How to turn partnership into an appealing acquisition: 4 tips for tech entrepreneurs
By Pavel Cherkashin
As a venture investor, I want the companies in my portfolio to make a successful exit one day.
IPO is not an option for a majority of startups, as it requires them to become established businesses first, which normally takes 7–10 years. A quicker way for a startup to make an exit is to be acquired by a larger enterprise.
Now is a great time for that. Global mergers and acquisitions totaled $1.2tn in value in the first quarter of 2018 — a record-breaking result and a 67% increase year-on-year. At the same time, the number of deals dropped by 10% according to Thomson Reuters, which means that the average deal has become substantially bigger. Moreover, the law firm Baker McKenzie forecasts that global M&A values will reach $3.2tn in 2018 — the second-highest yearly deal value since the financial crisis in 2008.
Tech giants eat up a startup per day. Most of such deals are small team acquisitions (called “acquihiring”), which are made to get startups’ technology, intellectual property, user base or to eliminate a potential competitive threat.
Clearly, everyone has heard stories how some startup founders managed to sell their businesses for billions in one day. But more often, founders struggle, walking the hallways of big enterprises without any luck and not understanding why their attempts fail. Just having a good product or service is not enough — founders need to understand the needs, rules and context in which potential buyers operate.
Before becoming an investor, I served in executive roles at several enterprises, and prior to that, I founded three companies, all of which were acquired by leading global organizations. Here are my insights.
In any enterprise, there are multiple decision makers who are driven by various motivations and who both collaborate and compete.
If you never worked for a large company, it may be hard to understand how one operates. In particular, an enterprise isn’t a single person or have just one center of interest; rather, it has a large number of centers of interests, some of which are contradictory, so their leaders might be involved in open competition. It is not rare that directors of departments are happy to screw each other over, acting worse than competitors.
Working with an enterprise is working with the particular people who have the power to make decisions. By learning how to maneuver the hallways of the enterprise and manipulate the existing interests and relationships, startup founders will gain the potential to achieve their goals.
The top purchase drivers for enterprises are joint business development and project implementation.
Partnership opens doors to an enterprise, including those to the offices of corporate development and M&A departments. Partnership should facilitate the M&A conversations, not block them. The startup has to build the right relationships with the enterprise, so the enterprise will want to actually acquire it later. For the enterprise, it makes sense to buy a startup only if it remains independent. For example, startup founders often make the mistake of agreeing to an exclusive relationship with the enterprise in exchange for promises of unclear future benefits. In this scenario, the enterprise no longer has any reason to acquire the startup because it has already eliminated the risk that the startup will help a competitor.
Just as a shark will never eat its pilot fish, a corporation will never acquire a partner that is a natural part of its ecosystem.
A shark and its pilot fish have a symbiotic relationship: the pilot fish maintains the shark’s hygiene in return for some food leftovers. Startups can perform similar functions for corporations. The startup finds a certain deficiency and fills it with efficiency, flexibility and agility. It sounds like a good strategy, but the startup becomes an integral part of the corporate infrastructure and ecosystem, no smart corporation will ever acquire a partner that is a natural part of its ecosystem. For example, an electronics manufacturer will never acquire a reseller, even the best and most important one in its ecosystem, because it will damage relationships with other resellers.
To avoid becoming an enterprise’s satellite and losing the potential to be acquired, startups should either offer a new product aligned with their line of business and business development goals or significantly enhance their main value proposition or main product. For instance, a cloud service provider will not acquire a service distributor, but it might be interested in buying a startup that develops a security solution to improve safety of the current cloud offering.
The threat of a startup becoming a competitor is a bigger driver for acquisition than a friendly partnership.
A startup can be a strong partner for an enterprise, but it can also be a potential competitor. A friendly partnership opens the doors and serves as a basis for purchase negotiations; but what drives the deal in the end is often the corporation’s fear that if they don’t buy the startup, their competitors will, or the startup will become a viable competitor on its own.
The best way to be acquired in these situations is to identify deficiencies that prevent the large enterprise from fully competing with other leaders in their priority business areas, both traditional and newly announced. These areas can be their customer base, technology, geographical outreach via a partner network, etc. By fulfilling these deficiencies, startups get on the radar of enterprises that are looking to quickly develop their businesses to keep up with the competition.
Overall, getting acquired by an enterprise is a great option for any startup. Business development partnership is the easiest way to start an acquisition discussion in a friendly way. But only the fear of competition, not potential benefits, makes the enterprise to open the checkbook. The acquisition conversation goes smoother and quicker if the enterprise decision makers see the deal as their great career move.
If you’re earlier in the startup cycle and still struggling to get attention of investors to develop your idea, I recommend reading my article about how to make your startup hot.
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Pavel Cherkashin is a venture capital executive and entrepreneur with a successful track record of building billion-dollar companies as a founder, investor and board member. As a co-founder and managing partner at Mindrock Capital and GVA Capital, Pavel invests in artificial intelligence, blockchain and self-driving tech. Earlier in his career, Pavel served in executive roles at Microsoft Russia, Adobe Systems and Siebel Systems. He also founded several IT companies, including Sputnik Labs, AdWatch and Actis Systems, all of which were acquired by leading global organizations.
