it is difficult to basically apply for a license and so a lot of Market participants prefer to just buy a company that's already regulated that's already obtained some of those licenses and so you can think about coin base and their recent acquisition of One River digital asset management is an example of that Trend that by the way we we saw you know since the beginning of this space like since 2013 a lot of companies were doing m&a basically to acquire licenses a lot of m&a is also happening in order to acquire Talent what we call Aqua hires right I mean despite the fact that this industry has been around for over 10 years there's still of there's still a scarcity of sophisticated uh talent that can actually work uh and so we see a lot of uh Aqua hires we also saw a lot of uh Acquisitions in the tokenization space right dtcc uh recently recently acquired company called secury uh and that's another Trend that I think is going to continue right a lot of tokenization of real world assets and so there's going to be a need for companies to acquire a technology stack that can facilitate that type of transactions and I can go on and on and on but Tony I'm sure you got some examples too sure uh you know rather than give examples maybe I'll back up a second our job is to optimize outcomes for our clients and so when I think about how m a will develop for our industry what we haven't seen almost any of is companies really coming from outside of crypto to buy crypto companies and I strongly believe in our thesis for starting this firm is there is a wave to come people ask me all the time when is it happening and I don't really know the answer to that what I can tell you is there's a high level of interest it's extremely difficult to build things as you guys probably all know um in our space and so ultimately there will be this motivation and and we believe a wave of m&a coming from outside of crypto so often times when we're sitting down with clients we're giving them the advice um that if they're young energetic and love what they're doing to keep building um to raise growth Capital to hit key initiatives and and uh this this Market will really develop in a much more robust way um we think in in the years to come so if I may let me uh present my sort of more skeptical case and then you guys can respond to it so the data problem is real I I looked at pitchbook the last 3 years they said there were about 400 300 m&a events and they said the biggest year of m&a in terms of disclosed transactions was 23 with a billion or so so like clearly the real number is much higher because we just don't have uh you know the terms are often not disclosed but there's a few things that I think from my seat as a VC appear to be impediments to meaningful m&a at least in this market r regime first of all on the acquirer front you don't have these behemoths that have a massive balance sheet and that can acquire dozens of companies so I think coinbase and ripple are probably the most active unless I'm mistaken uh in terms of the big crypto incumbents so you do see and we've had portfolio companies acquired by both coinbase and ripple and uh but there don't appear to be uh enormous kind of like very well capitalized firms even the biggest firms in crypto are kind of always clinging to life so that is one thing that seems to be missing outside in terms of outside firms looking in the problem we have in this country's regulatory like the banks are basically inhibited from dealing with crypto that's just the posture that the bank Regulators took and the banks that have tried like the B melons of the world have been totally styed unable to really launch the products they would launch so the Acquisitions that might have happened there or not so of course potentially there's a regulatory Catalyst if Sab 121 is lifted and the bank regulator become more favorable to crypto maybe we see more sort of trafi Acquisitions but that is an inhibiting factor and the banks doing the m&a seem to be foreign Banks from what I've seen y the last thing this is a crypto idiosyncratic thing that also inhibits m&a is you have the zombification of companies that would otherwise sell themselves but have enough Runway to cling to life and that's due to basically token issuance Dynamics so in other software investing Landscapes if you're going out of business you're running out of Runway you sell yourself right uh or you you know shut down return capital in crypto you have a lot of projects that may not have achieved product Market fit but they are able to raise enough Capital via the issuance of a token such they don't feel the immediate pressure to sell themselves so I think that's the thing that's different about cryp you have pre-product Market fit startups that are nevertheless somewhat liquid via tokenization so I think they're less willing to sell themselves here's few reactions I think there's there's you know you touched on a lot of things that are um relevant and I you know I would say selling your company is a personal decision and what we do have is a lot of young Founders who to your point in Cycles have had tremendous access to growth Capital whether that's through tokens or equity and so the opportunity to continue to build and and possibly even get some liquidity as a Founder is really appealing especially as early as it is and I'm the one telling them a lot of times don't sell right now we got this term sheet and here's what we're doing well you know guess what if it is crypto to crypto to your point which is the vast majority of deals that we see today um and the deals that really can happen because of you the Regulatory and other issues um that that can be fine if you're if you want to continue to go and build with that company um but it is limiting when you think about the prospects of having the S&P 500 looking at companies in our space and thinking about how they're going to execute on their crypto strategy and how valuable it is to them and those motivating factors which are basically is my share price