Preserving Startups During Acquisitions

27:10It'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're in corp dev, keep an eye on how that 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 buddies.

27:51Buddies? Like a buddy system? Right. The concept of onboarding buddies, 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 this 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.

28:31Yes. So they got somebody they can fall back. By the way, this 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 integration. The weekly reviews make a lot of sense up front for CorpDev 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.

29:14If 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 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.

30:07And 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 blog. They abandoned me. So it helps to continue to have, if not a monthly, at the very least quarterly touch points, one-on-ones, 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.

30:52That'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 a 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 have to have 11 people look at my work and check it off before even, you know, it goes through a bunch of iterations.

31:27So by the time it 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 our organization to adapt to this large 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.

32:03And you're giving a lot of that up. And 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.

32:40And 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. So now 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?

33:19It sounds like a lot of alignment from both sides because you want to understand what the goals are for that startup and then 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...

33:57Because right away, I've got to 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.

34:36The bonus structures, every time I assume they are going to be different, completely different, sometimes diametrically 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 star 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.

35:19And at the same time, if you don't change that compensation sooner or later, the acquirer, the sales team in the acquirer 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're 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.

35:58And it makes a lot of sense when I explain it in 60 seconds to the board. But then the things you're describing are... Minutia. 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.

36:39But 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 at sales reps comp and 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, it's required on both sides. What are the must-haves on both respected organizations?

37:08Make 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 acquisition? Yeah, 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 whose solely objective is to get rich and then, you know, coast.

37:47Okay, 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 cash out. And then in two years, they will be gone. Let's exclude those. They're becoming the minority. I witness myself that I do see more and more. Okay, maybe the minority is starting to grow. They are not talking to you. Okay, so there is at least a portion of founders out there that do care about their team and their people. Okay, so let's assume, yeah, this founder is decent and passionate and really cares about his or her team.

38:20Maybe 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, Beata, where the founder was at that stage, multi-billion dollars of value generated, and he converted the whole company to not-for-profit. 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 on how they can prevent their company from being destroyed. If one of your listeners is an entrepreneur who is being courted by an acquirer, a large company, and it's your first rodeo, definitely asking questions early on as to what are you going to integrate first or what are your plans for integration?

39:07I 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 or feel lost in the big machine. And also most founders know or should know what are the non-negotiables.

39:50The free food is very important or the health care 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 are getting into. I like that because you have the people part. Hey, these are the key people and making sure they're taken care of. You're getting a 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?

40:31That's good. Anything else that somebody's good to 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.

41:05And most of the times we don't listen to it. And the best decisions 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 buy 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. It goes back to the question, is my startup better off by being acquired by this big company? And you know better than anyone in which financial situation the company is, whether they are going to die without more funding or not.

41:46Sometimes preserving the company alive is more important than keeping the good food, you know? Yeah. 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 startups. 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.

42:24I 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 him apart. The sales went down. The very special culture he created is gone. My gut told me don't. 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 think what they could have created, they went from zero to$10 million in sales.

43:02So 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 to solve what was driving the exit. And then there's looking for alternatives in potential suitors because one wasn't the right home. Would have been obviously marketed a variety of different private equity firms, different strategics.

43:40Yeah. 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, as a good leader in the company, just think about that ahead. And a lot of startups are wising up to that, especially if 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.

44:12A 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 a timeframe you typically see? 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.

44:51And 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 &D and the sales teams to go in this area? Or does it make sense to acquire? So once we 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.

45:34And 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 out to them? Is there a form of persuasion that you can get people to sell? Oh, it's a tough one. And 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 for the targets to know that there can be a potential here someday.

46:22Yeah, 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.

47:04For 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 OK. 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.

47:41So 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, it was not the founder. The company could be without the founder, fine. Yeah, that's where you got to dig in and find those things out. And it was not the engineers, because in certain companies, it's the engineers. The engineers, yeah. Nadia, what's the craziest thing you've seen in M &A? As an angel investor, let me start with that one.

48:10I 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, well, let me go to the restroom.

48:49I'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 in. And I'm thinking, how much have you drank 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. 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.

49:30And 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? 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'm learning to play. I'm a little bit shy about this. This is only my first year playing.

50:04Okay, so let me tell you the strategy that I used to use when I started playing golf. Sure. Get your lunchbox, pool with beers and 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. Yes. This will help a lot because I'm always a... No, no, I'm telling you, by call number nine, everybody are friends. Everybody's friends. I like it. Very friendly with each other. I just want a 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.

50:36We're planning to do a little golf out there, but we're heading into winter here. Maybe we want 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 &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 &A, we host a bunch of events. So start with getting on a newsletter, but then try to get on one of our invite-only lists 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.

51:09This 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 &A scientist. Those of you tuned in. Until next time, here's to the deal.

51:36Thank you for taking the time to explore the world of M &A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M &A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email, Kisan, K-I-S-O-N, at mascience.com. Or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter.

52:21Again, that's mascience.com. Here's to the deal.

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