Liquidity in an Illiquid Market

August 31, 2009 at 3:44 pm

So, your venture investors have decided to stop funding your company, and you are about to run out of cash. What are your options? There are a number of alternatives, depending on whether your company has built significant value or not.

Seek sources of capital other than venture capital

If you have built significant value, you can pursue different types of capital for sustenance or liquidity. There are exceptions, but for the most part the IPO windows are virtually closed, regardless of how much value you have created.

So, if your historical financial investors (e.g. venture capitalists) have run out of the willingness or ability to continue funding your business while you wait for a great payday, you need to know that there are other ways to fund your business. One such way is to look for a strategic investor. These are typically not traditional financial investors but may be one of your customers or suppliers, or even one of your competitors. This investor might also be a company that is looking to expand through new technology. These parties may see value in funding the company to continue to watch you grow or to assure their supply chains are maintained. These investors might be interested in investing in you to see if they should consider acquiring you at some point in the future. Or, they may start a discussion about an investment and determine that acquiring you in the current market would be advantageous to all parties. Valuations in these circumstances are typically much better than a traditional financial investor, because of the different motivations which they bring to the table. To accomplish this strategy successfully, you should enlist the services of a competent financial advisor, who has managed these sorts of transactions.

Final liquidity option – selling your company or its assets

In our last blog, we spoke about restructuring in the difficult times. However, sometimes restructuring cannot work and forces the board to look at ways to receive anything, even a small amount, representing the value of the assets of the business. In most venture capital backed technology companies, there are primarily two types of assets: fixed assets which you can see and touch: furniture, computers, servers, lab equipment, etc.; and intangible assets which are the ones that probably have the most value. Intangible assets include intellectual property, such as patents or patent applications. Depending on your industry, and the strength of your patent portfolio, many companies might be interested in acquiring these assets. Defensive patents are those which other companies might want to purchase to prevent or block other companies from developing new products which compete with a core business. Offensive patents are those which a company acquires to allow it to pursue a strategic business opportunity faster and with greater defensibility. Lastly, the longer you can maintain the core of the business, such as the development team, the more likely it might be that someone interested in the intellectual property might also be interested in the team that developed it, and might pay a premium to acquire this.

If you cannot keep the team together long enough to see if there would be a buyer for the intellectual property and the team, selling the fixed assets usually requires retaining a financial advisor to conduct the auction of these assets. The value that will be received at auction is typically very low, but can generate a little cash to allow you to conduct a sale of the intangible assets. Retaining a financial advisor with experience in selling the intangible assets can result in better results for the stakeholders, which are the creditors and/or the shareholders.

So while liquidity events come in different sizes and shapes, there is always a way to generate some liquidity for your stakeholders.

Rich Brenner is Founder and CEO of The Brenner Group, one of Silicon Valley’s premier professional services firms. Rich is a veteran executive, entrepreneur, investor, board member, and philanthropist.

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Entry filed under: Interim Management, Restructurings, Shareholder Services.

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