As I described in part one of this series, you shouldn’t just avoid talking with Corp Dev and product teams with potential partners or acquirers without considering the upsides of competitive intelligence, learning and building a stronger opinion of the players in the market.
A good CEO must also be thoughtful about his/her optionality. Is raising capital my only option at this juncture? Is it raise or cut back, or even raise or your startup fails? Layout all the options. As we laid out those options, we chose to engage with corp dev and create another path to growth the business.
In this post, I’ll talk about the challenge of getting multiple Corp Dev teams outbidding each other to have your startup. We ran our process as two parallel paths of fundraising (plan A) and shopping the company (plan B) to see if we got compelling enough options to ditch plan A.
Let’s begin with a very basic question:
What meetings happened to reach a favorable acquisition?
Situations can vary greatly but, for those who enjoy bullet points, let me me share a quick overview of the meetings we had and the process we were running (in hindsight):
- Initial interest from the acquirer (inbound email or maybe quick phone chat)
- Once we engaged, we took things slow getting to the first conversation
- You should be doing your research to prep for the 1st meeting on customer count, types of products, vision on website, team, other partnerships or acquisitions they’ve made, funding sources, mutual connections
- 1st meeting (45-60 minutes) with corp dev and hopefully the product team
- I told many “We aren’t ready to go deeper, just too busy building product, acquiring customers, and building the team.”
- When I knew the times was more ripe I proceeded to schedule the next meeting
- 2nd meeting (60-90 minutes) with product team and a more technical audience
- You’re building trust and credibility in your audience for what you’ve built and the team who has built it, but still holding back part of your “secret sauce”
- One or many of these things might happen:
- Clarifying questions or final other stakeholders who need to be involved
- Proof of Concept of your tech on sample data or situations
- Deep dive on how things work behind the scenes, why it’s so hard to pull off
- In-person visits to meet team
- Letter of Intent (LOI) – often board, private equity investor or CEO approved
- Once interest of making an offer is clear, you must ask for this to get real expectations on when the official offer will come
- Bidding war between multiple interested acquirers (ideally) to get the best price
- You can leverage other’s interest to drive urgency around getting your formal offer in an LOI or term sheet for you to evaluate & make a decision
- Term Sheet – lots of negotiating and renegotiating happening at this point
- Diligence – tons happening here (more in the next post)
- Definitive agreement and final negotiations about team, comp packages, etc.
- Announce & Close – It’s public and official
The dating phase & the power dynamic
During the dating phase, you are just checking around to see what kind of real potential interest there might be a solid partnership or acquisition – whichever makes the most sense. In the first significant meeting you should be focused on learning why they’re so interested in the space and what they plan to do about it. You should also learn what drew them to look at your startup, your technology, and your team. At the same time, you want to share about your vision, the way you see the world, your approach to the customer, etc.
At VendorHawk, when had handful of companies (about 5 or 6) interested in talking with us, so we just focused in on the one whose business vision and product strategy aligned most closely with ours.
Your most essential assets in the negotiation
As a startup, you have very few things that give you power in a negotiation like this, so you need to operate in a tension of holding things back and only sharing more at the right time.
Here are some assets you have, listed in rough order of least sensitive to most sensitive:
- Domain knowledge of the industry and space
- Knowledge & details about your team
- A few notable, or marquee customers and stories
- Deep or surprising learnings you’ve uncovered about customers
- Your time – give them some, but only give it to advance towards an LOI or term sheet
- Your team’s time – “My CTO is too busy building and leading and can’t to join the meeting.” Don’t bring in the big guns until things are more serious.
- How you built your product and why
- What amount you’d seriously consider accepting to be acquired
- Exactly how many customers do you have
- How much revenue you have today
- Your cap table & previous investing round figures (valuation, price)
How does the future look with them?
You also must see how they envision you working within their company. How would your product strategy create a better together story? How does it help customers in general, or disrupt / dominate the market? Where will everyone work? You won’t have too many of the specifics, but you want a general understanding of your potential future with the most serious potential acquirers. Also, do you board members and advisors agree there is a natural fit between the companies?
Let them say the “A-word” first
Since they are the ones pursuing you, let them be the ones to bring up the acquisition conversation. If you don’t have a corp dev person in the conversation, you might not have the right audience if you’re just talking with a product person. So try to let them bring it up.
When they do, you can share that you’re open to discussing partnership and a potential acquisition, but the better together story and number for the company would have to be interesting enough to detract you (and your co-founders) from building a big and successful company.
