M&A Best Practices for Startups
Julianne Brands [OVF Partner from 2016 - 2020]
Oct 2019
As early-stage investors, we’re often the first institutional partner of a founding team, and we’re all working together to grow a successful, self-sustaining company. That said, one of the first tasks of a startup board is to create an exit strategy and plan, knowing the plan will evolve and change over time as the company evolves and grows.
We hosted an M&A workshop for our investors, board designees, and portfolio execs featuring Stan Shull and Scott Rogers. Between them, they’ve participated in 16 M&A transactions. Stan led acquisitions for Apptio and was on the sell side at NCompass (acquired by Microsoft), Rational Software (acquired by IBM), Intelligent Results (acquired by First Data), and Apptio (IPO and then acquired by Vista Equity Partners). Scott Rogers, currently VP of Business Development at Jama Software, has spent his career leading business and corporate development teams at WebTrends, Exact Target (through IPO and acquisition by Salesforce), Monetate, and Datorama.
Takeaways from the conversation:
It’s never too early to build strategic relationships – As part of annual strategic planning, identify ten potential partners who have at least an 80% chance of acquiring your company – most likely current/potential competitors and partners. Thought exercise: At who would I be really upset if they entered my space without me knowing it? Which larger companies best complete our solution for our customers? For their customers?
Meet with business unit leaders, product team leaders, and/or corporate executives from this list 1 - 2X per year. This may equate to 40 hrs / yr (3-4 hrs / mo) for the CEO. Review learnings and strategic list each quarter. Develop and include one slide in your board meetings deck on the topic.
When starting strategic relationships, come bearing the gift of information! Shared customers are GOLD for strategic relationships. An email with, “I'd love to sit down and discuss what we’re hearing from your customers” has a very high response rate. Updates can include company growth, product, and progress, customer information sharing, mapping the org through questions and introductions, and/or simply, “I’m visiting a customer nearby, I’d love to say hello”... and then book your plane flight.
Business units are your friend – Corporate development executives are inundated with incoming M&A queries and therefore rely on internal champions from within a business unit - “If you want my attention, go to the business unit and find a sponsor.” Think about overlapping customers, revenue, product areas, and sales & marketing efforts.
Key factors to assess your M&A readiness: Timing, Bidders, Relationships, Alignment, Preparation.
Multiple bidders can increase your valuation by 40%. If your logical buyers are highly competitive with each other, that will positively impact valuation and odds of success more than just the number of acquirers in your market.
Prepare documents (financials, contracts, patents, etc.) in advance – promptness, transparency, and accuracy makes the entire negotiation process more seamless - especially when it comes to reps, warranties, and liabilities.
If potential acquisition conversation starts, develop a clear “one liner” specific to that buyer with the reason for the acquisition, and repeat it constantly.
Investment banks are valuable for helping drive and run the process, soliciting multiple bidders, and negotiating hard. However, it will usually be the CEO’s job to bring relationships to the table, especially if the acquisition is under $100M.
According to our panelists, the time from first introduction to acquisition can be anywhere from 2-7 years. Trusted relationships take time to develop.
Thank you to our workshop partners at CBRE, Ajay Malhotra and Kristin Hammond, and to our expert panelists, Stan Shull and Scott Rogers.