Editor’s note: Tomio Geron is head of content at startup Exitround.
The dream of many entrepreneurs is to build a successful business that can go public or be acquired for a large sum. While IPOs are hard to come by, acquisitions are more common.
The mantra is that good companies are bought not sold. In other words, the best companies are sought after and not desperate to sell. But how can startup founders or CEOs ensure that they’re the ones who are bought and not sold?
While the obvious path is to build a great company and great technology, that’s not always enough. There are a number of other things you can do, says Ajay Chopra, general partner at Trinity Ventures and former entrepreneur who has bought and sold companies. He has three main tips to help in this process.
Establish a presence
First, establish a presence in the market and in the public. You probably have the most expertise of anyone in your specific business or market, so don’t be afraid to share that with the world.
“You may have the world’s best technology but if nobody knows about you, they won’t be thinking about you,” says Chopra, who prior to Trinity Ventures was cofounder of Pinnacle Systems, which went public before it was acquired. “Entrepreneurs who create an outsized presence for their companies are usually rewarded.”
You don’t have to be on TechCrunch or Re/code every week. And this is not simply traditional PR or marketing. But being a speaker on industry panels, having a good blog, or being featured in important industry niche publications can be great, Chopra says. And, of course, you’ve got to be authentic and thoughtful, and not just shooting off random information.
Chopra, who has had seven exits out of his 16 or so venture investments (excluding seed deals), including Ankeena, 21Vianet, Green Throttle and TubeMogul, says companies that were more active in creating a public presence were ultimately more successful. “My CEOs who authentically just made it a part of their jobs to take meetings and built partnerships and get to know people in the ecosystem — they got much higher multiples,” he says.
You as a startup CEO want buyers to hear about you and come try to talk to you. For example, one of Chopra’s companies stole a $10 million account from a larger rival. That made the rival notice quickly and want to talk to his company. That’s a different and more specific way of establishing presence, but it is another way.
Secondly, partnerships are critical for building relationships that can develop into bigger acquisitions. This means thinking about which companies would be good to partner with and could benefit from this product or technology.
“What we notice is that a lot of the strategic acquisitions where companies pay or even overpay — many happen because the companies had previously engaged in partnership discussions,” Chopra says. “It’s very, very important to start thinking about this early — even around your seed round.”
If the larger company is a natural partner, it is fine for a startup CEO to reach out to engage in those discussions. The partnership is a great way to talk and get to know a potential acquirer without having the pressure of M&A discussions. You also don’t have to worry about looking desperate to sell as you could if you initiate M&A discussions.
Chopra estimates that 50 percent of acquisitions start with some level of partnership discussions. He cited Ankeena Networks, which got an investment from Juniper Networks as well as a partnership deal and then a year later was acquired by Juniper. “The partnership is almost like a trial period,” Chopra says. “They’re getting to know you and hopefully will fall in love with you.”
Third, talent is a key factor why companies acquire tech companies. Top talent can bring attention to a company even if it’s a relatively small company.
“If you hire high quality technologists or business people or a COO, those things make a difference,” Chopra says. “They’re respected in their industries and have connections to potential acquirers.”
Overall, as a potential seller you have to be in the mindset of the potential buyer. That means really understanding what they want and what you can do for them. “They’re not thinking, ‘This is a cool app and let’s buy it,’” Chopra says. “It’s really what’s the problem you’re solving for them.”
Some startup CEOs will go to meetings with potential buyers and only talk about their product and technology. “Corp dev is not interested in that. They’re concerned with, ‘I have a presence in the industry, but I have these major holes. Are you a real player who can help me stop worrying about this so I can worry about something else?’”
They might be interested in how many customers you have and who they are or which verticals your company is in. “Entrepreneurs like to talk about their product and how cool it is instead of what gap they’ll fill,” he says.
While entrepreneurs can do all of the above to make their acquisition more likely and more successful, there is still the matter of making the acquisition work after the acquisition.
Acquisitions are major projects and many things can go wrong. When Chopra was buying companies at Pinnacle, his team would typically have a very detailed post-acquisition plan. This included many decisions, such as what to do with the different parts of the startup, including the finance team, engineering, sales, support and the CEO. Also, the buyer needs to figure out how the seller’s systems will integrate with its own. One of the most important things is human resources. If seemingly simple things like benefits and vacations are not resolved well, that can quickly kill morale in a team. But most acquiring companies ignore these issues, Chopra says.
Despite these plans a large number of acquisitions don’t work out. Chopra, who bought about 20 companies as a CEO, thinks that only about two of the acquisitions actually made an impact on his company. Both the buyer and seller need to have a very detailed understanding on what will happen after the acquisition, he says.
The M&A market has been exceedingly hot this year, but that may not last. Acquisitions are tied to stock market performance and the market could get weaker next year, especially in Q2, Chopra believes. Interest rates will be heading up, international markets have been and could continue to be shaky, and private company valuations have been very high.
There have already been some signs of weakness as two potential IPOs are targeting prices below their recent private company valuations, indicating more potential pull-backs to come. If the stock market does start to drop that could cause a slowdown in the M&A market.
Could those macro changes affect your startup M&A outcome? It’s a definite possibility, but if you try some of these tactics above, you could give yourself the best options when the time comes.