Don’t get pulled into a sale process

Once upon a time, there were relatively few buyers of software companies: Google, IBM, Oracle and the like bought lots of companies. And for the most part, buying was concentrated in the hands of large, public tech companies like them.

The world is very different now. When we run stats on exits every quarter, we see a long tail of buyers. The large public tech companies continue to buy, but the buyer universe has expanded significantly. Many buyers are smaller, private companies you likely have not heard of, backed by private equity sugardaddies. And of course, the PE firms themselves are active buyers. Vista Equity Partners is one of the most active buyers of software companies these days.

The exit landscape today then is characterized by LOTS of target companies (buyers have more choice than ever in almost every category) and many buyers. This makes for confusion and uncertainty on both sides.

It’s easier than ever to launch a startup these days. The 7,040 marketing tech companies tracked by Chief MarTech beautifully illustrate this. However, when you dig into these companies, you see most of them are de minimis. Bootstrapped, 5 or fewer employees. Not really relevant to buyers unless they are just want to acqui-hire small teams.

All of this noise coupled with more buyers backed by more capital than ever mean that startups are likely to get more inbounds from buyers than ever. How should you handle these inbounds?

First, unlike Paul Graham, I believe that you should talk to corporate development. Even if you are not looking to sell your company, the odds are very good that some day you will. It only makes sense (for both sides) to build relationships in advance (more on this point here).

The mistake I see management teams make is taking an inbound inquiry as a sign that someone wants to buy their company and acting accordingly. Disclosing way too much info before knowing if this is serious. And in the process of said disclosure, failing to spin up other conversations so that you have a competitive process if the discussions turn out to actually be serious.

As I have said many times before, strangers rarely marry. The chances of a buyer showing up and in a short amount of courtship time paying a large amount of money for your company are pretty low. Good things tend to take time.

If a buyer contacts you, it is not a given that they actually want to buy you. Many times they are doing something called market mapping. This is where they look at every player in a category in order to better understand it and to figure out who they would prioritize IF they decide to make a buy there.

Often, the only tangible outcome of a market mapping exercise is a commercial partnership. This is the dating phase before an acquisition. This phase could last a long time. Last month GoDaddy announced their acquisition of Sellbrite. This is the culmination of an exercise that began over a year before. As noted in our news roundup this month, this relationship began with a partnership. Only when they saw it was working did they move to the next phase.

So, the next time a buyer contacts you, here are my suggestions:

• Breathe
• By all means engage. But ask as many questions as they ask you. What drove them to reach out? Do they have a mandate to make an acquisition in your category? Does that mandate have an exec sponsor already?
• If it’s serious (they intend to buy), ask yourself:
• Is this the right time to sell? Do I have the scale and validation that will result in a significant outcome?
• Do I have to sell? ie. what are the implications if a competitor is bought instead?
• What are the implications to this company’s competitors if they make an acquisition here?
• Who else should I be talking to?

Navigating these discussions and questions is tricky. Turning them into an actual closed deal is hard to say the least. I’m biased, but this is where you need a great advisor/ banker. Don’t do it yourself.

In closing, don’t get pulled into a sale process. It is true that the best outcomes happen when buyers come inbound. Just be intentional. Get pulled in because it is the right decision for you, your stakeholders and your business.