Preserving Startups During Acquisitions

We recently launched a new book titled how to Stand up an M and A Function. Even if you're an experienced M and A practitioner, standing up an M and A function is a challenge of its own. That's why my colleague John Moretta and I compiled a series of templates, perspectives and Excerpts from over 50 interviews to help you build your M and A team from scratch. Topics include the order of hiring, establishing your operating model, developing your organization's integration muscle, and more. Find it on Amazon under How to Stand up an M and A Function link is in the show Notes.

I'm Kisam Patel and you're listening to M and A Science where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals.

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Today we're going to talk about how not to destroy Startups during acquisitions.

How not to Crush the butterfly.

I like how you framed it. How not to Crush the Butterfly Preserving.

Startups During Acquisitions Nadia, how are you doing today?

I'm great. How are you? Thank you for having me.

My pleasure. I'm excited. This is our first in person podcast that we've done in probably four or five years.

Wow. Seriously?

Yeah. We started the podcast originally doing them in person and then started doing them online because we had even before COVID Yep.

Wow.

That was. So now we're back at it. It's time to see people again. Can we start off with a little bit about your background?

I have been in strategy and mergers and acquisitions for over 20 years. I started my career in M and A due diligence and as anyone who has worked in due diligence knows, it's a really hard job. So I moved on from there to proper M and A and from there to a strategy and from there to operations. I have been in several industries and companies, both as a management consultant and leading the corp dev function. And as well, I decided to become an angel Investor back in 2010, so it's been 12 years now as well.

Wow, that's a good mix of M and A and being an angel investor.

Yeah, it's fun. I was so excited about this podcast because merges both of my passions. Quieting startups and talking about entrepreneurship as well.

You have to advocate for both sides of the table now.

Always.

And you've had exposure to deals where big companies buy little companies.

Yes. I would like to say that I have seen it all. Both what we call the mergers of equals, which of course there is never merge of equals, but mergers of equals. And what lately the trend has been acquiring startups.

Yeah, why is that? Why are more and more large companies now focusing on acquiring startups?

In a word, it's all about innovation. With the exception of Google, Facebook, Tesla, Apple and Amazon. And I'm sure I'm missing a few more of those. But most large companies are not innovating in a groundbreaking way. Their innovations are what I call adjacencies. What they are producing in house are incremental changes to existing products or services. Google, Facebook, Apple, Tesla and Amazon are one of the few ones who have successfully been able to establish in house incubators to create groundbreaking technologies and allow those in house startups to grow and leverage their current infrastructure. Other companies have tried to establish incubators, but they have not been very successful or have achieved very little. What I mean is a completely different product that is not even related to your original product. Here's an example. Take the case of Google. The example is Gmail. Gmail was released in 2004 and back then it was a completely different product from search and ads. It was groundbreaking at the time of its release. And as of today, Gmail has been able to leverage Google's infrastructure and withstand on its own as an amazing product. And there are several examples of those products at Google, like Maps, Google Pay, and that happens also at Apple. You know, those were products built in house, they were not acquisitions. For most companies, replicating that ability, that magic, to create completely different products from their core offerings has been very difficult. Enter the startups. They are innovating constantly and it makes sense because it's a game of numbers. For every successful startup that makes it, There are thousands of startups that died and didn't make it and some of them by the way, producing very similar products to the startup that made it. The startups that died didn't get enough funding, their leads gave up, or simply the idea was not working. So you get startups constantly popping up like mushrooms. And if you think the profile of a classic entrepreneur, most entrepreneurs are passionate about building something new that is not there in the market. So it makes sense that tremendous innovation continuously happens in the startup world. Most large companies have realized that and they are in a race against each other for acquiring startups that will allow them to enter new markets and users. If done well, they can grow explosively that startup, leveraging the large companies existing infrastructure. So the key question I always ask when we are looking at a target, is this startup going to be better off by being acquired by us? If the answer is yes, then it makes sense to move forward. Now let's talk about the future. Statistically speaking, the future is entrepreneurship. Most young people I know in this new generation don't want to work at large companies. And actually a lot of very experienced Gen X people as well, they are realizing, hey, they can build their own company now, a wider access to funding and they are creating new things and they have experience to leverage that. So to summarize, large companies are now focusing in acquiring startups because of groundbreaking innovations that they cannot produce in house.

