Bursts of Color - M&A 101 for Tech Startups
Conventional wisdom holds that most venture-backed startups will find liquidity via one of three paths:
Bankruptcy / shut-down
Acquisition by a larger company
Independent success / IPO
Given that #1 is undesirable and #3 is rare, it seems wise to devote a little thought to that possible #2 scenario.
What Makes a Desirable Acquisition?
I believe most startup acquisitions can be described by one of two sub-categories:
Desirable Acquisitions are priced well north of the last round's valuation, such that founders, employees and investors all get paid. The acquirer typically also offers other value, like distribution, brand and talent, that will be used to accelerate the startup's growth and makes the combination exciting for all involved. These deals are usually initiated by the acquirer, who is strategically motivated by greed (this is going to be huge!) or fear (our competitor can't have it!).
Soft Landings, by contrast, provide a home for a startup's employees and IP, but usually not much more than that. These deals are often initiated by the selling company when they decide discretion is the better part of valor. In these cases, the acquirer is often motivated by some practical details like the target's customer list or engineering team, and they tend to be price sensitive (e.g., we'll pay up to $X per customer). There is nothing wrong with a soft landing; it's just worth understanding the differences, so you can interpret the signals you get from a prospective acquirer.
Buying vs Selling
Peter Fenton of Benchmark once told me that:
Tech startups get bought sometimes, but they are almost impossible to sell.
Pressed on what he meant, Peter elaborated that in all of the desirable acquisitions he had seen, the acquiring company was the primary motivator: they made the first move and they were somewhat price insensitive once they did. Conversely, when a startup's founders or board were the ones to initiate an M&A process, it usually led to a soft landing or failed entirely.
So How Can I Orchestrate A Desirable Acquisition?
Unfortunately, the main answer here is to play the long game and build a great business. With enough success, others will eventually notice and come calling. In the short term, it can also be wise to build relationships with as many relevant large company execs as you can. This way you're on their radar, and you have people to call when the time is right.
Milestones in a Successful M&A Process
I think of startup acquisitions as having four key steps:
Meeting with Acquirer CEO
Verbal Offer / Price Indication
Term sheet / LOI
As the potential target, your incentive is to minimize the time of each step and the information you share. Acquirers will tend to take the opposite stance: every step takes months, and they need full access to all of your data up front. Maybe. Just be aware that if an acquirer is sufficiently motivated, these things can usually be done in hours or days. In one famous example, eBay negotiated and signed their PayPal acquisition over a single holiday weekend.
Once The Process Starts
When a large company senior exec says they want to acquire your company (and if you're actually interested), here are some suggestions for maximizing sanity and success:
Assume this deal will not happen; keep acting and planning for that likelihood at every step. To the whale hunting metaphor: if you have low expectations and minimize time spent chasing the deal, you might just avoid Captain Ahab's mania.
Within your team, keep the circle as small as possible. Every person involved will geometrically increase both distraction inside the company and chances of a leak.
By contrast, do keep your board and any other major investors in the loop. Some may be quite helpful; others may screw up a potential deal if they're left out.
Be very selective about what information you share; assume that it may be used to compete with you.
Once you get past the Verbal Offer stage and want to proceed, seriously consider appointing a banker or other intermediary to carry the ball forward.