With the slowdown in venture financing, many CEO's are likely eyeing acquisition as a rational exit path.
I’ve led the sale process of 3 venture-backed companies + worked in banking and private equity before becoming a founder.
Some insights learned:
* Deals close because of fear or greed, usually both. Your counterparty must see a positive ROI from the investment and ideally is afraid that if they don’t get the deal closed, their competitor will. Or, that you’ll become/remain their competitor.
* Create a target list and build relationships with decision-makers — product leaders and/or CEO's — as early as possible. A deal can take 6 months+ from the first meeting to Close. Note: Corp Dev typically needs an internal champion inside the acquirer to sherpa the deal.
* When mapping potential acquirers, don’t just think about who’s similar to you, think about whom you’re complementary with. For example, my last company, Knowable, was an audio-first learning platform. We thought another audio or learning company would want to buy us, but our best offer came from Medium, which was looking to accelerate its efforts in both categories.
* Maximize your runway asap. The less cash you have in the bank, the less leverage you have as the deal progresses. Your acquirer will know your cash balance and burn.
* Run a process. Just like with raising capital, you want to talk with several potential buyers around the same time. Ideally you're officially for sale only once you already have at least one interested buyer. The longer you’re perceived to be in market, the less attractive you become.
* Understand your buyer's problems and what they're trying to solve for. You’re no longer selling your vision for the future, but complementing someone else’s. This is hard for many CEO's to accept.
* Don’t name your price. Once you name your price, you cap your upside. Especially for a strategic acquisition, you want to be paid based on your value to the acquirer, not the value you'd accept. The acquirer knows the former better than you do.
* Use occasional humor to indicate confidence. For example, if someone presses you to name a price, you can respond with something like: we're willing to accept something less than $1 Trillion :) <= doesn't apply to you, Tim Cook.
* Read the term sheet very carefully! Don't expect your lawyer to catch everything, and don't be afraid to ask your lawyer dumb questions.
Be especially mindful of ambiguous phrasing. For example, one term sheet I saw offered a retention bonus "up to
$XM" for key employees without detailing how the bonus would be decided upon. The words "up to" needed to be struck. Once you sign the term sheet + grant exclusivity, you lose leverage.
* Keep the momentum going even after you sign a term sheet. Deals can get sidelined for a variety of reasons. Time kills deals — it's not done until the money is in the bank.
Selling your company is stressful and challenging, even when it's a great outcome for everyone involved. I hope this post is helpful.