image credit: EyeEm

8 Lessons from 5 Failed Acquisitions in 1 Startup

Navigating the Path to Exit

tl;dr: One deal eventually stuck, at least partially. In October we sold AVARI — our key product and namesake of the company since we rebranded earlier that year. Many of the team went with the acquisition, but a small group of us went back to the core to refocus on our original product which had been quietly growing the entire time. You can read that story here.

As we went through the M&A process, I was struck by how little information there is out there about how to get the outcome we all seek — an exit. There’s loads on how to raise seed, build your deck, establish yourselves, etc. But no discussion around what we needed. So, the following are a series of lessons we learned in 2015 as we went through the M&A process.

1) Plan for M&A from the start

I’m probably going to take some crap for saying this because the prevailing logic from much of the investment community is to not distract yourself by thinking about M&A too early: Swing for the fences, go all in, stay laser-focused, do all you can to be their 1 success in 12. Makes sense.

In reality, the ONLY REAL REASON we are creating this venture with outside investors is to ultimately sell the company — within 7 years at latest or they’ll get on your ass for a liquidity event (IPO/acquisition) to free up their capital again. And rightfully so!

“When you take money from me, am I getting money from you?” Wilson said. “You have a responsibility to give me my money back sometime. You can’t just say f — — you. Take the g — — — company public.”
Fred Wilson speaking about Uber

Furthermore, if/when we sell the company, we as founders want to make some cash too. Only a tiny fraction of us will ever be on a path for IPO. And only 10% of startups will ever even have the opportunity for any sort of outcome at all. Of that 10%, probably still half of the founders walk away with nothing due to heavy liquidation preferences or simply a crappy deal.

So, begin the process of planning for M&A early in the life of the business. Don’t let it distract you from building a great company. But don’t put this off or you’ll screw up the outcome.

2) You don’t sell a company. Your company is acquired. VERY different psychology.

So, this one is sort of obvious. You don’t want to be in a position where you *need* to sell the company. This dramatically changes who wins the negotiation and by how much. Protect your ability to get what you deserve and to even walk away. Don’t miss the obvious, know your out of cash date and never go past it.

3) Begin strategic corporate collaborations (corp dev, not BD partnerships) early in the life of the business

I mean world-changing relationships that dramatically alter the future of your business. Yes, I’ll also take a bit of crap from some investors here as well. But, I’ve formed a strong belief over the last 5 companies/20 years that the *right kind* of corporate collaborations can change the world for a startup — bringing market understanding, expertise, distribution, money and, yes, ultimately M&A relationships. Data shows that only 29% of startups in the US have strategic corporate investment. But, those who do have a 3X greater chance of exit. See above — companies are acquired (not sold) and this most often happens from well formed relationships to have the best outcomes for all. Especially founders.

4) Do Deep Tech Demos

This is probably one of the most important perspectives I’ve gained here. I’ll never forget the day that our engineering team, my co-founder/VP Product and I executed a Deep Tech Demo to the acquiring company. Our deal was negotiated and we were in due dil to ensure the all that we conveyed was actually true about the product, business and team.

The team spent 2 days preparing a script on how we should demonstrate the power of our technology, the complex data pipeline, ops environment and approach to building/testing/deploying product. And, honestly, we were all amazed when we saw it in this compact way.

Mostly what anyone of the team ever sees at one time are bit and pieces, features and UI, code and deployment scripts. In this compact view from left to right, it was rather mind blowing. The demo lasted a couple of hours and went something like this:

  • Product Demo (VP Product)
  • Integration Demo (VP Product)
  • Data Pipeline Active (VP Engineering)
  • Recommender System Demo (Data Architect)
  • Deeper Product Demos A, B, C from Live Data (VP Product)
  • Infrastructure Environment — basically a tour through every AWS product in existence :) (Devops Engineer)
  • Reporting Demo (Data Architect)
  • Data Optimization Demo (Data Architect)
  • Statistics Demo (Data Architect)
  • Dev / Test Process (Team)
  • Deployment Demo (Team)

Notice how it has a natural flow (we were a machine learning technology) with initial demo, data in, data turned to magic, data out and all the steps. And it emphasizes the impressive abilities of everyone on the engineering team who made it come to life. (If you’re reading this @AVARI team, thanks. It was like watching a ballet as you guys took them through what we’d built together — impressive as hell.)

I honestly think that if we had called all of our investors into the office earlier in the process and taken them through this Deep Tech Demo, we might have changed the outcome of the business. It was incredibly exciting to see it all in that way. Do it for yourselves, for your team, for your investors and other stakeholders — on a regular basis. Make sure everyone sees all the underlying mostly hidden gems that exist in your product/product dev process.