What I picked up was the organic path to growth lends more towards incremental innovation and that through acquisitions you're really getting something completely new because very little companies have that capability to bring about that kind of incubation in house. And then also with acquiring a startup, they're getting a level of validation. They've survived for a period of time where there tends to be a high turnover in the early stages of doing a startup. With that you do identify synergies because the larger company's infrastructure can benefit the startup. And I liked when you referenced is the company better off with the larger company? And that's a good view when looking at those opportunities. When you say that the startup is better off in the larger company, can you break that down? What are the common reasons why startups do thrive? And then maybe we can talk more about why they don't thrive.

If you look at that startups, are they better off by being acquired by us? I would say yes, because we are able to help them penetrate markets to which they did not have access before.

Okay, so going global as an example, being able to leverage the distribution so that they can accelerate the distribution of their products to a larger market.

And this is one example penetrating new markets. But there are other examples. I was talking to a friend years ago and her startup got acquired by Merck. And I said, how do you like it? And she says, you know what? I like that now I have access to these R and D and scientist, top of line that my little startup did not have before. So we have this very specialized product and we wanted to expand it and she was able to do that now after the acquisition with Merck. So access to talent, very specialized talent as well is one of the benefits for a startup.

Resources. Yes, you gave example talent. I think of money too. Of course they're willing to naturally invest, to grow. So we have that, we have people in capital, anything else. And what are the big pros of being come a part larger company, maybe the brand, I don't know.

It depends on the acquirer. If they have a positive well known brand recognition, definitely that allows the new startup to have that kind of access. To give you an example, with Google, a few of the acquisitions we had now they are public. Part of the allure that we did was you're going to leverage the brand and we are going to be powering your product by the amazing search engine that Google has and that's going to make your product way better, which we did by the way. Brand and leveraging existing technology at the large company for the startup, these are good examples.

It can help improve the product, the positioning of the product, the distribution. What about the bad? What are reasons why startups don't thrive in a larger company?

The two top reasons are speed and clash of the cultures. In terms of speed, startups are used to moving very fast. By the way, that's part of their secret sauce. They pilot, fail, learn from the failure iterate, create a new pilot. If it works, grow the pilot, fail again, and so on and on. Pivot, start another pilot. In most large companies, that concept of failure is not well seen. And getting approvals for those kind of pilots takes time. And most of the times by the time it gets approved, it's not even relevant. It goes through several layers of reviews and that frustrates the startup folks. And if the competitor is moving faster, the project is going to fail already. That takes me to the next point. There is the clash of the cultures. Working at a large company can fail for startups like going before at 100 miles per hour and suddenly hitting a brick wall. And likewise, by the way, for large companies, those startup team members might feel like whoa, these people don't want to follow processes and they might feel entitled and they would just want to do their own thing. There are a lot of archetypes on both sides of the table and they don't help while trying to create an integration for a startup.

Okay. Speed and culture clash and they sound like they're pretty hand in hand. Culture is to move fast and break SPE stuff versus large companies tend to be a little more conservative, more red tape process to follow. And doing that makes a lot of sense. How do you start perceiving this from the beginning? When you look at some of these smaller companies, are there certain things that you look for in terms of just knowing right off the bat that hey, this may not work at all, that there are certain things that this company just generally wouldn't be a fit in terms of being adaptive into a large corporation, where you may look at another startup and saying, hey, this would likely work out, then it could fit in. I'm just wondering if there's some fundamental things like on the onset that gives you a sense if a company is acquirable or not.

For a question like that, we would need to step back to the fundamental strategy as to why are we acquiring them. Is it to penetrate new markets? Is it an acqui hire? Is it a new technology? It's just are we doing it for publicity? Which is also another reason, you know.

You'Re right, it is about the why. But let's break that down. Can we break that down into what are the factors that you're looking at when considering acquiring a startup?

Yes. So it, it depends definitely on, on where we are in terms of our strategy as a company. So to give you an example, in a prior job, we determined that when we looked at the portfolio of offerings, we determined one of the products was weak. And we looked at targets that we could use to complement that specific area of our products offering. Once you select the target, assuming everything goes well, you integrate it with the product and we built a more stronger product. Also, it depends on the economic cycle. Now that the economy is starting to cool off and potentially we are heading into a recession, I can foresee a lot of acquisitions being focused on companies acquiring startups that have access to a different set of customers. That priority the company doesn't have access, certainly also the technology that it would take years to develop and our competitors already have as well. So the answer to this question is always it depends on a variety of factors.

Okay, so what's driving the deal? You have innovation, the people acquirers.

Yes, that's also another customer.

The market you're getting into. Yes, but then when you click down into the characteristics of that company, what are those things that you're looking for?

