Greetings!
It is hard to believe we are almost done with February… Why is time in such a hurry this year? Is it rushing us towards something wonderful or trying to break free from the gravitational pull of the black hole of 2020? We will probably find out soon enough. Speaking of time, that is a central theme for this post.
I have had the pleasure of working with many inspiring and incredibly hard working entrepreneurs who sadly never got to see the fruits of their labor or see their extraordinary visions realized because they were forced to shut down their startups prematurely. And we are all worse off for it. These startups typically run out of funding before they have been able to show enough traction to raise a new round of financing or find an acquiror. While gaining traction depends on many external factors that are beyond an entrepreneur’s control, entrepreneurs have far more control in determining their own destiny when it comes to getting acquired than they realize. And because they don’t appreciate their own agency in that matter, they make some grave errors that sabotages their prospects of getting acquired. In fact, I believe that with some forethought and advance preparation, many of these startups could have avoided being shut down and continued to survive and even thrive by joining forces with an acquiror.
The biggest mistakes I have seen entrepreneurs make in this regard are the following:
They wait too long to work on an exit strategy: The earlier an entrepreneur starts to think about what a successful exit would be for them and who would be their ideal acquirors , the more likely they are to set in motion the right series of events to lead to that outcome.
They don’t build strong relationships with potential acquirors: Successful M&A transactions come about because the parties know and like one another. It takes time and deliberate effort to find and connect with the right champions at your ideal acquirors and build strong relationships with them, the foundation of which are trust and mutual respect.
They don’t build the capabilities to be a desirable target: Each acquiror has a set of capabilities that it looks for in their targets. Some are very interested in depth of technical expertise, or leadership strength in specific areas. Some are very focused on IP or technology. Others care about sales growth, profits or a certain size of customer base. Entrepreneurs have to understand the needs of their ideal acquirors and ensure that they have the right mix of assets that makes them an attractive target to them before they lean into acquisition discussions.
They don’t create leverage: Leverage is what gets an entrepreneur their desired valuation and deal terms. And leverage comes from options. Having other suitors at the table is definitely a source of leverage, as is being able to continue operating. Too many entrepreneurs wait until they have 6 months runway left in the bank and no other funding prospects before they seriously open up acquisition discussions. It is sadly often too late by then.
They prioritize valuation instead of relationship: As mentioned in point 2 above, acquisitions happen because parties know and like one another. Although valuation is important, entrepreneurs need to be careful that valuation discussions don’t overshadow the relationship and strategic benefits of joining forces. All acquirors understand that they won’t be able to get to a deal unless their valuation is reasonable and acceptable by the buyer. It is best to focus on the benefits of joining forces and what it would mean for the combined customers and employees before you start haggling over price. Also, be careful about anchoring on a high valuation. Unless your high anchor is a valuation that is reasonable based on recent comps or public company metrics, throwing out an unrealistic high valuation most likely will shut down the discussion prematurely, and erode any goodwill created that far.
Each of the points above deserves a much more thorough treatment of course, which I hope to elucidate in future postings on this topic. Please share your feedback and let me know if one or more of the above resonates with your experience. Furthermore, if you have encountered other hard lessons in your experience with buying or selling a startup, I would love to hear it.