In the area of technology, we are seeing an increase in service-focused companies that are realizing they have even more to offer their customers. Somewhere along the way of providing a high-level, quality service, and while listening and responding to what their customers really need, a key solution begins to emerge. The company discovers a product offering for its customers – a tool, an app, a device or a core piece of programming, for example – and the result is an increased opportunity for investment or a buyer.
From maturation to opportunity
A new product’s design and execution is often a naturally occurring phenomenon. For example, a technology company begins as a startup with precise objectives and a clear target audience. As the startup grows its leadership, staff and customer base, it is infused with new ideas, new problems to solve, new failures and new successes. It blossoms, and from that maturation comes new opportunities.
From a solid foundation at the company’s base comes a specific tool, device, app or similar product – perhaps even something worthy of patent protection. Investors, fellow players in the industry or even complementary companies in a different industry take notice and see the product’s potential.
With that added attention comes a flattering bouquet of offers – private equity companies want to invest in the up-and-coming company or interested buyers present potential acquisition terms. In the current marketplace, we’re seeing different scenarios that yield strong opportunities.
Scenario example 1 - Spin-off yields infusion of capital and buyer interest
Doing great work? Investors are watching. When a service company produces a noteworthy solution that addresses a customer need, the resulting product may have enough legs to stand on its own.
Such was the case when Nemphos Braue client Synaptic Advisory Partners LLC spun off Youreka Labs Inc. in 2021. A mobile automation solution that particularly helps frontline workers and integrates with Salesforce, Youreka drew the interest of multiple investors. With a multimillion-dollar capital raise, Youreka was able to use the Series A funding to further develop the product, and an interested buyer took notice. Less than a year later, Youreka was acquired by Dispatch Technologies Inc., allowing the two businesses to unite and expand their work with Salesforce.
Scenario example 2 - Product spin-off brings in capital for umbrella company
“Simple solutions for your complicated problems,” a key phrase from Nemphos Braue client Kognitiv Inc., underscores the high level of service they provide to customers. Kognitiv offers Workday consulting and professional support to help clients bridge the gap from implementation to enhancement – and multiple products have been borne from the company’s client-minded approach.
In 2022, Kognitiv spun off one of its products into a new company. Rooster Inc. is a proprietary software solution and streamlined interview scheduling tool designed to integrate with Workday Inc. Timed with the spin-off, Kognitiv secured a financing deal that provided debt and equity investment. In this case, Rooster is staying within the Kognitiv umbrella, bolstering the service company’s lineup of multiple products, and the incoming capital further propels Kognitiv’s core business platform.
What to look out for
From the outset, a spin-off sounds innocuous enough; after all, the service company and the resulting product are benefitting the same customer, right? Actually, it’s not so simple. And perhaps it’s that very expectation that can end up making a transaction a bit hairy.
It’s not that dissimilar from other mergers and acquisitions; considerations include leadership styles, company culture, back-office support and internal dynamics. Depending on the investors or the buyers, there may be mismatched IT tools, specific protocols, unique forms and third-party providers all in the mix.
The investors don’t always take notice. To get additional funding for the spin-off, it may require meeting with other investors and investment banks, and leaning into your network and support team that includes your attorney, accountant and advisers to make the right connections with potential buyers, independent sponsors and venture funds.
Contracts, too, may become more complex with additional layers of approvals, as will operating terms, stock options, employee and vendor agreements, and other documentation. Finally, don’t forget intellectual property, which is especially critical before a product is released or in someone else’s hands. Patents, additional trademarks and copyrights for the new products and licensing support will secure the value that your company – and product – have earned.
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George Nemphos is co-founder and managing member of Nemphos Braue LLC. Having spent a majority of his career with big international law firms, and now as an entrepreneur himself, Nemphos brings a unique perspective to client issues and works closely with clients to achieve practical, business-oriented solutions.
George Nemphos and Tim Braue started Nemphos Braue LLC in 2016, combining big firm expertise with the flexibility and creativity of a boutique practice. From venture capital and private equity to intellectual property, mergers and acquisitions and general corporate counsel, Nemphos Braue is a different kind of law firm. Learn more at nemphosbraue.com.