Acquisition is a topic nearly all startup founders will confront at some point in their career. For every successful startup exit that goes on to IPO, there are dozens that get acquired or merge with other companies.
Over my career I’ve been part of hundreds of acquisitions on both sides of the table. When I was at Yahoo!, I helped source and see through acquisitions of companies like Oddpost and Verdisoft. Now as an investor, I help founders from companies like Aprente (acquired by McDonald’s), Canvas Technology (acquired by Amazon) and Datafleets (acquired by LiveRamp) through every part of what we affectionately call the “acquisition dance.”
Here’s some of what I’ve learned along the way.
Strategic vs. financial success
The first thing I tell founders is that strategic success and financial success are two different things. In an acquisition, it’s possible to achieve one without the other.
You might make off financially with the sale of your company but end up killing your vision in the process as your company gets absorbed into a larger company’s objectives. Or it could go the other way: you keep your company’s vision alive but without the big financial payout.
Your objective should be getting an acquisition offer that’s both financially lucrative for you (and your investors) and delivers a strategic win.
Bought, not sold
To do that, you want to be bought, not sold.
You want the acquiring company to pursue you, and not the other way around.
Trust me, I’ve seen it go both ways. It’s not fun being the company that’s desperately contacting anyone and everyone in their network to try to get the acquisition dance started before they run out of cash.
Your potential suitors have to believe that you can make it on your own. They should see you as a successful, growing company that they’d be lucky to bring to the dance—if only they could convince you. A mere whiff of desperation will drive down potential offers and make this infinitely harder.
You want to be in a position to turn down offers. When a company offers $100M, you want to be able to respond with, “I’m not for sale, but I might consider $200M.”.
That means you don’t want to wait until you’re facing a three-month runway of cash before putting yourself out there. You can’t start that process the night before prom and expect an invitation. You’ve got to start early.
Find an evangelist
All of the acquisitions I’ve helped put together over the years shared one thing in common: They were the result of relationships that were built over time, sometimes years.
Many founders don’t realize an offer is the tip of the iceberg—90% of the work goes into establishing and deepening relationships prior to an offer being put on the table.
Usually, the relationship starts with a sponsor within the acquiring company who simply cannot live without your product. More often than not, this person is a business unit leader. Corporate development ("corpdev") might ink the ultimate deal. But it’s the sponsor who will get the conversation started within the company and can attest to your company’s value with their leadership when the time comes.
Identify an individual within the company who gains the most from embracing you. Maybe they take pride in being the person who champions company-changing acquisitions. Maybe their bonus will increase with the increased revenue you’ll bring in. Maybe they can bring their product to market faster with your team.
Whatever their incentive is, you need to gain an evangelist within the company and understand their motivation for championing your product or service
Demonstrate value and alignment
Once you’ve cultivated relationships with people who love your product, you should focus constantly demonstrating the value you deliver to their organization.
Remember that value for a potential acquirer is a byproduct of value you deliver to your customers. Take time to talk with your customers to discover where you’re actually bringing them value.
Prospective acquiring companies also need a clear picture of how your company’s vision and direction aligns with their own. Buyers need to be reassured that you’re flying in the same direction.
You can do this directly, in interactions with clients and updates you send them. A simple way to do this is by adopting their language. “They finish our sentences—they fit in with our culture.”
You can also do this indirectly in how you position your company on your website, etc. Speaking engagements at industry events, first-person perspectives on industry on your company’s blog, and other communications initiatives can also help get your vision out to a larger audience.
Like any dance, acquisitions require communication and coordination among two engaged partners.
Start the dance early and build a case over time for why they should make you their permanent partner.
Demonstrate the value you bring and how well aligned you are.
Let them see that you're moving in the same direction, to the same music, and how good of an idea it is to pursue you.