I do look for how much of that company is dependent on the founder. What is their secret sauce? Is it the way they develop products? Is it the way they go to market? And of course, are we prepared to ensure that once we we acquire them they are not going to get lost inside the big machine? If we are acquiring them for their service or product, can we replicate that in house in a moderate amount of time? Because again, if that's part of their secret sauce and to our previous question, they are moving very quickly and that's what makes them successful in developing that product or service. And we are not going to be able to replicate that. I mean let's not Kate ourselves thinking we will. And again, most importantly, will that start to be better off by joining us?

The founder dependency parts Interesting because in the early stage it's very dependent on the founder and then as the organization matures it becomes less dependent on the founder. What do you look forward to identify with that?

Yes, you're right. A lot of I would say 80% of the startup secret sources. Right, you're right. Dependent on the founder. But we can break that down as to as well whether that can be replicated in house. Ultimately most of the times the founders or the startups, when they come into a large company, they get some retention packages so that they stay at least a couple of years, hopefully three years. But we know, we are aware that the startup founder, most entrepreneurs are chronic entrepreneurs. There is a reason why they went and started their own company. They wanted to create their own rules, have their own time for working. So we are aware in corp dev of they, they will not stay, they will not most likely be happy. But so heading back to can we replicate what that founder is doing in terms of part again, part of the secret sauce is it that the founder is never giving up on pursuing this kind new projects or closing new deals. I have seen all kinds of founders, the ones who are actually talented, gifted salespeople and the ones who are highly technical and they are thinking they're engineers creating new products and being able to connect the dots. So it's also a matter of identifying what kind of gift they bring to the company, the founders, so that we replicate that to this point. In most cases the startups die inside of a big corporation if the founder leaves. More and more companies are realizing that and to that end they're taking more and more steps to prevent that can.

You give me examples of when you do come across those signs that this isn't going to work? What are some of those examples of? This is a founder. I right away could tell this isn't going to work.

This is not going to be.

This is not going to be good for this company to get acquired by us.

It's tough, I have to say, because everyone is on their best behavior, particularly when they are trying to sell. If they didn't want to be acquired by a company, they wouldn't even take the call. The approaches that I have made in corp dev to startups, usually when I get rejected saying like, well, they're not interested. I know, you know, they probably, yeah, A they don't want it and that's fine. But for the ones that are like, yeah, let's talk.

Because I heard the technical examples. We got our mutual friend James Harris the other day, he gave me an example when they were doing technical diligence that this product presented himself with the capability. But then they sort of.

James is in an amazing company that is very flexible for acquisitions, but other companies where I have been are not as flexible with the companies acquired. What I have seen, the clash of the culture heading back not only with the founder, is also with the rest of the team is when they are used to certain things, things that the startup provides and they are no longer going to have once they join, such as free food, for example. Companies in certain areas don't work on certain days of the week and there is a if the acquirer actually they work every single day and they need to be back in the office in person. And if the company has a flexible work from home, two days per week culture, I can already see that not only the founder is not going to want to stay, but also pretty much nobody.

Okay. So there's some big fundamental things like that if a company's working fully remote and you know that you're more in a hybrid model, that's probably going to be a big issue.

Yes. And it goes back to the question can we replicate the product or their secret sauce? And most likely the answer is going to be no. Because in the beginning you need at least a period, a transition period for that.

Anything about the team? I looked at a deal for our company recently and most of the employees were in the eu and I've done enough of these interviews to not want to deal with a lot of the HR sort of regulations.

Eu, yes.

So that right away I steered away from it. Are there things like that when you look at the team composure that may come off as a signal for a larger company that this is going to be a tough one. Or larger companies tend to have that international presence.

For example, for Brady and my prior companies, that was not a deterrent to have a team in the EU because we do have presence there. It's more about certain practices that at the startup might feel allowed. And in a publicly traded company that has to follow SEC regulations and all these ethics and compliance rules might be difficult to get them to adjust to that for sure.

Okay. As an organization looking to acquire startups, you should probably think about this ahead of time. What would be some of those things that are going to make it very difficult for that startup to transition to large companies? It could potentially be the deal breakers. If the larger company, it's more conservative, they don't provide a large varieties of perks and benefits and the startup does and you're expecting them to conform to the larger company and be fully integrated. Might not be a good thing. That works out. And then some of the other little unique things, larger public company, the way they follow regulations and so forth and making sure that there's some alignment there. Does that sound fair to create some guidelines around that?

It's a great summary.

