How your startup actually gets acquired

(this post originally appeared on pmeenan.com on October 21, 2015)

You hear it all the time in startup circles. Founders, investors, advisors and writers are all guilty of saying it at one point or another.

Some variation of: ‘This company will get acquired by [Google, Salesforce, Facebook, Microsoft, Apple, Oracle, SAP, etc.]. They will just have to have it and will swoop in to buy it.’

Really?

I’m pretty sure that’s not how this whole thing works so I’m confused why I keep hearing it.

The only explanation I can think of, other than people trying to reassure themselves about decisions they are making, is that there is a broad lack of understanding on how acquisitions actually happen.

I’m talking big time, multi-hundred million dollar acquisitions. That’s the goal right? Not acquihires. Not feature buys.

I can’t recall the exact number of M&A situations I’ve been around in my career, but across 10 years of being a VC, in Corporate Development at Microsoft and as an investment banking analyst I’ve seen enough to confidently share a few myths and facts about how startups actually get acquired.

  • Myth: If your startup is in the same ecosystem of a big company, then the big company can be considered a likely acquirer.
  • Fact: It simply isn’t enough to be in the same ecosystem. Ecosystems are massive. Your startup usually must be doing one of two things in a material manner: 1.) delivering joint value to the same set of customers (i.e., very active integration, products work better together) or 2.) be taking away customers from the acquirer (customers literally choosing you instead of them). If neither of these are happening, there is a high likelihood your startup is not on the mind of the acquirer.
  • Myth: Acquisitions happen quickly.
  • Fact: The time between getting ‘the phone call’ and the initial offer can be short, but often times it takes years of relationship building to just get the phone call. Trust, value alignment and joint strategic direction are critical to big acquisitions, especially when the CEO of the company being acquired will have a leadership role with the acquirer. This stuff doesn’t just happen overnight.
  • Myth: The Corp Dev team decides what companies to acquire.
  • Fact: I’ll be brief because Paul Graham has already done a great job covering this, but in almost all cases Corp Dev are purely focused on executing the deal when told. You want to build relationships with the actual business unit leaders that have P&L responsibility and will be leading the business once integrated. They drive what happens because they are the ones who live with it after.
  • Myth: How much money I am losing doesn’t matter. Its all about revenue growth and momentum.
  • Fact: Revenue growth and momentum are huge drivers of getting acquired, but how much money you’re losing matters way more than people think. The business unit leader, the one calling the shots, is going to absorb your P&L when they acquire you, but chances are their own end of year targets they are accountable aren’t going to change as a result of the acquisition. Sometimes CFOs give their business unit leaders what is called ‘P&L relief’ on acquisitions, which basically means the business leader can remove the losses of the acquired company from their end of year results, but its not that common. Don’t think this is a big deal? Tell that to the Exec buying you who has worked 20+ years to get in their current role. They kind of want to stay there and missing end of year targets is a great way to have a short stay.
  • Myth: My chances of getting acquired increase a lot after someone else in my space gets acquired.
  • Fact: It really depends on how big your category is. There are some strong examples of material acquisitions happening after an acquirers competitor makes a purchase (Microsoft buying aQuantive after missing out on Doubleclick, Apple buying Quattro Wireless after missing out on AdMob, Oracle buying Taleo after SAP bought SucessFactors), but usually it doesn’t extend past the top 2 or 3 players in a space. So I guess your odds might increase a bit if another player in your space gets bought, but you better be next or it might be a long slog. Besides, who wants to be second or third anyway?

Are there edge cases to these myths/facts, of course. Acquisitions happen in all sort of weird ways, but if you really want to be smart about who might be an acquirer of you startup ask yourself these questions while your building: What companies do I have strong customer overlap with? What companies am I taking customers from? How senior is my relationship at that company? How strong is that relationship? Is the financial health of my business make me more or less attractive to them?

By answering those questions you’ll probably learn a lot about who you true set of acquirers may be and how attractive your business actually is.

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