Preparing your startup for the next wave of mergers and acquisitions

Although these troubling headlines sound all too familiar today, each of them originally started from 2007-2010: The Great Recession drastically slowed the raising of venture capital for many companies, just as recession fears are shrinking markets projects today. According to PitchBookAnd the Venture capital investment is down 30% in the second quarter of 2022 compared to 2021, and IPOs hit a 50-year low. While a few popular brands including Uber, Airbnb and Square have successfully emerged from the recent downturn, most venture-backed companies have struggled during this period, and many have ended up pursuing merger and acquisition strategies.

When dealmaking slows, venture capital dollars typically favor the perceived market leader, starving other capital-backed firms into the same capital space. While some adapt and survive, others end up falling behind and creating a future M&A opportunity for those left holding out. The process starts slowly, but as the chart below shows, project-backed mergers and acquisitions slumped during the recession, when venture capital investment slowed as well. However, during the early recovery, venture capital-backed mergers and acquisitions rebounded and rose significantly: annual deal values ​​topped $30 billion in 2010, and stabilized before ballooning above $70 billion in 2014.

تعافت عمليات الاستحواذ على الشركات الناشئة بسرعة بعد الأزمة المالية العالمية. <br /> Project-backed acquisitions declined in 2009 but recovered in 2010, surpassing pre-crisis levels. <br /> This chart shows the number of Venture-backed companies acquired with a disclosed value, and their value for the years 2008, 2009 and 2010. In 2008, there were 175 acquisitions worth $17.9 billion.  There were 128 acquisitions worth $13.1 billion in 2009. And 232 acquisitions worth $35.7 billion in 2010. <br /> Source: PitchBook. <br />” title=”W220909_KLEIN_STARTUP_ACQUISITIONS_360″ width=”360″ height=”622″ class=”size-full wp-image-338018 aligncenter”/><br />
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Regardless of whether you plan to search for a buyer or take advantage of changing market dynamics to make a strategic acquisition, it is important to note that mergers and acquisitions typically require 12-18 months from start to finish. Today’s sudden slowdown in venture capital investment suggests that a post-recession wave of M&A is looming. Startup founders can start positioning themselves now to be acquired in that wave. Unfortunately, many of the acquisitions that happen now and then will falter. How can you avoid this unnecessary fate?

To get a jump on the process, it’s important to know how you will be evaluated by a potential buyer. Most will have a ranking scorecard with specific criteria, such as deal terms, strategic fit, bridging competitive gaps, cultural fit, potential elevation, and finally “leverage” – how difficult is the acquisition and subsequent integration?

The last category is the most doable. If mergers and acquisitions are likely to be in your intermediate future, your task today is to reduce the influence of the potential buyer and increase your “acquisitiveness”. To achieve this, entrepreneurs must answer the following three questions in preparation for buyers to knock ways:

How scalable are my systems?

You and your potential buyer may have different definitions of “scalable systems”. From a buyer’s point of view, scalability means they can grow without needing a major infrastructure investment right away, even if all they did after the acquisition was direct the pipeline and relationships into your sales operations. While the buyer may eventually integrate your back office systems, IT stack, supply and logistics networks, they will first ask if they can take a hands-off approach while still getting value. As an active board member of many companies, I often advise against acquisitions that require additional investment to create value. The more obvious the realization of value, the lighter the lift.

In addition to offering systems with increased growth capacity, scalability also means audited financial statements and cleaning errors. If you’ve been hesitant to close a poorly performing department or settle pesky lawsuits, do so now. And get maverick shareholders—those who demand management time in excess of their actual strategic or financial contribution—from the cap table. It’s a sensitive message to convey but try to frame it as, “It looks like an investment is no longer meeting your needs. When existing and new secondary selling opportunities appear, do you want me to contact you?” It is in the best interest of all parties involved in these conversations and explored early.

How do I list my company in the M&A deal flow?

Getting acquired by the right partner is hard enough, but if the market doesn’t know both your company and its story, or worse, if the market has the wrong story, a successful M&A is virtually impossible. Fortunately, there are two concrete things you can do to improve your situation.

If you’ve avoided the process so far, it’s time to meet and get to know three to five investment bankers who know your cool place, and participate in the active transaction flow in your industry. Introductory breakfasts and field visits to your office are a good start, followed by regular 60 to 90 minute check-in conversations. In addition to educating potential advisors, these discussions often yield valuable insights for the industry.

When you are looking to hire a consultant, they will need to understand your company and team, its strengths, and what you are trying to achieve so that they can accurately craft your story for a potential buyer. This is an exercise in defining your plot line, and while you may not actually activate all of these relationships, it is likely that what you share with a potential financial advisor will inform the process later. Who knows – maybe they will advise the ideal buyer. This is your chance to establish the narrative.

The second unconventional way to enter the M&A stream is through strategic board improvements. People join boards for many reasons, but one of them is to take advantage of their networks. Adding board members who work in contiguous categories or who have recently retired from larger players in your field is one of the least expensive ways to expand your profile, and gain access to potential businesses or strategic partners.

Is my company a good business partner?

Buyers are busy, often evaluating several opportunities at once. They are human too, and they will naturally focus on the options that seem most willing to complete transactions. When establishing your company as a good business partner, ask yourself the following questions:

  • Are your operating plans up to date?
  • Is there a detailed version that includes the current fiscal year and another higher level plan for the next 3-5 years?
  • Does this include detailed organizational design and staffing strategies?
  • Is your IP address fully tabbed and in digital form?

Best practice entails maintaining a constantly updated virtual data room even if the business is not actively pursuing mergers and acquisitions. It’s worth considering how quickly your company can provide this key deal information without putting pressure on the organization, or risking poor performance in the middle of acquisition negotiations.

The best CEOs I know keep three active lists on their desks. The first is a list of the top executive talent they would like to hire – a topic for another day. The second is a list of potential acquisition targets, which are companies that will increase their value in the long run for the right price and at the right time. The third is shorter: companies that could be the right potential acquirer for them.

Knowing who belongs on your list, and how to get on another company’s list, can make the difference between finding the right partner and settling for a lesser partner. When acquisition waves start, they move very quickly. One of the most troubling sentiments is watching weaker competitors get stronger in a downturn by being acquired by huge corporations simply because they were more prepared.

Many of the actions that make your company a desirable acquisition target will also enable you to better overcome economic uncertainty. Selling during a period of consolidation is not necessarily inevitable, so the goal is to create the option, allowing you to efficiently decide if this is the right outcome. The proactive steps above will ensure that the decision to sell is your choice – not a necessity.

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