5) Start your Data Room on Day 1 of the venture

Wikipedia says “a virtual data room is used to facilitate the due diligence process during an M&A transaction, loan syndication, or private equity and venture capital transaction.” Take a moment to understand what a Data Room is, what it is used for and how important it is to have everything stored in a safe, structured environment.

M&A/funding opportunities show up at moment’s notice. Be prepared and keep your sh*t organized and ready for review on-demand. We didn’t. We weren’t prepared for the sudden process that began. Don’t be caught unprepared.

The Data Room contents typically include:

  1. General Company Data
  2. Financial Information
  3. Corporate Agreements
  4. Legal Documents
  5. Intellectual Property Rights and Product Information
  6. Insurance Coverage
  7. Litigation History and Documents
  8. Employees & Human Resources (HR)
  9. Environmental Matters
  10. Tax Filings and Documents
  11. Marketing and Customer Information
  12. Internal Controls & Information Systems
  13. Sales Operational Information
  14. Support Services & Product Pricing

Do it today if you have not set up your Data Room already. A suggestion by Thomas Ruland is to structure your company share drive in this way from the moment you begin your venture. Then, when you need it, you can simply transfer the prepared structure to a 3rd party data room provider for each deal so you can share deal information in the right way without a bunch of additional new work when the pressure is so high.

6) Manage your Cap Table and know it cold

I’m not a pedigreed founder from the most perfect university program. I’m an in-the-trenches founder with more than 20 years of experience building companies — both with good and bad outcomes. So, when it comes to managing cap tables, I’ve learned by doing. And, thankfully during RetentionGrid, I’ve been able to rely on our awesome investors such as Sitar Teli & Bill Earner of Connect Ventures and later one of our angels Jeremy Millar. But, really owning your cap table is critical as a founder.

You probably use your cap table to simply understand the ownership structure of all equity shareholders and the impact of convertible notes. But, really owning it means you can do scenario analysis during new investment rounds and M&A negotiations. If you don’t have this solid, it will bite you in the ass.

Just recently I’ve seen solutions such as Capyx and eShares that can help founders do this. Don’t rely on your law firm and, if possible, don’t rely on your investors. They should back you up and make sure you are correct. But, understand it well enough to be able to know your path and make your own choices.

7) Transparency and Team Morale during trying times and M&A

Our team was awesome during the nearly 6 months of crazy highs and crazy lows of negotiating five different transactions. They were committed, loyal, (mostly) understanding and gave me all the chances in the world to bring about an amazing outcome. I can happily say that their resilience paid off and we delivered on that — for them.

But, it’s important to decide your strategy for team transparency at the outset. The M&A process takes its own path and, as a founder, you really have *no control.* I can’t even tell you how many times the situation went something like this:

“Well, this deal with [party A] is pushed out by 2 weeks due to [fill in the blank]. But, [party B] indicates they will definitely counter a term sheet from [party A.] And now, [parties C & D] are interested in XYZ… blah, blah, blah.”

It felt like this every week. Founders are an overly optimistic, “fuck all else just keep running forward” sort of breed. We can handle this uncertainty. But, your teams are not founders. Treat them well.

If you plan to be transparent, then do that. Let everyone know from day one of the M&A process that you will keep them in the loop, tell them the TRUTH no matter how painful, establish a clear process for sharing updates and stay consistent.

Or, decide to NOT go the transparent route. Put on the happy face, make the negotiations confidential, keep the team stable and productive, and pretend it’s all business as usual.

Go fully transparent or not at all. But, don’t (as we did) try to bridge the two approaches. Quasi-transparency is complicated and you end up with lots of requests for one-on-one updates when your time could be better spent on the transaction. We survived — barely. But, don’t take the process lightly.

8) Enjoy the process

If you read the above, you may think that I’m crazy and hate what I do. But, it is in fact the polar opposite. Most founders never get the chance to be in M&A negotiations at all, much less 5 with some of the most exciting companies in our industry. This wasn’t my first time going through the process so I know it can be exhilarating and fun.

After over 20 years building technology companies around the world, I often joke that this is my gambling addiction. That I am wholly unqualified to ever work as someone’s employee after so many years doing this. It’s because I absolutely love it. Blood, sweat, pain, tears and all. If you’re like me, you get this. If you’re not, then please go get a job and save yourself from the madness. :)

I mentioned at the beginning of this article that it was hard to find useful content around these topics when we were in the throes of the M&A process. And to be honest we really could have used better insight about how to leverage corporates much earlier than that. That needs to change.

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Check out the presentation at PODIM in Maribor, Slovenia.