Looking to Sell your Startup? How to Transform your Startup from Stale to Sold
Welcome to Spencer Trask Perspectives, a monthly interview series with our CEO Bill Clifford and writer John Essick. Mr. Clifford has generously agreed to share his unique insights and expert opinions on topics such as business development, deal flow, C-suite management, startup culture, entrepreneurialism, and more.
We welcome your feedback, and encourage you to submit questions to askST@spencertraskco.com for Mr. Clifford to potentially answer in future articles.
Despite the fact that in 2018, the United States experienced over $1.5 trillion in merger and acquisition (M&A) activity — with 5,718 individual transactions ranking as the second highest number in history — thousands of startup companies that began with great ambitions failed to bring their great plans to fruition. Many were fine companies developed by founders with visions of unbounded success, creating products that filled a real marketplace need, staffed by dedicated employees, and with an early revenue curve that pointed to the moon. Only they flattened out as competitors entered the market, sales cycles lengthened, and margins shrank.
Today’s conversation with Bill Clifford addresses what a startup’s leadership team can do when faced with this dilemma, to shift from earning a profit to finding a way to break out of the pack and make their company an attractive acquisition candidate.
John Essick: If an M&A opportunity hasn’t come knocking at the door, has a founder or CEO missed out on reaping a significant financial reward, or are there ways to still capture a decent payday?
Bill Clifford: M&A isn’t the only way that a founder or CEO can cash a big paycheck after years of hard work turning a startup into a market leader.
Many companies simply find their niche and are happy to cultivate and maintain a loyal and satisfied customer base that provides just enough revenue each year to keep the company operating profitably. In these cases, the leadership could decide to minimize the expenses of the company, reduce speculative investments in new research and development, minimize G&A and focus on client retention. In essence, they now operate the company as a “cash cow” and pay executives and investors handsomely from the profits, earned from the margins generated from the business.
Alternatively, leadership could break out into a closely related area of business, leveraging the current staff, sales channel, and company brand name to find new markets. This would require a minimal investment of resources and maximize the value of in-house staff and talent that’s already onboard. For example, engaging in a joint venture to begin selling products from another company on a royalty basis to customers with which they have a current selling relationship.
JE: Startups that have venture capital investors are unlikely to be willing to accept a cash cow solution. The VC business model is to cash out and put that money to work on other deals as soon as possible. What tactics can leadership employ to make their startup an attractive acquisition target?
BC: There are a number of things that a company can do to separate themselves from the pack. Sometimes it’s a matter of activating marketing programs to generate enthusiasm. A commonly used tactic is to simply change the name of the company. A calculated name change from ABC Software to Breakthru Software Products, Inc., accompanied by marketing and advertising spend to create buzz, can transform a staid old backroom software company into a must have meeting.
The same thing applies to a change in a product name. Companies looking to find suitors often seek to make a marketing splash by changing the name of their product and doing anything possible to modularize or break their products into components that can be named separately, priced, and sold separately. As a result, the marketplace now has the impression that the company produces a suite of products.
There are many other techniques that companies can use to stand out in the crowd that fall more into the realm of public or media relations. A common approach is for the company to announce the formation of a prestigious Advisory Board, separate from the Board of Directors. This assemblage should contain members who are former CEOs of respected companies, VPs of R&D, or CFOs of successful companies that have competed in the same industry as the company. This particular Board is generally not very influential in terms of shaping the direction of the company or its product strategy, it is more an honorarium.
Another approach is to add a prestigious individual to the Board of Directors. This would be done with much fanfare and press attention to emphasize the new member’s background and accomplishments, The company would of course make abundantly clear how honored and proud they are to benefit from the contribution that such experience will provide.
JE: Many times, especially in the technology industry, there are one or two very large companies that become the primary acquirers as they begin to consolidate a given technology space. Rather than build out all of the unique technology features and the facilities required to complete a robust product offering, they accelerate their product suite by adding components built by other, smaller companies through acquisitions. What steps can these smaller companies take to ensure that they are on the radar screen of the larger, acquisition-minded companies?
BC: There are two overt steps that these smaller companies can take to ensure that they are front and center when an acquisition-minded company is in the market to fill out a product suite.
One is to add an executive from one of the larger companies to the Board of Directors or Advisory Board. In this way, the individual has personal knowledge of the capabilities of the products and people of the smaller company, and a working relationship with senior management. This would make any overture for an introduction to an acquisition negotiation a simple process. This new executive would also have the opportunity to influence, to some degree, the direction of the products of the company from the inside. Anticipating that a future acquisition may one day become a possibility, this could ensure compatibility with products of the larger company.
A second step that the smaller company could take would be to examine the product lines of the larger, acquisition-minded companies to investigate shortfalls in the current product lines of those companies. It wouldn’t be difficult to determine where deficiencies lie — certainly every competitor of the large company no doubt has marketing literature that provide such information. The startup could then build products with features and components that specifically address the problems found during their investigation. In essence, the smaller company becomes the solution that the larger company needs in the marketplace to fill out their product suite. Not every company has the time and resources to address each and every deficiency in their product line. Therefore, smaller companies have the opportunity to supply this just-in-time solution to a marketplace need.
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About Bill Clifford
Bill Clifford is Chief Executive Officer of Spencer Trask & Co., a privately owned advanced technology incubation firm. Prior to joining Spencer Trask & Co., Mr. Clifford served as Chairman of the Board and Chief Executive Officer at Aperture Technologies Inc., General Partner of The Fields Group, and General Partner of New Vista Capital. He is also the former President and Chief Executive Officer of Gartner Group, the world’s leading authority on the information technology industry, user and vendor technology strategies and market research. During his tenure at Gartner, annual revenues increased from $175 million in fiscal 1993 to $780 million in fiscal 1999.
Mr. Clifford currently serves on the board of directors of Cybersettle Inc. and SWK Holdings (SWKH.OB). He has been featured in CEO Magazine, Leaders Magazine and Forbes, and is a keynote speaker and panelist at numerous Technology Industry conferences.
