A crisis puts pressure on both slowing down and accelerating startup acquisitions. Slows down because many acquirers, especially corporates, become more conservative trying to conserve cash. Case in point the week of Apr 13 was the first time since Sep 2004 no $1B deals were announced globally. Accelerates because many startups, especially at the early stage, decide to find a home instead of potentially going under. How these two forces play out is unique in each industry and geography but in tech at least, where acquirers are overwhelmingly well capitalized, our expectation at Tau Ventures is for small cap M&A to grow. And in many verticals there are secular trends around acquisition, for instance AI has been booming.
How can startups ensure a win-win when the deck is stacked against them? How to avoid a story like Digg, which Google came close to buying for $200M but was eventually sold for $500K? An acquisition is arguably the most important decision a CEO will take in the lifetime of a startup, here are five practical considerations.
1) Fairness Is More Than Price — Price is one metric that gets disproportionate attention, similar to valuation during a fundraising round, but there are many other variables. Is it a cash or a stock deal or a mixture? If it’s a stock what is the cliff and vesting period? Are there other financial incentives (golden handcuffs) such as bonuses or relocation expenses? Are there any triggers ie acceleration of vesting? Are all the employees getting hired or a subset and if so how will that decision be made? What title and role will employees take? How much autonomy will the startup overall have within the acquirer? If this is truly a merger rather than an acquisition then who is going to be in charge of what? Are we transferring all assets including the products themselves, userbase and IP or is this an acquihire? Fairness is about answering these and other questions to a level that is satisfactory to both sides.
2) Hire A Banker — If you are an entrepreneur chances are there is an even bigger knowledge asymmetry when it comes to M&A than to a VC fundraise. Reason is you may have gone through enough fundraising rounds yourself and the VC industry is far more about recurring interactions. M&A is a single event and the acquirer will almost always have far more experience in acquisitions than the startup. Which is why hiring a banker is also almost always a good idea. Besides negotiation they can also help immensely with outreach leveraging existing relationships, and ensure discretion in the process. In Silicon Valley today a banker might take for a small transaction 5-8% of the final value and 2-5% of the value plus a retainer for a large transaction. Given the higher stakes sides it’s harder to ensure a win-win — having a good banker is worth his / her weight in gold.
3) Get Competitive Bids By Building Long-Term Relationships — Lest not to state the obvious but a key to a successful negotiation is having multiple options. Whether you reveal to other parties who they are, what they are offering, and what their timings are is arguably more art than science. Similar to a fundraise and getting to know a VC, getting to know a potential acquirer over time is highly correlated with a smoother process. Are you holding a happy hour inviting existing or potential partners, investors and hires? Consider inviting potential acquirers too. Same if you are sending a newsletter, giving a presentation, or really sharing anything publicly. With the due caveat that if you are competing with your potential acquirer you also have to balance how much overtly you want to be in their crosshairs.
4) Dual Track / Process aka Fundraise And M&A — Many companies will pursue explicitly or implicitly both a fundraise and an acquisition. For instance, Instagram’s round led by Sequoia at $500M famously catapulted Facebook to acquire them for double the price ie $1B literally the same week. There may be some overlaps in a dual process if the potential investor and acquirer are the same but otherwise it’s truly double the amount of work ie a CEO better be ready. It also requires careful coordination with your existing investors given their expectations of returns and influence on your strategy. For a deeper discussion see “Dual-Track: Investment or Acquisition?”
5) Think Proactively About Timing — When are you running out of cash? Is there a big news from your startup? How is the market performing? If the acquirer is a public company what has been their latest quarterly and annual report? Is it the start, middle or end of the year? Do you take this offer or wait to get a better one? Fundraising ebbs and flows but there are far many VCs out there than acquirers. So getting the timing right is absolutely critical since there are legitimately windows of opportunity. The common wisdom is to have acquisition as a perennial topic during board meetings, which is usually a quarterly cadence, and seriously start tracking it at least six months before an ideal M&A date.
Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.