going to go up um if if I'm a public company thinking about acquiring crypto am I going to get hit by The Regulators so if I'm a financial services company thinking about buying something crypto like these are the non-starters today at the point we see Main Street companies starting to execute in a relevant way in crypto and crossing over um that's when you'll see the motivation from their competitors that they need to do something and you know your guess as good as mine when we're going to see that but um but th those are some of the key factors for me that that will you know break down these barriers and allow that wave that I'm talking about to come yeah and in some cases m&a is inevitable right if you want to enter a new market a new jurisdiction uh or if you have scarcity of human capital there's there's no other way to do it other than through m&a right and to Tony's Point yes I've seen a lot of crypto to crypto m&a I've also seen a lot of tra traditional financial institutions buying crypto companies whether you know a majority interest a minority interest uh you know PayPal B curve uh Visa made Investments right I mean it's it's it's a it's more um diverse that that you may expect and I think to your point about regulatory I mean that's basically what I do I would agree that's very frustrating that after 10 years we don't have a comprehensive regulatory framework but what happens is that instead of not doing Deals Deals are structured in a way that comply with the regulatory framework through a combination of us and non- US entities so I think there's a way to make deals and and get them done even despite all the valuation discrepancies that we've seen last year there's one there's one other issue that that you guys all know um and that's cultural um I think you know conceptually that Jamie Diamond really doesn't want to buy a crypto company it's it's cultural in that in that organization and in many in many companies right if there's a champion for crypto in the organization if they've really decided like actually MasterCard and visa for example um that that they do want to execute in this space over time there's champions for crypto in the company that is is going to be a key factor in in whether you know we'll see capitulation ultimately and they'll come and buy I think what we' expected to happen this was kind of part of the premise of our firm obviously there's only two ways to get real liquidity as a venture firm Acquisitions and IPOs which are vanishingly rare where would like maybe Circle will go public at some point I suppose they think they will um what we thought was that trafi would see that they had to engage an m&a in order to enter the crypto opportunity in the US but it seems to me that most of the acquirers in the more traditional Financial Services space are actually more fexs that aren't as heavily regulated and don't face the pressure and you know one anecdote that really sticks out to me is during the bank crisis in uh 23 in Spring of 23 you had the two most crypto-friendly banks that went down silvergate uh signature right and they had crypto practices they ran clearing infrastructure for Real Time liquidity provision between crypto firms a lot of it was useful for stable coins sun and Signet what happened to those assets during the uh divesture the FDIC receivership those assets went nowhere they were just furloughed no Bank bought them no Bank wanted the crypto exposure they didn't want to be told off by the FDIC for having a crypto exposure right so there is still this massive impediment to m&a it seems to me based on the continued hostility regarding the crypto industry from Washington that it hasn't changed doesn't seem like it'll change this year maybe after November it will banks are the hardest 100% And and because of that regulatory aspect that you mentioned um but that doesn't mean that other that payments companies and fex and non-financial companies won't want to execute in our space and and buy companies but you're you're 100% right we've got to solve regulation in in crypto in the US um and get clarity to give those prospective buyers confidence to come and and acquire in our space yeah I couldn't agree more there are a couple of pending bills in Congress that make me feel a bit optimistic right there the Lumis gilland uh bill that's relatively comprehensive is going to pass no not anytime soon what I think is going to happen instead is that they're going to handle one piece of crypto at a time probably started from the low hanging fruit which is stable coins and then they're going to you know take it one step at a time but I I I couldn't agree more I mean today we don't even have a definition of what a a security uh token is or clear lines between Securities Commodities uh payment methods so sometimes we do due diligence on a Target company and we say well you're basically like a combination of all these things you have to comply with a very broad variety of regulatory Frameworks that sometimes are inconsistent with with each other across uh boundaries across U jurisdiction so big issue um not a total deterrent right but definitely uh definitely an issue yeah following up with that given the current market situation and Bitcoin now you know hitting $60,000 I'm curious what you're seeing from your side when it comes to buyers or seller activity um and just any kind of difference in or changes in reception coming from you know web 2 or any of the other potential acquires that you're seeing sure I I can start with that um I think that we have some Founders who who've basically survived uh our our crypto uh winter uh recently and and they're thinking about a business in many cases that's that's really monoline right we're we're a group of Founders we started this business we do one thing really well do we really want to expand the business into these other areas to make it um sort of less procyclical more um durable over time or should we think about selling if we are going to think about selling shouldn't we probably