Okay. And then obviously we know surprises, right? There's only so much information you get your hands on before you get the letter of intent out there. You find out so much more afterwards and then it's all about how do you manage those.

It is like a marriage. Everybody's on their best behavior while dating and so then you're married and who are you?

That is very true. You get the one year honeymoon and then it does happen. In this case is similar. So how do you actually prevent startup from getting destroyed inside the larger company?

I have seen during my years of experience that the leadership in the acquiring company falls in love so much with the idea of this startup. Again, it's courting. It's again it's like dating. So they go and promise, we are going to preserve your culture. We're going to ensure you are not merged immediately. You're going to continue to operate independently. Sometimes again, that's the plan and that's what they have in their minds, the leadership, the executives. And suddenly the acquisition is done. Now it's time for integration. Yes, I have been in cases where we delay integration for 1, 2, 3 years, but sooner or later they have to be part of the company. We are not acquiring a startup to be hanging arm, not joined to the body. So it is important to Be transparent that integration is going to happen. That yes, there might be a period for not for allowing them to continue independently, but there will be. And by the way, for what's worth, in every team where I have been we have had this debate of is it better to rip off the band aid for this startup immediate immediately you are, you are here. Integration on day two, day one is closing. Integration on day two starts or do we delay it? We have had great arguments for both sides of the table and it's very difficult. It's a very difficult balance. And the second point is some startups have non negotiables. So find out what are those non negotiables and be open to adapting to those. Because if you find out the non negotiable after the acquisition is done and everything is signed, then you know, if the acquirer is not willing to concede and it turns out to be a very bitter marriage, negativity starts settling in.

What are examples of non negotiables you come across?

Like for example, the food not working certain days in certain areas of the country. Most companies in the neighborhood, in the city do not work every other Friday and that's a non negotiable for this for certain startups because it's part of the culture. And also the talent in the city will go to another company money because they took away my Friday off. Find out what those non negotiables are.

Okay, I know the non negotiables are be transparent with your plan. I actually heard about a large company that did a very significant acquisition and part of the deal told the management team, we're going to let you run independent. It wasn't long before they started picking at them to integrate them and started doing more of that. And then the actual founders got frustrated to the point that they up and left and walked away for some very large earnouts despite they couldn't take it anymore. They couldn't take it anymore. That was the big reason why they communicated the independence. That's not what was in written for what they actually were taking action on. The transparency lies. True. Be really candid upfront about that. I almost wonder if there's like a better practice around that joint planning in terms of how you're working with the executive from the target company to set this expectation up early on. Do you have an approach or how do you do that?

Yeah. And by the way, this is back to the corp deaf person leading the transaction. So I have to say earlier in my career I was shyer of pushing my executive Team, my pushing back on my president because I knew my president would be like, who are you? But now I'm, I have to say I'm more vocal at saying, you know what, this is a red flag, this communication. What you are right now communicating or you are sending the message that you are not going to integrate. And let's be realistic here, let's create these scenarios. What happens if the quarter, the year is down? What are the scenarios where you are actually truly successfully thinking we are not going to integrate in the first year. And because that's possible, if the startup is doing so well and if they are having an excellent year, it might make sense. Leave them alone, let them continue to fly, let the butterfly fly. If you see them struggling and does it make sense we are going to integrate quickly. And by the way, I have found that my being braver and asking these questions, they appreciate it more and they appreciate the feedback because at the end of the day, the person in corp dev ideally should have had all these life experiences with deals that went source to be able to say, look, I mean I've done this a number of years, I have seen all these scenarios playing and sometimes the executives don't have that kind of experience. Particularly if the company has not been highly acquisitive in the past.

Yeah, be honest in your marriage, it.

Always comes down to that.

In that regard, what are the key drivers that you really want to frame early to make sure you have a good healthy marriage? We talked about just the communication in general, being very transparent, understanding the non negotiables. But what are the other pillars to make sure you got a strong healthy marriage that you should try to address early?

Keep an eye on both ends. If you are sitting in corp dev, you are at the best place to keep an eye on the polls for both the acquirer and the startup. Because again, startups are not like a merge of equals. It's not an acquisition of two publicly traded companies that have similar processes and they understand the compliance aspect and they understand the procurement process. A startup, it's highly dependent on again on their culture. So if you, again, if you're in corp dev, keep an eye on how that a startup is doing and communicate early. Keep the line of communication open. And of course ideally you should have weekly or monthly reviews to understand what is going well, what is not going well besides the normal integration meetings. But yes, don't let them alone. Another thing that I have seen very successfully implemented is creating a system of buddies onboarding bodies.

