Getting Deals Done

In the 18 years that I've been doing venture capital investing, I've probably been very involved in over 250 deals. I've probably been tangentially involved in another 500 to 1000. I don't just mean venture investments. I mean mergers, acquisitions, IPOs, strategic investments, joint ventures, venture fund formations, employment contracts, severance/termination agreements, and a whole lot more.

And I have to say that getting a "deal" done is one of the hardest things that you have to do in business. It's easy to come to an agreement on the business terms of a deal. But then you've got to sell it to the other constituents, then you've got to paper over it, and then you've got to close it.

It seems like its getting harder to get deals done these days. That's not a comment on the desire to do deals, I think that's been on the rise for the past 18 months. I am talking about what it actually takes to get through all the steps to actually close a deal.

Some of this is probably due to the increased scrutiny that everyone is under post Sarbanes Oxley/Enron/Adelphia/WorldCom/etc. Lawyers are more cautious and more empowered to be naysayers. Accountants are more cautious and more empowered to be naysayers. Boards are more cautious and more empowered to be naysayers.

I guess this is good in many ways and a natural reaction to the excesses of the late 90s. But it's also a drag on the risk taking nature of our free markets/capitalistic/entrepreneurial business climate here in the US, and that's not a good thing.

It takes at least one and in many cases all of the following three things to get a deal done in this world we find ourselves in:

1) A familiarity and trust among the participants in the deal. Familiarity and trust greases the skids, makes things easier, and is a great foundation for any deal.

2) A competitive dynamic and a deadline. If a deal is hotly contested and has a deadline that can't be pushed out, then getting a deal done is a lot easier. That's always been the case, but these factors are more important than ever. I think using a public offering or an auction process in order to bring a buyer to the table quickly is the best way to sell a company these days.

3) Intense focus and effort. Unfortunately, there's a cost to this approach. If the CEO and/or his team has to focus intently on getting a deal done, everything else is going to take a back seat. And in the end, there's a big cost to that.

So what do I think we should all do about this? We should think long and hard before we jump into a deal, recognizing the costs associated with deal doing and the risks of actually getting to a close. Once we've made the decision to jump in, we should look for trust and familiarity if at all possible, create a process that produces the right competitive dynamic and urgency, and we should commit ourselves to getting it done.

Because deals are what business is all about. And plus, I love doing deals.

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Doing it in 2004 [Read More]

Tracked on Dec 1, 2004 7:07:00 PM

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New York VC Fred Wilson weighs in on the increasing complexity of getting deals done in today's risk-averse environment. The investment deal that actually gets done is somewhat of an anomaly. Even after navigating a minefield of lawyers, accountants an... [Read More]

Tracked on Dec 2, 2004 1:25:51 PM

Posted December 1, 2004 in Venture Capital and Technology

Comments

Fred,

Great post as usual. One quick question, that may result in a long answer.

How many deals have blown up or never reached completion after the initial dance?

Hearing how hard it is to get a deal done, it seems that the success ratio can not be great, even with someone as skilled and masterful as yourself. :)

Tom

Posted by: Tom | Dec 1, 2004 6:59:32 PM

Fred,

Intersting post. To your comment "It seems like its getting harder to get deals done these days", I think you are right. I recently moved from working in the Series A company space to consulting with both pre-Seed and post-Series C. The pressure is really on ventures these days with Sarbox adding costs and legal backtracking as you mention.

What I struggle with sometimes is how to handle the pre-Seed and Seed stuff. Bootstrapping is tough when you are trying to experiment and avoid legal costs. Guess it almost really helps to have a legal guy involved as a partner (depends on venture clearly). Can keep help keep legal costs down in some cases.

Posted by: Steve Shu | Dec 2, 2004 12:50:32 AM

This reminds me of a quote by UK CRM consultant, John Frazer-Robinson: "The object of a business is not to make money. The object of a business is to serve its Customers. The result is to make money."

And while the satisfaction of customers may be the result of what one would call a deal, I have the strange feeling that most business people are as far removed from "satisfying customers" as they possibly can.

Posted by: Helmar | Dec 2, 2004 3:03:33 AM

It's about fear. As you pointed out, there are plenty of reasons to be fearful. The true, maniacal entrepreneurs with a focused vision will always be out there. You just need to find them. We are in a "ground up" idea space, not a "top down" idea space. Very little leadership in business to solve our pressing problems. If I was you, I'd look at space dominated by lazy & fat corporations, where consumers haven't been presented choices (duh ;) (unlike technology, where we do have choices and price pressure, at least somewhat). New companies solving old problems with a mix of tech and people. Alternative fuels at the retail level (everyone of us writes a check to terrorist supporting govt's when we fill the tank), companies innovating solutions to our huge pending infrastructure problems (roads, bridges), consumer "union" ideas using new tech communication avenues to fight the demolition of the middle class. I've always found great, new, ideas are easier deals to get done. Energy is where you find it. Good ideas seem to have it. Lame ideas don't. There are a lot of re-hashed lame ideas out there right now!

Thanks for Rilo Kiley- great band.

Posted by: Rob | Dec 2, 2004 4:13:07 AM

I would add a fourth key element to getting a deal done: leadership. This applies more to deals other than VC financings, where the drill is fairly standard and the parties generally know who is in charge. But a lot of deals break down where the leadership role is not defined, which can mean that people involved (both internally and externally) don't know their marching orders, the vision isn't articulated and tasks aren't prioritized properly. It can also result in having multiple parties thinking that they speak on behalf of the entity, which can be a killer.

As far as the difficulties in getting deals done, my observations as a lawyer who has been involved in the venture space for about the same amount of time as Fred has been and has been through a couple of economic cycles is that risk tolerance has still not quite reached equilibrium. I see a much higher percentage of broken deals than I did five or more years ago. I think there are several reasons for it. One is that term sheets don't mean as much as they used to. A term sheet used to mean that the bulk of the business diligence was done and the lawyers would take over to finish the deal. Now, a term sheet is sometimes nothing more than a standstill period to let a buyer or investor do its due diligence without the fear of losing a deal to a competing bidder. Also, I have been involved in a lot of deals where the term sheet contemplates a syndicated deal, but the syndicate isn't close to being filled out when the term sheet is signed and doesn't get there for several months, if at all. On the sell side, it seems to me that boards are taking their responsibilities more seriously than before, and are acting more responsibly and deliberately.

I am not surprised that there is a perception that lawyers are more empowered to be naysayers, but I don't think that is generally true, at least not for deal lawyers. My experience representing risk-takers has taught me that being perceived as an obstacle to completing a deal is not an effective practice development technique. I don't feel myself more inclined to point out issues than I did before. But people are listening more, and that's a good thing. Now of course I would think so because I'm a lawyer. But I think that better deals are getting done and people on both sides are happier with the results.

Posted by: JayR | Dec 2, 2004 11:20:40 AM

Dealmaking beats working. Dealmaking is exciting and fun, and working is grubby... That's why you have deals that don't make sense. - Peter Drucker

The term "institutional investor" is becoming one of those self-contradictions called an oxymoron, comparable to "jumbo shrimp," "lady mudwrestler," and "inexpensive lawyer." - Warren Buffett

Posted by: Warren Drucker | Dec 4, 2004 3:07:34 PM

Great Piece.
Top Down Accountability.
Everything’s expensive when the cheap money dries up and investors / LPs start asking questions. The party's truly over; its time to get back to work. ( I can't believe we're actually gonna have to work for a living. ) Oh well, here goes.

Posted by: RCP | Jan 5, 2005 4:57:38 PM

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