do that at the top of the next Bull Run which it seems like we're we've uh We've commenced here so um and that's I think it's natural to think about those things and so yes we're getting these sort of early calls from from companies to say we're not going to sell right now but we understand what our business is and it sure looks like there's going to be an interesting opportunity on the horizon and and I agree with that I think there'll be a wave of selling here actually um as a lot of the firms that raised during the most uh liquid portion of the cycle in 21 and uh early 22 reach the end of their uh 18 to 24 month Runway associated with the raise and you know startups tend to raise in a phased Manner and uh the valuation they were able to attract in 2122 um You probably isn't for the most part what they're able to get today and they may not want to do a Down Round so they're coming to the end of their L sort of Runway Horizon and are now motivated to sell uh the other thing though is tokens are always liquidity mechanism uh for many of the startups that you know we follow and in our portfolio and as liquidity returns to the market the motive to issue a token as an alternative fundraising mechanism uh becomes greater so some startups are able to defer those m&a decisions until later so we kind of see both things but I I generally agree like Wall Street you know traditional asset managers they do now see the opportun unity in blockchains Black Rock is launching a tokenization product that will be a very key moment for the industry uh so I do think there will be more outside in interest and uh you know we're we're hopeful about that yeah and look m&a is a confidence game and with interest rates um stabilizing recessionary fears disappearing I think that more buyers are coming to the the m&a market looking for Quality targets uh at the same time I think sellers are understanding that 2021 valuations are not coming back anytime soon uh and they're getting more willing to accept more realistic valuations but even in cases where there's a valuation discrepancy through the use of earn outs you can bridge that valuation Gap and I've seen the past year year and a half a lot of very creative ways to structure earn outs right not just a usual EA net income and Revenue Bas are out it's but a lot of different Milestones to account for the specific crypto Market yeah hello let's talk about that a little bit more Dario I love to dig into um a hypothetical project now looking to sell to a say multi-billion dollar FTV project right um what are what do they need to consider what do they need to think about and what kind of terms are you seeing that's most founder friendly um look in terms of um how to bridge the valuation Gap you know a lot of sellers want to structure their earn outs based on Revenue metrics uh because they don't want to give a buyer the ability to potentially manipulate those metrics post closing where buyers typically want to have a net income um thresold or or metric to have more control and so what typically happens that you start with this convers ation net income versus revenue and then you sort of end up in the Middle with an Abida based uh metric um and then there's a lot of conversations around retention of talent you know one of the most important criteria for the success of an m& transaction is a successful integration according to a recent study more than 30% of the employees end up leaving within the first year after closing and so it's super important for Founders and for sellers to make sure that there's um planning with respect to the treatment of the employees to make sure they will be happy post closing if you don't have if you can't secure a talent then your success is quite frankly tarnished yeah Tony you have anything to add yeah just that you know a lot of these issues are solvable by structuring we still have there's I think one thing that's that's unique in our industry is as early as it is um is the amount of subjectivity so the lack of that financial data and and being able to reasonably model it uh over time and so the challenge of modeling and integration um so how do you solve for that and and you know Dario mentioned a few ways you know but you know clearly in the structuring if we're talking about um if we're talking about a higher stock component um where you know the the the target is effectively going to to own stock in the in the combined company and so they they're sort of solving for like is you know is that 2021 print is that really the value of the acquired what's our what's our stock worth well if we do stock for stock it you know it matters less right or if we if we change that component so there's a variety of things that we can do in structuring to kind of close that Gap but clearly one of the impediments is is the subjectivity in in these deals and and in valuing companies in our space what's the typical timeline that you're seeing for projects doing deals now sorry what do you mean by timeline from initial conversation to closing oh to to consummating a transaction if they want to sell so we're we're typically a sells side uh Banker um and um it depends sometimes uh folks come to us with a term sheet and say like this looks pretty good but can we do better and those can move quickly um a few months um other times it's more exploratory it's um we're thinking about doing this we we want to start to understand who the universe of buyers might be and what they're what they think about us um and that exploratory process can take a year or more it also depends on whether you need consents or regulatory approvals between signing and closing so sometimes you get sign in do in less than three months right if you're really diligent and you've done a lot of thinking before the term sheet but then you sign and you need to get third party consents you need to get regulatory approval so um in my experience if you do you know larger transactions like anywhere above the 120 million that's required for anr purposes and therefore need