Buddies, like a buddy system.

Right. The Concept of onboarding bodies, which is you pair the person from the startup with an experienced person in the company so that they can ask safely questions. And there are questions to questions, There are questions, simple questions as to how can I print or where is the coffee? To more important questions as to how can I get these approved or we need to make this decision. What is the process here?

I've heard of that. I think I've heard it referred to as two in the box.

Two in the box.

Yeah.

I like that.

When you pair the two different companies with their counterparts so that they got somebody they can fall back.

By the way, these two in the box is not like the manager, the new manager in the acquirer and the startup person. It's more of a peer to peer pairing. That has been very successful for sure.

Yeah, I think that's a good way to approach the integration. The weekly reviews make a lot of sense upfront for corp dev just to keep that high level of frequency communication so that I'm sure that it's got a lot of benefits. In general, just having good communication is always good. Anything else to keep marriage happy?

Definitely avoid burnt out. The integration is a marathon. And the startups at the end of the day also have to accomplish their synergies promised during the acquisition. If the idea is that they are going to grow 20%, 10% quarter over quarter. Usually those targets are high, benchmark is very high. So that can be once they are part of a larger company for the people working in that startup. So also a little bit of empathy and patience. Yeah, always goes a long way.

We look at two in the box as an integration approach. Empathy ties in with that as part of how you can make that transition smoother. Are there other things that a large company can do to protect the smaller company they're acquiring?

It always helps when the senior leadership does not abandon them. So what happens is during the due diligence and the pre deal closing, you get always the attention of the president of the company, the president of the division. And once the acquisition is done, they move on because they are busy executives. They move on to their day jobs and to the next acquisition. I have seen it for the founders and even level two executives in the startup. They feel like now I'm not the new kid on the block, they abandoned me. So it helps to continue to have, if not a monthly, at the very least quarterly touch points, one on one, the way it used to be before the acquisition. And I know this is tough because everybody is so busy after the acquisition is Done. And again, most likely the executives have moved on to the next target. But this goes a long way because again, I have seen how disappointing it is to the startups that they got all this executive attention and suddenly it's gone.

That's true. Yeah. The integration part you mentioned, it's got me thinking of, how much do you integrate? And obviously every case is different, but I feel like that's such a big factor. If you do leave that company, you're not messing with as much. I feel like as a large company, it's so much. I remember working with designer at one of the very, very large tech companies. The thing he enjoyed the most about working with us was that when he designed something, it got to production so quickly.

So quickly.

Yeah.

He's like, I had to have 11 people look at my work and check it off before even, you know, it goes through a bunch of iterations. So by the time he gets production, it doesn't even look the same. That's why it's got me thinking of like, is there a way to think that through? I guess it all goes back to what you're communicating and what the plan is, and as long as you're communicating that plan. But I do feel like that's the tough part. Even if I look at ever selling our own company, that'd be the hardest thing on top of mind is that now we're going to change this, our organization to adapt to this larger organization. And I'm thinking about their culture and is our culture going to really fit in there? And a lot of this stuff where we enjoy our autonomy and our ability to really be creative in what we do. And you're giving a lot of that up. And I, I don't know, I'm trying to get a sense of like, where do you strike that balance as a company? Because it sounds like a large organization, that protocol is eventually you're going to fully absorb that company, period. It's just the way it makes sense because you want it all under one brand.

I'm also an angel investor, so also a lot of the questions I asked when I'm about to invest in a startup is, what are your plans for Exit? I have heard everything from founders telling me I'm going to be the next Google, the next Uber. Their plan is to grow independently or create a new empire. And others who have been actually very, very vocal about I want to be acquired. So I am growing this to the point that it will be attractive to an Adobe, to an Apple. The founder wants to be rich and that's why you are an entrepreneur, you are doing it your way. So if they are honest as well the founders as to why are they doing this, that's usually very helpful. Now as an on sitting on the other side, as an acquirer, if I ask the founder like why did you start this company? What was your vision when you were starting it? Did you want to be independent all the time and suddenly we are making you an interesting offer or was your objective since the beginning to be acquired?

Sounds like a lot of alignment from both sides because you want to understand what the goals are for that startup than your organization. Because you may have some situations where we've interviewed folks in the gaming industry and part of their model to acquire is providing a level of independency, communicating, yes, but here's some trade offs. Certain things like your benefits and payroll are going to have to get integrated. But we can let you have some autonomy in these areas but being able to understand what that is and communicating it to that startup. So it sounds like it's understanding on both ends to really get that right. Because I think that seems like the trickiest part of right away I've got assumption if I'm selling to a large company that they're going to take everything apart and it's going to get infused.

