You Are Not Going Public, You’re Going to Get Bought

May 16, 2018

I am sorry to be the one to tell you, but your startup is not going public. I don’t mean your startup in particular but as a general rule. Very likely, your exit (if there is one) will be through acquisition. CB Insights figures for 2016 show that of 3,358 total tech exits, 3,260 were M&A exits and 98 were IPOs. Despite the numbers being very much in favor of trade sale, nobody talks about it much, or plans for it.

For the percentage players, that means less than 3% of exits are IPO. Or, you’re 97% likely to be acquired. Surely with those odds, you want to spend some time on it.

Cart, Meet Horse

Some people think talking about acquisition is putting the cart before the horse. There’s no point putting the horse up front if it doesn’t know where to go.

you achieve an exit valuation based on your worth to the acquirer, not your revenue

Tom McKaskill (Dr Exit) has written a lot on the subject of Strategic Exits. Some of it might read like it’s from a previous time. And it is, but the advice is timeless and still as valid as ever. McKaskill defines a Strategic Exit as something that you can plan for. It’s where you achieve an exit valuation based on your worth to the acquirer, not your revenue. It’s worth deeper consideration.

Be Careful What You Wish For

Given the above let’s assume acquisition is in your future. There are good acquisitions and bad acquisitions. There are good acquirers and bad acquirers. If it’s likely you’ll end up involved in one or the other, how do you avoid the bad? By understanding the process and carefully planning to achieve the best outcome.

You can read a lot about the process. It’s grueling. Due diligence is tough. It will take much longer and be much harder than anyone told you. The MOU you sign will not cover all material deal terms. Some of those will pop up in the dying days and stretch them out to eternity. Eventually, you will close, and the deal will be final, public and you will want to open some champagne. The thing is, even though it will feel like you’re done, you have only just begun. After closing is when the real work begins.

The thing is, even though it will feel like you’re done, you have only just begun

As you head off on this new journey, you may or may not feel more financially secure, but your position in the new company is far from it. Good acquirers plan to integrate their new acquisitions. When you turn up on the first day, it should be like checking in at a great hotel. “Your room is ready, walk this way, Mr. Pryor”. It will rarely be that good, but it should be.

You’re Not In Kansas Anymore

In the best cases you’ll get a good host, but no matter what, you also need to be a good guest. The first thing to get straight is that this is not your company anymore. Likely, you are no longer the decision maker either. Make peace with that. Your new job is to work hard at making sure your team becomes indispensable in their new home.

The water here is different and you need to learn to swim

Culture wins every time, and you have a new host now. The water here is different and you need to learn to swim. It is the fastest way to a happy and successful acquisition.

Make It So

More than anything, deliver on the promise that the acquisition is based on. Nothing will make you happier or your acquirer more satisfied. Understand the strategic reasons for the sale and work to deliver on those. This gives your team purpose, and your new co-workers a reason to want you to win.

Show Me the Money

Acquisitions frequently have significant financial deal points tied to performance. It’s possible that you’ll get cash on the nose, but not normal. Far more likely, you and your team will have to hit milestones and targets to unlock prizes. This is even more reason to be focused on what will make your team a success in their new home.

How Do I Know?

Money isn’t everything, that’s what they say. Your investors will care a lot about the financial elements of a deal. You will too. You will also want to care who is acquiring you.

If employees from previous deals are still there years later, this is a good sign

The sure way to know what it will be like on the inside is speaking with previous acquisitions. If employees from previous deals are still there years later, this is a good sign. Speak to them if you can.

Begin at the End

Before you all jump on my head about vision and belief and self-determination, keep in mind I am being pragmatic. If your startup grows and thrives, it’s more than likely you will get acquired. It might not be as sexy, but it certainly makes sense to spend some time thinking about how to maximize the second most likely outcome for your startup, your team, and yourself