How do you pick a price? (and not talk about it)
Without millions upon million in revenue, tying the acquisition price to a revenue multiple is not going to help you. At VendorHawk, we had some great council point us to analyze a few things:
- What is the upcoming funding round that we’re going to raise on? What is the pre/post money you might expect? That’s one data point.
- How many customers does the potential acquirer have and how many of those customers can you sell your product to? How does that math pencil out over a 1, 2 or 3 year period? That helps to justify the price they would pay for your business, product and team. Remember that any deck you prepare about why a better together story makes sense, should help the bidder build the case internally to put their best foot forward.
I’d recommend you avoid to sharing your desired price until the Corp Dev team is pulling it out of you, throwing out really low numbers or suggestions to get you to say, “No. we’re not interested at $5M, we’re thinking $15M.” It’s better to provide a range, but I’d wait until you’ve crunched some numbers and have discussed the revenue opportunity with them first. It’s much easier to drop a range out there when the backdrop is a huge & believable upside of cash for the acquirer. When it’s clear they need some indicator of a range to get an offer back to you, it’s probably the right time to share your range and indication of what a more compelling vs less compelling deal looks like to you.
If you haven’t started it yet, you need to begin populating a “data room” (we used onehub.com) to start pulling together all your relevant diligence docs. We just tweaked our VC pitch deck to help us have a more relevant partnership conversation. Having a common data room where info is stored for all to see hints that you’re serious about running a process and the potential acquirer is just one of many in the game.
It’s not enough to talk price and what maybes. You need to create urgency – a reason for them to give a good offer, and quickly. Some ways of doing it might be an upcoming funding round, a public company’s upcoming quarterly earnings report, or other bidders giving. If you don’t have a funding round, or multiple serious potential bidders in the mix, and business is going moderately well, you should probably just focus on running the business and stop the conversations altogether.
Your goal in running a “bidding process” is to get multiple interesting offers as quickly as possible, from companies you would get excited about working for, with an outcome that is good for your team and your investors as well.
That’s why we decided to work with an expert.
Hire a deal guy (banker or M&A consultant)
We then hired a “deal guy” (obviously, man or woman), who helped us shop the company to the market and run a process to get the best deal. Ideally, the deal guy has domain experience selling companies in your industry and already has a rolodex of companies who like to acquire startup tech and teams.
They should work with your corporate counsel to run the process as the leader. A good deal guy will understand your company, do the research on potential acquirers that might be interesting to you and reciprocate that interest in your startup. They will reach out and schedule meetings, speak about the dynamics of the deal to the potential acquirers and be a master of creating urgency to weed out only the best options. As CEO, you should learn to benefit from their expertise, let them lead, and just focus on running the company and which option (fundraising, Acquirer A, Acquirer B, doing nothing) is best for the everyone.
The bidding war
At VendorHawk, once we had lead the first offer on its way, we ran our bidding process to engage everyone with great urgency. I probably had second and third meetings with 4-5 companies in the span of about 2 weeks (most of which were remote using Zoom.us).
When you turn up the heat, you’ll see which companies are just dragging their feet shopping for ideas and are not truly interested in a deal. If you keep asking them for a price and using the range you have in mind to guide them, you can make sure no one is wasting each other’s time.
You might get a verbal offer first by phone, but you need to get the signed LOI in writing to make it final. Your deal guy can help create the dynamic of negotiating for terms up front so you don’t get a bad deal. Pro-tip: you probably want a stock sale in cash, not an asset sale or cash + earn out. Read more about that here.
Once you have one LOI coming in, as the CEO, you need to continue pressing the urgency of the situation (fundraise, or other inbound offers). Your deal guy will help you create this urgency as well.
With multiple offers in hand, the deal guy works their magic to get a best a final offer. Usually with tight deadlines on accepting the LOIs you have to decide if any of the offers is serious enough to take.
Will you sell or not?
That’s when you need to step back and make an exciting or a tough decision on the whole deal. Is this arrangement something you can get excited about? Is this something your investors would be pleased with? How will your team feel and their families? How will your customers feel? After all the work you’ve personally put in up to this point, how would you and your co-founders feel about the outcome personally? Also, how do you prospects look for raising more capital or continuing to build things on your own?
Once you’ve signed that LOI and then a term sheet shortly after, you’re set on the track and you shouldn’t waiver from it – especially if you’re running out of cash.
Did you sign the LOI? If so, read the next article about diligence (coming next week).