In the land of startup acquisitions, two adages are proven true over and over: no buyer will pay more than they have to for your company, and startups are bought and not sold. Those forces act like gravity, pulling all acquisitions towards zero. Startups are notoriously difficult to value, and those that want to sell the most are the least likely to actually complete the process. Therefore, from a founder's perspective, acquisitions are inherently an uphill battle. Thankfully, there is one force that can overcome those headwinds and deliver outcomes founders dream: competition.
The competitiveness of an acquisition process is largely determined by two factors. The first is the value at which you can raise additional funds, which creates a “competitor” in the form of an option to continue building and places a floor on any offer a startup receives. The second– and potentially more powerful – factor is the number of companies on your call list that already view your company as strategic by the time you decide to start a process. The goal of pre-process development (ideally done well ahead of time) is to identify and develop that deep strategic interest, so that you can capitalize on it when the time comes. The more entities you have on that list, the more likely it is that your process will be competitive. While no two processes are the same, here’s an approach to getting that done.
Imagine a combined entity, then pitch it as a partnership
Imagine a world where you’ve already been acquired by your counterparty. How would you recommend integrating your products? What’s possible with your powers combined?
- That future could be allowing you to operate as an independent business line, sharing customer relationships as upsell/cross sell potential.
- It could be a white-label version of your product embedded into theirs
- It could be a core capability you’ve built that powers a product on their end, taking advantage of their GTM motion
If that future is hard to imagine, I would question whether they’re a good partner target. If you can, that combined entity is your north star. Your job now is to present a more achievable, partnership-oriented version of that vision. For example, before we sold Level Money to Capital One, the original pitch was that Capital One would power banking products that we would offer inside our personal financial manager. That positioned Level to be the marketing engine we designed it to be, using money management to increase savings balances. We would have signed the original partnership we pitched, but it was also easy to see why Capital One might want to own the whole thing.
The point here is to establish a starting point for a conversation, not pitch a deal that you would turn on tomorrow. Pitches need to be realistic but not necessarily immediately actionable. For the purposes of these discussions, allow yourself to be unchained from your desired direction for the business.
Look for whether or not you’ve hit a nerve
Like many partnership processes, the likely outcome is that conversations will stall at some point. That’s ok, you haven’t hit a nerve yet. For those entities, the goal is to get into a holding pattern that maintains an open line of communication in case priorities change. That usually looks like getting on a 3-6 month cadence with an executive in the business line (not the CorpDev team) that has insight into their corporate strategy and who you can also get time with. The contents of those conversations over time will reveal how likely they are to be a real M&A candidate down the line.
In other conversations, it’ll be obvious that you’ve “hit a nerve”. In Level’s case, we quickly learned that one bank had been working on a very similar initiative for several years but had not been able to launch it. That was our cue to launch a full-court press to ensure they understood how strategic we could be to them. Other successful acquisitions have included stories of corporates that had just handed down annual priorities in line with their startup, or the fact that they happened to resemble a very successful deal for a particular PE firm. Until you’re in the room, it’s impossible to predict which entities will happen to have priorities that align with yours. Therefore, the best way to improve your chances is to increase your shots on goal.
When you do hit a nerve, reorient your pitch around the priorities that you’ve discovered. You should also start mapping out the various stakeholders inside the organization that will play roles in delivering (or perhaps delaying) the delivery of that priority. At some point, they will likely nudge open the M&A door, usually by bringing in a CorpDev unit to evaluate the company. If you’re not ready to start a process yet, you can give yourself more time by developing relationships with the business while categorically rejecting any talk of M&A. The longer you can maintain that dynamic, the better your chances will be once a process does begin.
Find a holding pattern until you’re ready to start a process
Eventually, you’ll start to develop two lists:
- Potential price-setters: companies for whom you’ve hit a nerve or you have other reason to have high confidence in your strategic importance. This list can also include direct competitors for whom it may not make sense to do any kind of discovery beforehand
- Potential stalking horses: companies that could be interested once a process starts, but for whom you haven’t seen direct evidence of your strategic importance
Both categories can be put into a holding pattern until you’re ready to start a process, though with different priorities. For price-setters, you should seek to widen your relationship with the company, developing allies and perhaps nailing down a formal business relationship (though this can have drawbacks). For stalking horses, seek to maintain visibility into their corporate priorities, and take the occasional meeting with CorpDev to ensure you’re on their radar.
You’ll know you’re in a good position to start a process when more than a couple parties have expressed some level of interest in M&A and are in a holding pattern. That’s when the ball goes back into your court — once you have two or more of those parties, you can decide when you want to go back to them and kick off a process.
Great outcomes are created when three things are true: you’re viewed as strategic by more than one player, they’re willing to fight each other for it, and they have enough corporate willpower to see the process through. By conducting your initial pitch, you’re conducting discovery into their set of priorities. By developing relationships, you’re working to increase their level of willingness to fight and to see the fight through. Those forces combined can overcome the inevitable forces of gravity pulling the other direction.