Dissected and surgically removed portion by portion. You're hitting on a really interesting point which is the compensation. So I have seen multiple times how the compensations are vastly different for each of the departments. And suddenly you acquire a startup where a person in marketing is earning way more than his or her manager in the acquiring company. That happens not that often, but certainly it happens a lot in sales. In the sales department, the bonus structures, every time I assume they are going to be different, completely different, sometimes diameter different. And that's a tough one because when you are going through the due diligence and start planning for day two, you're going to agree with both the sales team on the acquiring company and the startup. How are we going to handle this change in compensation, the bonus structure? And here's why it is important. Most salespeople go in sales because they lack money. So if you change the compensation, assuming someone who is a start salesperson, you're going to lose that star because he or she will go to another company that pays him or her as much as the startup used to. And at the same time, if you don't change that compensation, sooner or later the acquirer, the sales team in the acquired company are going to be like wait, these people are earning way more than me and they are. Sometimes they are working completely different things but sometimes they are attacking the same kind of customers and we are both going to this customer and they sell even less. Why are you not paying me the same compensation? Alignment for the sales department is very important to do it early on.

It's tough because when I think about doing deals it's always these big macro element that gets you drawn in that hey, this aligns with our strategy and it makes a lot of sense when I explain it in 60 seconds to the board. But then the things you're describing are minutiae. Yeah but they're like big minutiae that.

Really the little stone in the shoe.

I think of them more as landmines. That this thing could blow up into something a bigger issue. That's going to be a tough thing for us to deal with. That makes a big impact on this deal value and it makes doing deals a little scary. That's what I'm thinking. Because that's what happens. I think that's why we throw around that term deal fever and things like that. Because you do you get brought in on the big picture of doing this deal and the excitement of it. That everything just the must have is to figure out some kind of mitigation plan around this. But then you get some of these unique surprises where there's a big varying difference in their compensation structure.

And people talk. Don't assume they are not going to talk to each other about how much they earn. They do.

And you don't want to tinker. That's the last thing you want to tinker with. You tinker with sales reps comp. And it's. They're going to walk right away. Recruiters are already going to be knocking at their door if they haven't been. That's a really good perspective. It ties back to what we talked about earlier. Having that alignment required on both sides. What are the must haves on both respected organizations? Make sure they're mutually aligned on it. I'd like to talk to you a little bit from the startup's perspective. What can the small companies do to protect themselves?

Ooh, from where? From, from acquisition.

From. From getting destroyed. How do they protect themselves?

Is this scenario assuming they get sold, they are closing the deal.

We can walk through the process because I'm sure there's things early on versus later. But what are those key things for a small company to do to protect themselves from getting destroyed?

Stepping back. It always also depends on the founder Because I have seen again founders who. Whose solely objective is to get rich and then, you know, coast.

Okay, so we got a profile of founders that just don't care. They want the check and that's it.

Right. They will coast for during the retention period agreements in order to get the escrow and the cash out and then in two years they will be gone. Let's exclude those.

They're becoming the minority. I can I witness myself, I witnessed myself that I do see more and more. Okay, maybe it's not minority. Maybe the minority is starting to grow.

They are not talking to you.

Okay. So there, there is at least a portion of founders out there that do care about their team. Okay so let's assume.

Yeah.

And they.

This founder is decent and passionate and really cares about his or her team.

Yeah. Maybe he's driven to an actual mission of the company and wants to see that continue and grow and succeed. One of my favorite stories is from one of our customers Bayada where the founder was at that stage multi billion dollars of value generated and he converted the whole company to a not for profit.

Yeah, I love that.

But it was very much about the mission. So there are some good people out there and let's build on them and we want to share some ideas and how they can prevent their company from being destroyed.

If one of your listeners is entrepreneur who is being courted by an acquirer a large company and and is your first rodeo definitely asking questions early on as to what are you going to integrate first or what are your plans for integration. I have seen that Most founders and CEOs have already identified who is the key talent part of the secret sauce. People who have been since the beginning with the company. And a lot of founders are really good at letting us now look when we go do the due diligence they are like you know, go through the engineering team, go through the marketing team. This person is key, this person will help you and that's great because that allows the acquirer to assign the two in a box to ensure those guys or girls are not going to leave and or feel lost in the big machine. And also most founders know or should know what are the non negotiables. The free food is very important or the healthcare plan is amazing. Can we preserve it? And sometimes that has been possible, sometimes it's not possible. It depends on the acquirer. Believe it or not, some of the benefits losing benefits for after the acquisition. It really gets people angry as it should. So ensure what you're getting into.

