In this comprehensive guide, serial founder and angel investor Daniel Debow explores the nuances of pursuing an acquisition. He discusses the best mind-set for approaching the process, tips for pricing and advice for navigating the transition to an executive role. Debow also explains why selling can serve the best interests of founders, investors and the acquiring company alike. Driving for a billion-dollar business doesn’t always make sense.
- Think of your company as offering a solution to a specific problem for the acquirer.
- Approach the acquisition process like a job hunt.
- Be honest with your investors, and treat your employees with respect.
- Be persistent in the deal-making process.
- After the sale, transition from a founder mind-set to your new executive role.
Think of your company as offering a solution to a specific problem for the acquirer.
When selling your startup, your mind-set – how you view your role in the acquisition process – will have a significant impact on your success. First, stop thinking in terms of selling to another company. You’ll be selling to a group of people, and the acquisition should solve a problem for these people. Think of the process as providing a solution for the buyer.
“You go from ‘I have to sell my company to Twilio’ to ‘No, I have to get Jeff Lawson to see that my company is a solution to a problem his organization has.’”
Second, if you see selling as a failure, reconsider. In reality, every founder sells, and the only question is whether to sell the entire company or just a part of it. Raising funds or going public also involve selling shares. By adopting this mind-set, you can pursue the decision to sell with a more positive perspective.
Approach the acquisition process like a job hunt.
An acquisition isn’t just another round of fundraising. When you sell your company, you’ll be joining the acquirer for at least 18 months. And the acquirer knows this too. A founder might be able to get away with arrogance during funding rounds, because investors know they won’t have to work together on a daily basis. But unpredictability or an attitude of entitlement can turn off a potential acquirer and scupper a deal.
“When you’re sitting across the table from an executive, you have to make them want to like you. Because they might work with you for three years.”
To position your company for acquisition, prioritize building relationships long before you sell. Speak with mergers-and-acquisition (M&A) teams at larger companies, as they can open doors and guide you to the people who matter, but don’t rely solely on M&A teams either, as acquisitions usually require a senior executive’s sponsorship. As you approach potential acquirers, be direct and explicit about your intentions. Prepare materials that will clarify the value of the acquisition to both companies. Avoid inflating your numbers.
Be honest with your investors, and treat your employees with respect.
Although you might feel trepidation about informing your investors or board that you’ve chosen to sell, you’ll see the best results from a direct and honest approach. Explain why a sale will be in everyone’s best interest. Respect the energy and time your investors have committed to your company, and don’t attempt to deceive them.
“You don’t lose face with a sophisticated investor by being honest and pragmatic.”
Employees will be concerned about how the deal will affect their jobs. If you extend empathy and ensure the team feels cared for and considered throughout the acquisition process, you’ll build their trust and reassure them that the acquisition can also be a positive change for them.
Be persistent in the deal-making process.
To get the process moving, choose the potential acquirer that appears most likely to close a deal and initiate a conversation with the executive you trust most. After speaking with all potential acquirers, select your preferred company and executive. Ask about the organization’s decision-making process, and assemble a small team to gather materials and prepare for meetings. Be transparent, honest and persistent.
“If a deal falls apart, that might just be the moment where you have to rally. You can’t give up on this journey. You have to be quite relentless.”
As a starting point for discussions about price, use the company’s valuation in its most recent round of funding. If the value has declined since then, focus on the amount of investment the company has received – the amount you’ll need to pay back to investors. Ask whether the buyer will be able to meet that price.
After the sale, transition from a founder mind-set to your new executive role.
Once the deal goes through, try to take a break. Spend time with family and friends who probably haven’t seen much of you while you built the business, and release the tension of the acquisition process. When you get back to work, expect to feel some disorientation and turmoil. Seek out other founders within the company to help you make the transition. Be humble enough to learn about the organization’s culture and processes, but make the most of the skills and confidence you’ve gained.
About the Author
Daniel Debow is vice president of product at Shopify. He cofounded Helpful, acquired by Shopify; Rypple, acquired by Salesforce; and Workbrain, acquired by Infor. Debow has served as an angel investor for more than 90 companies. This article, based on an interview with Debow, was published in First Round Capital’s online magazine, The Review.