Years may pass before the company we’ve invested in will feature on the tech giants’ radars. As with all VCs, we like to be involved early with the companies we believe are destined for greatness. Our policy is then to stick with them, through further rounds of investment, as they negotiate the ups and downs of establishing new technologies and cementing their unique properties, talents and team dynamics, and their product. So, when the time comes to face the big acquirers, our relationship is deep and long-standing.
Sometimes an acquisition process will start out as a partnership discussion, but either way, once you start rubbing shoulders with the tech majors, things can change dramatically for founders.
From Startup to Business of Interest
You started a business, it’s now a few years established, but there’s no question it will be dwarfed by any one of the tech majors in every way. A new world of private jets, dazzling multinational engineering teams, and access to millions, if not billions, of users changes horizons and aspirations, regardless of the outcome. One-on-one time with global tech legends or more niche stars in their own field can dazzle and leave the head spinning. Keeping things grounded is a job in itself. Secrecy is an underlying constant in these situations, but tight-knit teams pick up on the seismic tremblings of change, so the home team may need to be handled carefully. What should they know and when? The key thing is to keep the day-to-day running of the business going smoothly; a hard task when big things are happening or key people suddenly disappear to California for 48 hours.
In more than one case, a team of due-diligence lawyers arrived that outnumbered the entire staff count of the portfolio company. Then there were the engineering teams that descended to pick over the technical specs to a level of detail that challenged even those who created them. This kind of activity happens beneath a level of intense secrecy. This is of paramount importance to the majors for obvious reasons: even showing an interest in small companies with very specific technology strongly suggest the big company’s future intentions and ambitions. Knowledge is power and the less their competitors have of it, the better. Knowing a leak could jeopardise the process adds yet one more layer of pressure.
The acquirer has done this many times before — the team it sends probably exists for no other purpose. The acquiree, on the other hand, is almost certainly in completely new territory. They need help, not just from us but from outside professionals. This costs money which, we argue, will come back in the form of the best possible deal. However, it can still be a lot to swallow: in one case, in the first 48 hours of the process, our portfolio company ran up a legal bill of $100,000.
Now, the details of the deal emerge in a proliferation of specifics and broader negotiation strategies. In one case, the discussion dived straight into IP, which — as there was nothing more than a demo product in existence at that time — drew the full heat of negotiation immediately.
The Two Most Valuable Assets
The experience and steady confidence of an outside specialist advisor is invaluable. War-gaming scenarios and scripting answers arm David against Goliath. Surprises can be averted and strategies revealed and prepared for. On an emotional level, simple reassurance and right-sizing counts for a lot. The other crucial asset is team-cohesion. The relationships we built with our portfolio companies over the years prior to the exit process stood us in good stead to withstand the force, both subtle and overt, of the giants’ professionals. Trust is key, and many “whites of the eyes” conversations were had which required honesty to a level only the strongest relationships could endure.
Driving the Wedge
The fact has to be faced that the acquirer ideally wants to get the acquiree in a room on their own. No venture capitalist, no partner, no lawyer, no corporate finance team — just the people who started the business. The danger is that the wrong conversation takes places too early. An isolated founder can unwittingly put a cap on the selling price in an early interaction. Additionally, someone very senior from the tech giant, maybe the CEO themselves, has sanctioned this process but then handed it over to the corporate development team, which of course has no previous relationship with the founder. Their priority, as professionals loyal to their organisation, is to achieve the very best terms. This is where the dynamics can become dramatically tactical and lead quickly to challenging conversations. The earlier a founder’s home team is aligned, the better the challenges and drama can be withstood. Trust, transparency, and loyalty count for a lot here.
Time as a Weapon
These are some of the world’s biggest companies, so it’s no surprise they operate on a different timescale. The global nature of their operation can account for unexpected delays in communication, but often, sudden periods of silence can appear almost tactical. Whether deliberate or not, they can be unnerving, particularly when they occur in the very latest stages of the process. Aggression is rarely overt, but no one is under the illusion this is anything other than a gloves-off, no holds barred process. One side wants to realise the full value of their company and its assets (intellectual, technological, and human) as they perceive it. The other wants to pay the lowest possible price. The tension between these opposing forces is where the deal is created. Turning communication on and off is the powerful prerogative of the buyer.
As all this is going on, remember, founders are still having to maintain Business As Usual back at base. Starting a business creates a concentrated net of relationships. A small, tight team might be asking questions. The usual sweat of running a small or any sized company is still required, whether or not nerves are being quietly shredded. Support, trust, solid advice… these are more important than ever.