I like that because you have the people part. Hey, these are the cute people. And making sure they're taken care of. You're getting retention if you're going to stick around and making sure the right people get the right incentives to stick around. Also the parts of your organization are what are those things that you want to keep? And identify what those non negotiables are so you can bring that up front. That's good. Anything else that companies could do.

We have the firm philosophy that everything is negotiable in this life. So again, if there are things that you can negotiate early on during the courting period. Yeah, go for it. Figure out what the non negotiables are for sure.

For the startup we talk about when to walk away. I feel like that's your other part is on the buy side. You talk about some of the best deals are the ones you don't do. And then on the sell side, how do you think about that? When to walk away.

That's interesting. What I have seen in my career is that believe it or not, your gut tells you a lot and most of the times we don't listen to it. And the best decisions or have been in my career, both in business and on the personal side when I listen to the gut. So if you're getting the vibe that the acquirer is telling you everything you need to hear or you want to hear, but you get the sense that they are not going to follow up with their promises, saying no before signing is not the end of the world. Goes back to the question, is my startup better off by being acquired by this big company? And you know better than anyone which financial situation the the company is, whether they are going to die without more funding or not. Sometimes preserving the company alive is more important than keeping the good food, you know.

Yeah, no, I guess it ties to what are those real key factors.

And let me give you an example. As an angel, I have had a few exits already and I spoke with one of my very favorite startup. I was there since the beginning. I love the founders. Paul, if you're listening to this, I would invest in your company again immediately. So Paul called me once and said we are being acquired by a PE firm. I was like, I immediately thought they are going to kill you. They're not you, the company, they're going to kill the startup. And the very special place he created. I thought it was a terrific startup. And I asked him like why are you selling? You don't need the money, like you can raise more. And he was like, you know what it's been 10 years. I'm exhausted. I have not had vacation in 10 years. I just went out. So he went ahead, sold the company and as expected, the PE firm has not been doing a good job. Pulled them apart. The sales went down. The very special culture he created is gone. My gut told me don't they. And his gut, I'm sure was telling him don't. But he was ready to exit.

Yeah, that's tough.

I don't blame him after 10 years. But I thought think what they could have created. They went from zero to $10 million in sales. So they were great. They were doing really good.

Do you think they could have weighed out additional exit options?

Oh, totally. Either get a new CEO because by then after 10 years the company probably could have survived without him. And bringing a new CEO and keeping him as a consultant would have been great.

That's a whole different path is restructuring the management.

Yes.

Could have been another continuation that solve what was driving the exit. And then there is looking for alternatives in potential suitors because one wasn't the right home would have been obviously the market. A variety of different private equity firms, different strategics.

Yeah.

And being able to weigh that out when it makes sense to engage with an investment bank to help identify those options. I think the thing I've learned is you should court them earlier. As part of it is a good leader in the company is think about that ahead. And a lot of startups are wising up to that. Especially they have institutional investors. They'll start making those introductions for them. If the time comes and it's out of your control, then you know where you can have that conversation. That's something that we didn't talk about too much. You did reference it earlier about the relationships behind all of this. A lot of this stuff isn't very transactional. It sounds like there's quite a bit of time invested in the relationships.

Yep.

Can you tell me a little bit about that? What does that typically look like? Is it the time frame you typically.

See or I can tell you my perspective as an acquirer. So both sitting in corporate development, I have to keep a pipeline, an active pipeline of both opportunities that bankers, accounting firms, even our own salespeople bring me and say, look, I mean this is a target ready for sale. And on my own end, I sit constantly with the presidents of my divisions to discuss their strategy. And again, we map here is where we are playing very well. And probably we do not need an acquisition here, but here is where we could play better. So once we Identify the areas here is where we can play better and are we going to dedicate the R and D and the sales teams to go in this area or does it make sense to acquire? So once decide, let's go find targets. Then you know, my team and I find specific targets that might not be for sale and then I make an approach again heading back to the example of courting. I get a lot of no's in my job. I reach out to a lot of potential targets, introducing myself and 95% of the times they are not interested in selling or in talking. And it's a matter of heading back and continue and building the relationship. Because these things take years.

Is there anything that comes about is this, hey, here's an event and people reach back to you or do you catch them at the right time? When you reach reach out to them, is there a form of persuasion that you can give people to sell?

