Top 5 M&A Insights from Senior Industry Leaders
Most founders consider two possibilities when thinking about their exit strategy: IPO or acquisition. However, the process of startup M&A likely remains shrouded in mystery for founders who have never seen it first-hand. At Dreamit, we’re well aware that founders have lots of questions concerning M&A like, “What are the top reasons M&A deals are done?”, “Where do M&A deals originate?”, and “What are the top mistakes you should avoid when executing a deal?” We invited Amit Yoran, CEO of Tenable, and Mike Viscuso, Co-Founder of Carbon Black, on #DreamitLive to answer these questions and more. We pulled out 5 key lessons from the discussion to shed some light on M&A and help you navigate what can either be an extremely rewarding or painful process. You can watch the whole episode below.
M&A Insight #1
Companies are bought and sold. You want to be bought, not sold.
So, what does it mean to be bought instead of sold? Mike says that companies that are bought add significant value to shareholders. This is not just about ARR or customers. When considering a possible acquisition of your company, try to figure out where you could add value to a prospective acquirers strategy. When an acquirer is considering their strategy for the upcoming period, they ask themselves, “What they would like to build, what they would like to buy, and where would they like to partner?” To put your company in the ‘buy’ bucket, you’ll have to show that your product adds significant value to their business.
M&A Insight #2
There’s always a buyer for a great company.
At Dreamit, we advise against building to exit. Managing Partner, Steve Barsh, refers to this as being a “mercenary” entrepreneur, instead of a “missionary” one. Mike and Amit share the same sentiment. As long as you continue to build and provide value for your shareholders, the rest will take care of itself. First and foremost, this will allow you to avoid being forced into a sale. Instead, you will be able to sell on your own terms at the optimal point in time for the company. Mike says, “There’s always a market for great companies.” Don’t worry about the market. Worry about being the best.
“The best way to be attractive to an acquirer is to be the best.”
When he was considering acquiring a startup at Carbon Black, Mike would start by asking, “Who was the best in the area they were looking to fill?” How do you become the best? Continue to add value for your customers. Amit added that you must also stay focused on your mission. Consider where your company has the most to offer and build upon that.
M&A Insight #3
VCs aren’t going to build your business, you’re going to build your business.
Most of the time, VCs are strategic partners. They will share knowledge regarding the market that you would not have had otherwise and offer support as you build your business. However, Amit says, “VCs aren’t going to build your business, you’re going to build your business.” When a VC signs onboard to help you with your company, do not expect or look for them to do the bulk of the work for you. Instead, when considering different VCs, look for ones that will cause you to think differently. Look for VCs that will ask you the tough questions. No, they will not know your industry or product better than you will, but they will offer an alternative perspective on it. The VC you're bringing on board should consist of people who you want to work with. You should feel your interests are aligned, of course. Amit advises the ideal VC-founder dynamic fosters constructive and healthy conversations, or even arguments, with the intent on both sides of bettering your business.
M&A Insight #4
If you start paying an investment banker, you have a for sale sign on your door.
Amit and Mike mention multiple times to be wary of M&A advisors, investment bankers, and lawyers. What is the perception once you bring them on board? Remember, earlier in the episode, Mike advised that you want to be bought, not sold. However, once an introduction to a prospective acquirer is made by an advisor or an investment banker, you immediately put a ‘for sale’ sign on your door. It is difficult to avoid the stigma that it's a fire sale. Mike urges it only makes sense to take this route if you have a letter of intent (LOI) from another company. Amit echoed this sentiment and encouraged you to avoid creating the perception that you’re selling your company. Still, building relationships is always beneficial. When you do get an LOI, you’ll want these professionals on board so you can get the most out of the deal. You should build these relationships with investment bankers and advisers early on, but do not engage in a paid exchange unless you have an LOI or are looking to sell the company.
M&A Insight #5
Deal cleanliness is key.
Once you are closing and negotiating the terms of a deal there are three criteria you should look for.
Are the terms straightforward?
Is the deal clean and simple?
(again) “Is the deal clean and simple?” Deal cleanliness is paramount.
Mike adds that deal structuring is an art, not a science. You need to know that the team you’re joining consists of people who you and your team will simply enjoy working with. You must feel like you’re doing the people who are relying on you a good service by making this deal. Amit adds that this means you must consider your customers, employees, and shareholders before closing a deal. More specifically, Amit and Mike, advise against earnouts, where you are bound to an agreement. Both of them say you should try your best to get an upfront payment. Earnouts don’t always go sour, but they lack cleanliness that Amit says should be prioritized.
Hopefully, these 5 tips will help you as you navigate your exit strategy. Watch the full episode above to get more of your questions answered.
By Alana Hill, Securetech Associate at Dreamit Ventures
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