A good exit means success. Entrepreneurs, management, employees and the venture capital investors that believed in the company have together been able to raise the company to the next level. For the company, an exit means a new owner – a more suitable one for that moment in time. According to financing theory, a company’s owner should be the one to whom the company is the most valuable at a certain point in time. The best owner will vary over the company’s lifecycle. Venture capital and private equity investors are always temporary owners, acting as catalysts for growth, creating value and pursuing other strategic and operative changes.
For the company and its personnel, a new owner generally provides a better foundation for success in the future. In 2017, Tesi exited successfully from four companies in our venture portfolio: Rightware, Optofidelity, Visedo and IonPhasE. We believe that the new, international, industrial owners of these companies can considerably boost the business development of the acquired companies with broader resources and strategic synergies – for instance, by opening doors to new markets and creating completely new value chains. This is the experience of Finnish technology company Applifier, which grew its sales to over 200 million euros within a few years after being acquired by Unity Technologies.
Exits are the life blood of venture capital investors. Without profitable exits there would be no returns. Most of the capital in the venture capital and private equity investment sector comes from pension funds, so the returns on these investments safeguard the viability of Finland’s, and other countries’, pension systems. If investors do not succeed in exits, they cannot raise new funds.
The businesses of venture capital backed companies include, almost without exception, a negative cash flow in both the investment phase and also still at the time of exit. This is a known risk factor in venture capital. Of Tesi’s portfolio companies mentioned earlier, only Optofidelity was profitable. Regardless of this fact, industrial buyers perceived a definite strategic value in these companies and were ready to pay many tens of millions of euros to acquire them.
It would be simple to attribute the recent exits simply to the prevailing economic upswing and to the generally favourable development of capital markets and the macroeconomy. I am convinced, though, that other interesting phenomena are at play. There is less mismatch between startups and large companies in Finland than there used to be. The strategy of many global corporations has for decades incorporated the systematic identification of potential acquisitions of smaller companies, including startups mastering interesting technology. Large corporations have constructed predefined processes for negotiating corporate acquisitions and for effective integration. Finnish corporations have earlier exhibited a “not invented here” attitude, but fortunately are now moving to a more open-minded approach. In summer 2016, for instance, Wärtsilä acquired Tesi’s portfolio company Eniram, which offers high value-adding marine technologies.
Large corporations, too, are now acutely aware of digitisation and the profound changes this will bring to all sectors. Company management has received stronger support from their owners and boards for acquiring smaller technology companies as an element in their own R&D and innovation activities.
I believe that such international interaction will continue to be greatly important in Finland’s venture capital and private equity market, and generally for our whole economy. Evidence of this can be seen in the high degree of involvement by Asian, and especially Chinese, players in acquiring and investing in Finnish companies.
Digitisation will result in global-level competition gradually reaching into more and more sectors. It is vital, particularly for Finnish companies based in our small domestic market, to network as effectively as possible with international customers, whether it be through B2B or B2C businesses. International investors have already proven their value by bringing a “shoot for the stars” attitude, along with their expertise and networks, to support many Finnish growth companies with strong international expansion plans.
The truth is revealed at the moment of exit. Have investors managed to create value through working with the company over several years? If the answer is yes, everyone wins – including society at large. Our ex-portfolio company Visedo was bought by the Danish multibillion conglomerate Danfoss – an excellent new home for a small company. With the support from Danfoss, Visedo gets a completely new possibility to grow its environmentally friendly business in global markets as well as strengthen resources in its hometown of Lappeenranta.