to file HSR filings it can get anywhere between six months and a year and a half um so it varies any thoughts Nick I feel like you're thinking we we uh when we have a startup that wants to sell itself we generally tell them they're going to need at least 6 months yeah to run the process and so if you have 12 months of Runway left you better start pretty soon because you don't want to be negotiating an m&a transaction when you have a month or two of Runway left of course you're in a a much worse bargaining position as time goes on I totally agree and I think more Founders should actually learn more about how to do m&a because in the last cycle we had a lot of Founders who came with to us you know 3 months into going bankrupt essentially and saying hey what do we do um we and then we are telling them to explore m&a option even with just the aqua hire and they're like we might not even have time yeah and it's it's a very it's a very traditional I guess m&a is still a very traditional Finance concept to many Founders especially in crypto because you the crypto founds are quite young you know many times they don't have experience in that particular you really need a lot of expertise and knowledge um so I really encourage even now in this current market for Founders to learn more about the optionality of what they have do yeah yeah our normal advice is actually be talking to acquirers potential acquirers casually in the normal course you business uh even if you're not actually looking to sell yourself at all uh often times your big clients are potential acquires so keep them a breast of your progress with an eye to a potential acquisition in the future obviously that doesn't apply to every single high growth startup some might want to take it all the way try and get to IPO something like that but but your acquisition process is going to be much cleaner if you have an established relationship with an acquir as opposed to starting from scratch when you have six months Runway left I I agree with that I would also add that clear communication is key uh I've worked on a variety of deals where sometimes issues are disclosed in the middle of the process and cause Havoc uh so think about a lwuit of data breach and employment Mis classification issues with open source software right my advice would be to communicate these issues to the buyer ahead of time to show that you've got a handle on your business that you've been thoughtful you've been preparing and you have solutions for the buyer because if you do it at the last minute the buyer may want to retrade the buyer may want to adjust valuation or frankly terminate the deal um there's also been a recent case in Delaware where the buyer was allowed to terminate a deal because between the time of signing and closing the sellers disclose Phantom equity and even though it wasn't material in the context of the overall transaction the Delaware cor chry said well this was a fundamental rep it's breached and so now buyer can just walk away from a deal without paying any termination fees or whatsoever so uh clean your cap table and communicate early yeah yeah nothing to add on that I mean we we harp on it all the time it's never too soon to learn about how these processes work if it could be relevant for your company eventually yeah I'm curious about any common blind spots you that you know Founders specially in crypto have when it comes to even doing basic relationship management with their you know potential acquirers right it's something that besides customers who they probably would you know put first and foremost but you know many times they don't have experience don't have an experience coo don't have an experience like operations don't have experience auditing um so these things all needs to be in place which we definitely need overall as an industry I I think my last question and you know feel free to add on anything else that you think uh you think I missed is you know are we going to see a kind of a new paradigm of different types of m&a transactions in this cycle meaning are we going to see throwing out their crazy ideas nft Acquisitions right like we're seeing or any different kinds of you know Bitcoin rollups having synergistic potentials right like nft uh issuers tend to actually we see a lot of activity on the acquisition front uh yugul Labs have been very active and making Acquisitions uh there's a big uh transaction recently I think between Moon birds and I don't remember who the buyer was so we do see Acquisitions there what I'm interested to see more of is actually token projects or even l1s and l2s uh merging or acquiring I haven't seen much of that I haven't seen many uh Dows or sort of like defi native Crypton native projects uh sell themselves to be sold I think Rari is one example but I haven't seen a lot of that so I'd be very curious to see if standard transactions can be worked out in in that sector yeah we've seen some of it and I think um we will continue to and I I guess I would say um you know those deals are those deals are you know have their own interesting Dynamics but I think overall um when we have we have more bullish markets we tend to see more deals I think that's going to happen across sort of deal types um and I think we will see um we'll see at least a couple of transactions coming from outside crypto this year um and I predict we're going to get one in the in the billion plus range as well all right I would agree with that I expect Mega deals this year uh I also expect more consolidation among custodians I expect a lot of non-market participants to tap into the whole metaverse and nft Marketplace by along the lines of what Nike and a D is already did um and also a lot of acquisition of companies that develop Layer Two scaling Solutions um those are the those are trends that I expect well looks like we're out of time thank you guys so much yeah thank you everyone for listening in make sure to find Tony and Dario after you have questions about this because they're the experts thank you thank