How your startup actually gets acquired

You hear it all the time in startup circles.  Founders, investors, advisors and writers are all guilty of saying it at one point or another.

Some variation of: ‘This company will get acquired by [Google, Salesforce, Facebook, Microsoft, Apple, Oracle, SAP, etc.].  They will just have to have it and will swoop in to buy it.’

Really?

I’m pretty sure that’s not how this whole thing works so I’m confused why I keep hearing it.

The only explanation I can think of, other than people trying to reassure themselves about decisions they are making, is that there is a broad lack of understanding on how acquisitions actually happen.

I’m talking big time, multi-hundred million dollar acquisitions.  That’s the goal right?  Not acquihires.  Not feature buys.

I can’t recall the exact number of M&A situations I’ve been around in my career, but across 10 years of being a VC, in Corporate Development at Microsoft and as an investment banking analyst I’ve seen enough to confidently share a few myths and facts about how startups actually get acquired.

  • Myth: If your startup is in the same ecosystem of a big company, then the big company can be considered a likely acquirer.
  • Fact: It simply isn’t enough to be in the same ecosystem. Ecosystems are massive.  Your startup usually must be doing one of two things in a material manner: 1.) delivering joint value to the same set of customers (i.e., very active integration, products work better together) or 2.) be taking away customers from the acquirer (customers literally choosing you instead of them).  If neither of these are happening, there is a high likelihood your startup is not on the mind of the acquirer.
  • Myth: Acquisitions happen quickly.
  • Fact: The time between getting ‘the phone call’ and the initial offer can be short, but often times it takes years of relationship building to just get the phone call. Trust, value alignment and joint strategic direction are critical to big acquisitions, especially when the CEO of the company being acquired will have a leadership role with the acquirer.  This stuff doesn’t just happen overnight.
  • Myth: The Corp Dev team decides what companies to acquire.
  • Fact: I’ll be brief because Paul Graham has already done a great job covering this, but in almost all cases Corp Dev are purely focused on executing the deal when told. You want to build relationships with the actual business unit leaders that have P&L responsibility and will be leading the business once integrated.  They drive what happens because they are the ones who live with it after.
  • Myth: How much money I am losing doesn’t matter. Its all about revenue growth and momentum.
  • Fact: Revenue growth and momentum are huge drivers of getting acquired, but how much money you’re losing matters way more than people think. The business unit leader, the one calling the shots, is going to absorb your P&L when they acquire you, but chances are their own end of year targets they are accountable aren’t going to change as a result of the acquisition.  Sometimes CFOs give their business unit leaders what is called ‘P&L relief’ on acquisitions, which basically means the business leader can remove the losses of the acquired company from their end of year results, but its not that common.  Don’t think this is a big deal?  Tell that to the Exec buying you who has worked 20+ years to get in their current role.  They kind of want to stay there and missing end of year targets is a great way to have a short stay.
  • Myth: My chances of getting acquired increase a lot after someone else in my space gets acquired.
  • Fact: It really depends on how big your category is.  There are some strong examples of material acquisitions happening after an acquirers competitor makes a purchase (Microsoft buying aQuantive after missing out on Doubleclick, Apple buying Quattro Wireless after missing out on AdMob, Oracle buying Taleo after SAP bought SucessFactors), but usually it doesn’t extend past the top 2 or 3 players in a space.  So I guess your odds might increase a bit if another player in your space gets bought, but you better be next or it might be a long slog.  Besides, who wants to be second or third anyway?

Are there edge cases to these myths/facts, of course.  Acquisitions happen in all sort of weird ways, but if you really want to be smart about who might be an acquirer of you startup ask yourself these questions while your building: What companies do I have strong customer overlap with?  What companies am I taking customers from?  How senior is my relationship at that company?  How strong is that relationship?  Is the financial health of my business make me more or less attractive to them?

By answering those questions you’ll probably learn a lot about who you true set of acquirers may be and how attractive your business actually is.

get in touch: Arthur Ventures; patrick@arthurventures.com


Paul’s post on Corp Dev – http://paulgraham.com/corpdev.html

 

9 Comments

  1. Patrick- Many years ago I, too, was in corp dev at MSFT. I was in charge of sourcing, investing and building early stage companies in Silicon Valley. While at Microsoft I wrote a kind of “dashboard/rule book” for corporate development and internal operating divisions.

    I strongly disagree with the passive picture you paint, “Corp Dev are purely focused on executing the deal when told.” Corp Dev and Operating Divisions should be constantly communicating on what oper. divs. need and what corp. dev. knows is available. Corp Dev should be a very active “eyes & ears” of what/who/where is happening in the early stage community. Corp. Dev should must know the direction and needs of each oper. div to inform them of what new developments are appearing and what competitors are doing.

    Please take a look at my video for my latest venture – the Early Stage Marketplace – http://www.youtube.com/watch?v=4ZNZdutnGdc.

    You can see a very basic static demo for ESM at http://www.earlystagemarketplace.com

    Elliott Dahan
    http://www.thegrowthgroup.com

    1. Hi Elliott – Thanks for the thoughtful reply. I think you and I had drastically different experiences at the same company – probably because our time there was in very different time periods. Looks like you left in 1998 an I joined in 2008. Lots of things can change over 10 years and two very different economic climates. I didn’t intend to demean Corp Dev. I spent 4’ish years, worked with a lot of smart people and built a lot of great relationships. We too did thoughtful analysis for our business unit counter parts and tried to stay close to what was happening in the market. All of that said, every time a meaningful deal went down, it was the business unit leader pulling the trigger, not us, and it wasn’t because of our market analysis.

      1. Patrick – ” it was the business unit leader pulling the trigger, not us, ” Yes, corp-. dev. serves the needs of an oper. div. – you are right. I am just saying that corp. dev – then and now – is not a passive process.

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