Getting Acquired (1 of 4): Engaging Corp Dev for Partnership or Acquisition

As a CEO at an early startup, it’s all too common to see unsolicited emails from junior partners at big VC or PE firms reaching out to “start a relationship”. They are basically the SDR for the firm trying to get their name on my radar in advance of a future raise.

In a similar tone, initial emails from a corporate development team at a big company can feel disingenuous, or even flattering. This big company wants to chat with me, taking an interest in what my team is building? Maybe I should take the call.

Anyone who has read Paul Graham’s ‘Don’t talk with Corp Dev’ article a few times, knows to avoid starting a conversation and politely declines or ignore the conversation altogether. These requests become even more interesting when coming from an established player in the market, maybe with a marquee name, older legacy technology, or even competitive motivations.

Having been down the acquisition journey just once before (and coming out with a successful early exit), I’d like to share my experience. I’ll also share the combined wisdom of several experienced entrepreneurs and coaches who helped me navigate the process if you ever find yourself among the 10% of startups that actually get acquired.

Before we talk about Corp Dev about an acquisition, there are two very real questions any tech startup CEO should be thinking about:

Question 1: When might partnerships be appropriate to fuel our growth?

If you’re like most startups, trying to grow your business through organic growth or B2B direct selling (when you have no brand recognition) is very tricky, fickle and sometimes downright hard. If you’re building a VC-backed, high growth startup, you absolutely need to build your growth engine to stands alone and justify its worthiness for repeatable growth (& more funding).

In addition to getting that revenue engine stood up, CEOs must also be considering how they can raise the trajectory of their growth, which sometimes involves partnerships. Partnerships are lighter weight relationships that sometimes lead to acquisition conversations – similar to how dating is more casual than marriage.

In B2B SaaS startups, there are really 4 levels of selling partnerships to consider:

• • Referral: Usually low commitment on both sides, where 5-15% of first year’s Annual Contract Value (ACV) is paid to the referring partner. Read Tomasz Tunguz good blog on this.
    • Caution: don’t expect much volume from these partners.
  • Coseller: Mid-level commitment on both sides, where 15-30% of first year’s ACV is paid to the referring partner.
    • Caution: These take time and coordination to sell with another rep or team. Admin, process and training to collaborate can be difficult.
  • Reseller: High-level commitment on both sides, often 30-50% of revenue sharing on deals sold, depending on marketing resources, annual sales commitment, etc.
    • Caution: Significant time and resources required to make this work, for both the partner and the startup from product marketing, sales enablement, sales ops and billing operations.
  • White-label: Very high commitment in sales and engineering, not just in enabling a channel sales team, but also changing the product to meet those requirements.
    • Caution: requires lots of effort, but can be very successful if done right. Read more in this guide to white-labeling.

Remember that partnerships are not good if you haven’t figured out how to sell to customers yourself. There are also a bunch of challenges and barriers for startups to succeed with partnerships, which is why most early-stage startup advisors often discourage looking into them as an option until much later on.

Question 2: Do we have enough cash and optionality?

The second question startup CEOs should always be thinking about. How far away are you from running out of cash? If you’re struggling to sell, you may not have enough growth to attract a desirable Series A round from top-tier venture capitalists. Maybe you can raise another seed round to extend 6 more months so you can hit the turning point in product, or product market fit so you can get to your next milestone.

At VendorHawk, we had some great early customer logos and we’re figuring out our sales motion and how to get leads from marketing efforts. I had several experienced entrepreneurs in my corner coaching me about the benefits and the risk of the partnership conversations. We also had to deal with inbound interest from large companies, including a few well-established competitors. I decided that having options outside of just raising more capital was the prudent thing to do.

Should you even consider the Corp Dev conversation?

Read this excerpt from Paul Graham’s blog: “It’s usually a mistake to talk to corp dev unless (a) you want to sell your company right now and (b) you’re sufficiently likely to get an offer at an acceptable price. In practice, that means startups should only talk to corp dev when they’re either doing really well or really badly.”

This is great advice, but I disagree with point (a). We lightly engaged about 6-7 months before the acquisition happened. On point B, I agree, but let’s add more color to other factors to pay attention to know when it’s good to have a conversation:

• Have you built up a team that is desirable to acquire?
• Has that team produced a product turns heads?
• Are you beginning to win customers, or even beat the legacy options in the market?
• Do you know something about the next wave of innovation the potential acquirer doesn’t know or is struggling to execute against?
• Is this space heating up with “bidders” (potential acquirers) knocking on startup doors?

At VendorHawk, we saw all these things coming to a head, in full knowledge and sobriety that many acquisition deals just don’t pan out and are a massive waste of time. Time is a different type of precious currency to a startup, so you should avoid wasting it, even at the risk of sounding too standoffish.

Were we ready to sell at the time we took a few intro meetings? No. But our advisors reminded us that starting a relationship with a quick call focused on learning is still valuable. How much can I as the CEO learn about how this big company thinks about the space, the market, their product, what their customers are asking for, their roadmap, their intentions, and areas of potential investment? This valuable intel is why I took a few 30-minute meetings, to get acquainted, and talk about our business/industry at a high level, sometimes even “demoing” our website (which was very unsatisfying to the potential partners/acquirers).

The Talk Track is Key

My co-founders and board discussed what an acceptable price might be for the company, but what was important was our talk track. Before you have any meetings with Corp Dev, I encourage making a list of things you’ll share and things you won’t share; questions you will answer and won’t answer, even under an NDA (which you should put in place after the intro call).

Our talk track sounded like this: “We’re here to build a big and exciting company. We’re interested in evaluating ways that partners could help us tackle the market. We’re exploring if there is a better together story that could be had between our products. Our investors want to see us dominate the market – so we’re considering different ways we could achieve that goal.”

You notice how that sounds? It doesn’t sound like we’re trying to fold our hand, give up or just get desperate – which is a common mistake startup founders fall into. Corp Dev at big or impressive companies can sometimes make you feel small, or weak or potentially afraid of them. Don’t give into the fear. There is a reason they’re talking with you. They’re at least interested, or perhaps they are worried about your presence in the market. But just like dating, pay attention to which ones you have good chemistry with and which ones are too caught up in their own ego.

Did we meet with every company who wanted a slice of our time? No. We decided to only deal with inbound requests from companies we respected as market leaders, or with tons of customers we wanted to reach.

Plan A

Emotionally, it’s key to remain as detached as possible from a potential future with an acquiring company. You’re also trying to stay focused on running the business, coaching your team, and remaining engaged in how to grow it yourself. For us, we were gearing up for the fundraise, which meant that I, as CEO, was running the business, pitching VCs and teeing up some interest with potential acquirers simultaneously. I often spent time praying and re-centering myself in my faith so I could try to be effective wearing so many hats at once.

So how did we, at VendorHawk, engage with Corp Dev and get acquired?

Check out part two to learn how to create a competitive bidding situation.