Introductory breakfasts and site visits to your office are a good start, followed by regular 60- to 90-minute check-in conversations. If you’ve avoided the process until now, it’s time to meet and get to know the three to five investment bankers who know your space cold, and participate in the active transaction flow in your industry. Thankfully, there are two tangible things you can do to improve your position. Getting acquired by the right partner is challenging 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 process is virtually impossible. How can I insert my company in M&A deal flow? When current and new secondary sale opportunities arise, would you like me to contact you?” It’s in the interest of all parties to engage in and explore these conversations early. It’s a delicate message to convey but try framing it as, “It seems the investment no longer meets your needs. And get dissident shareholders - the ones who demand management’s time in excess of their actual strategic or financial contribution - off the cap table.
If you’ve been wavering on closing an underperforming division or settling nuisance lawsuits, do that now. In addition to offering systems with excess growth capacity, scalability also implies audited financials and cleaned-up messes. The more straightforward value actualization is, the lighter the lift. As an active board member across several companies, I often advise against acquisitions that require additional investments to actualize value. While the buyer may eventually integrate your back-office systems, IT stack, and supply and logistics networks, they will first ask whether they could take a hands-off approach and still get value. You and your potential acquirer may have different definitions of “scalable systems.” From a buyer’s perspective, scalable means they could grow without immediately requiring a substantial investment in infrastructure, even if all they did post-acquisition was direct their pipeline and relationships to your sales operations. If M&A is likely in your intermediate future, your task today is to reduce a prospective buyer’s lift and increase your “acquirability.” To accomplish this, entrepreneurs should answer the following three questions in preparation for buyers to come knocking: How scalable are my systems? Most will have a ranked scorecard with specific criteria, such as deal terms, strategic fit, competitive gaps filled, cultural compatibility, potential upside, and finally “lift” – how hard will the purchase and subsequent integration be? To get a jump on the process, it’s important to know how you’ll be evaluated by a potential buyer. Unfortunately, many acquisitions occurring between now and then will be distressed. Startup founders can start positioning themselves now to be acquired in that wave. Today’s abrupt slowdown in VC investment suggests a post-recession-type M&A wave is on the horizon.
Regardless of whether you plan to seek a buyer or take advantage of shifting market dynamics to make a strategic acquisition, it’s important to note that M&A processes typically require 12-18 months from start to finish. During the early recovery, however, VC-backed M&A rebounded and skyrocketed: Annual deal values eclipsed $30 billion in 2010, holding steady before ballooning above $70 billion in 2014. The process starts slowly, but as the chart below shows, venture-backed M&A plummeted during the recessionary period, when venture investing also slowed. While some adapt and survive, others end up retreating and creating M&A opportunity down the line for those left standing. When deal-making slows, VC dollars typically favor the perceived market leader, starving other venture-backed businesses in the same space of capital. While a few iconic brands including Uber, Airbnb, and Square emerged successfully from the last downturn, most venture-backed companies struggled during this period, and many ended up pursuing M&A strategies. According to PitchBook, VC investments were down 30% in Q2 2022 compared with 2021, and IPOs hit a 50-year low. Though these alarming headlines seem all too familiar today, each originally ran from 2007-2010: The Great Recession dramatically slowed venture capital fundraising for many companies, just as recessionary fears are curtailing venture markets today. “Venture investments fall 61 percent in Q1” - Associated Press
“Venture capital investing plunged in 2009” - The Washington Business Journal “For Startups, a Bleak Year for IPOs and Acquisitions” - F ast Company
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