Oh, it's a tough one. It's usually very convenient to have your senior leadership engaged, helping with. Once you make the intro CEO to CEO and get them to talk, that's usually one of the most effective ways of if not changing their mind at least to for the targets to know that there can be a potential here someday.

Yeah, depends on I guess organization size. Because if it's not CEO then it'd be business unit president.

Yes.

What are some successful strategies you've used to mitigate the risk of destroying a small company?

Understanding the startup very well earlier on, what is their secret sauce, what makes them tick, how dependent they are on the founder, what could get them to break? As a strategy person, when you look at a company, if you have been doing this for a number of years, you realize very quickly like oh, this is what makes the company special. And if these were to be taken away, then the rest will fall apart or the company would go into obsolescence. For example, there was this startup that we looked at on paper, they looked like the technology was the interesting portion. I thought, oh wow, they have a technology that we don't have. So we visited them and I realized that actually the technology was that's okay, it could be bought. They were actually relabeling. But their secret sauce was not the technology. Their secret sauce was actually their installation team, their go to market practices. They have a very proactive vice president of business development. He was magic. He's able to close deals and to keep the relationship going with their customers. So I thought that guy, if that guy comes with the deal, this company is going to work out inside of our company. So again, identifying what's the secret sauce takes time, and you have to spend a lot of time with the company to figure it out.

That's what it comes down to.

Ironically, in this example was not the founder. The company could be without the founder. Fine.

Yeah. That's why you got to dig in and find those things out.

And it was not the engineers, because in certain companies, it's the engineers.

Engineers, yeah. Nadia, what's the craziest thing you've seen.

In M and A as an angel investor? Let me start with that one. I have seen startup founders getting funding commitments of hundreds of thousands of dollars after less than five minutes talking to the investor. Let me give you the example. And this is during, by the way, if you're a startup founder, this example, I'm telling you, happened during the last recession. So there is hope. Even if this economy goes into a recession, there is hope this continues to happen. I remember we were in this drinks party with investors and founders, and I remember making this intro of this founder with this very famous investor in New York City. And I made the intro and I said, oh, let me go to the restroom. I'll come back. And when I came back, the investor was saying, yes, let's do that. And the startup founder looked at me and said, oh, just agreed to found my startup. And I'm like, I just went to the restroom, people. I asked the fellow investor like, hey, you know, do you want to see the financials? And this person was like, no, I just met this founder. I'm. I'm in. And I'm thinking, how much have you drank before? Before this event? And again, for what's worth, it was a great investment. I also ended up investing, but I did my due diligence. And this was not the only example. They, their founders told me, like, so and so happened to be in line for the buffet, and the person in front of him was such and such investor in San Francisco. And yeah, that's how they got funded. Just standing in line at the buffet.

That's what I need on this podcast as a founder to talk through how do you pitch like that and how to pitch and land. But that's a great story.

They are more common than what you think. I'm telling you.

I hear about the golf course deals. I didn't know the line in the buffet deals were there too.

So this is an interesting thing for golf. Yes, golf. I have to say, I have gotten more job interviews and offers than I can count just by playing golf.

You play Golf.

I do.

I learn to play. I'm a little bit shy about this. This is my first year playing.

Okay, so let me tell you the strategy that I used to use when I started playing golf.

Sure.

Get your lunchbox full with beers and a scotch by hole number four. Everybody will be so drunk that nobody will care how good or bad you're playing.

I like this. I should get everybody liquored up and this will help a lot because I'm always a no, I'm telling you by.

By hole number nine. Everybody, your friends, everybody's friends are very friendly with each other.

I just want to drink so I can actually learn to play better. We are going to do some more stuff. I'm already talking to a few folks out in Austin. We're planning to do a little golf outing out there, but we're heading into winter here. Maybe we're going to.

Yeah. After tomorrow, I don't see any golfing in my future.

That's why you got to come down south. We'll have the M and A science golf outing and they'd be more than welcome to join those of you listening in too. If you're in corporate development, corporate M and A, we host a bunch of events. So start with getting on a newsletter, but then try to get on a one of our invite only list that we extend private invites to golf outings, happy hours and other things. This has been great. Thanks so much for taking the time to hang out. This is fun to do in person too. People listening, let me know, give me some feedback on the quality of this podcast versus the ones we typically do online. Nadia, thank you so much.

Thank you.

You're helping me become a better M and A scientist. Those of you tuned in, till next time, here's to the deal.

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