Playing the Game
Like any negotiation process, the poker analogy applies. Cards close to the chest, poker-face, the timely bluff — these may come into play at various stages. Honesty and transparency is the guiding principle, but the truth is still a resource to play with. For example, the fact of other companies’ interest, other giants’ perhaps, is an ever-present possibility. If the acquirer is sure they are the only buyer in the game, they will act accordingly. The belief that a rival might gain highly specialised IP, for example, can dramatically change the balance of power. Keeping cards close to the chest is a way of at least keeping that possibility open. It creates a more level playing field without any hint of deception. What you don’t say can speak volumes.
Maintaining a solid front gets increasingly important. On more than one occasion, the acquiring company was vocal in its opposition to having a corporate finance team on hand. Again, they ideally want the founder alone in a room, so the pressure to slim the team down is there. Often the argument goes; “do we really need…?”; “wouldn’t it be simpler if…?”; “it would be much quicker if…”. These can appear to be persuasive, especially to the pressured startup CEO, especially in the context of threats that the deal might be off. But time and again, we’ve won out and landed the better deal by sticking together as a team and consistently presenting a united front with all bases covered.
By this stage in the process, the initial euphoria is a distant memory. Long hours, protracted discussion, unexpected layers of detail and left-field issues take their toll. The pre-planning and reassurance from an experienced board help keep the energy focused and in context. The aim is to get the acquirer “pregnant” with the process — to the point of no return where a “maybe” becomes a “must have”.
The Possibility of Collapse
Even so, we know from first hand experience that eleventh (sometimes twelfth) hour collapse can and does happen. In one case, an unrelated external lawsuit scuttled the deal in the final 24 hours. No one could have predicted or planned for it, but it blew a fatal hole in months of negotiations. In another case, the deal would have created a new UK-based team that outnumbered the giant’s existing presence. The risk associated with setting up another base of operations alongside acquiring the company proved too much to bear, and the decision was taken at a very senior level to pull out at the last minute.
In both cases, this seemingly devastating collapse cleared the way for a superior deal with a different tech major to happen…even if years later. Hindsight isn’t there at the point that success turned into defeat, but these experiences provide valuable context for future scenarios. As the golden rule of negotiation goes: it’s the one who’s prepared to walk away with nothing who is ultimately in the strongest position.
Life After Exit
Signing the deal doesn’t always feel like the conquered mountain summit imagined. Detail, compromise and complication can be part of the experience right up to the last minute. The view may not seem like a clear blue sky. Conditions and lock-ins may greatly affect a founder’s life for years to come. Yes, life-changing amounts of money are involved, but life-changing circumstances may be in there too. Re-location or radical change in the company are possibilities.
Time was when giants were reluctant to locate large teams outside the US, but fortunately this has changed. In the case of Evi (the company whose technology Alexa is built on), Amazon maintained the team in Cambridge. Evi’s CEO himself went on to become the senior lead in the Alexa team, effectively expanding his cohort from 30 to 400. Google, Twitter, Facebook and Microsoft are likewise much more likely to retain teams in situ and add to them, rather than transplanting as they used to do. It’s an important factor to counter the argument that “foreign” companies are buying “our” UK-born assets. Far from being any kind of brain drain, these acquisitions feed the homegrown ecosystem. Small companies, more often than not, stay where they are and expand in situ. Skyscanner, bought by the Chinese giant Ctrip in 2016, stayed put in Edinburgh. Any sense of selling off the family jewels is balanced by this new pattern of behaviour by the giants. It’s important to see things as the giants see them. IP and the people who create and develop it are the point of interest, more so than national identity or even global location.
The Value of Experience
Even one iteration of selling a business to a tech giant reaps a vast resource of experience. Each process is unique and presents challenges you could neither predict nor expect. There are also some fundamental similarities, not least the simple David and Goliath asymmetry of a giant wanting what a small company has to offer. The firepower, the experience, the repercussions are of different orders of magnitude. But the fact remains that the big company wants something the small company has. On this basis, the two can meet and come to an agreement. Believing the right outcome for both parties is possible pulls the process through turbulent times. The more we do it, the better we get — this simple belief remains at the core of the endeavour.
Starting a business takes enormous dedication and energy. Developing a new product or technology demands tenacity and imagination. Founders tend to be the people with these qualities in spades, (if they didn’t, they wouldn’t have made it this far), so, as their venture capitalists, we already know they have what it takes to face the giants and win.