In the current state of the market, there are going to be some tough decisions that startups will have to make spanning ultra-resourceful ways to extend runway, close shop, and optimize opportunities for acquisitions. Ideally, startups position themselves for acquisitions in frothy markets full of optimism and close deals resulting in 10X+ returns for the founders and shareholders. Even though the market is anxious right now, we are seeing promising M&A activity from some pragmatic and bullish acquirers focused on getting good deals by buying great companies.
Kyle Park, a Co-founder & Managing Partner at Harvest Management Partners and Strategic Advisor for Silicon Catalyst, led an Angel Club Masterclass for buyers and sellers to help both prepare, position, and close acquisitions.
Kyle is a highly accomplished technology executive with 30+ years of experience in corporate strategy, leadership, finance, investment banking, and operations. Having originated and executed more than 60 transactions, Kyle positions his clients by emphasizing the overall value of the company, not just the financial metrics. I've known him for over a decade after having initially explored deals together during my CVC days in London.
Timing in Acquisitions
Timing is crucial when it comes to acquisitions. A startup that is acquired too early may not have had the opportunity to fully develop its product or establish a solid customer base. On the other hand, waiting too long to sell can result in missed opportunities for growth or a decrease in the company's value.
It's essential to identify the right time to sell based on your company's current position and future projections. As I shared during the Masterclass, in an ideal situation, as a founder, you want to consider a potential acquisition when you believe that you are at a point with your company where you've created enough value to be considered a market leader (or have created enough value in terms of assets, i.e. team, technology/IP, customers, etc.) and can be strategic about your potential acquirer, yet show that there's still room for significant growth that could be accelerated by an acquiring company.
I've been too early, too late, and just right in the timing of acquisitions as a founder, operator, and investor. All other things being equal, timing makes all the difference in the courtship of corporations looking to acquire your startup or you buying a business.
Once you decide to pursue an acquisition, the process will take several months to complete, typically anywhere from six months to a year on average, from start to finish. Park advises that “the first thing you're going to do is put together well-polished materials that describe your business– a summary or a teaser that you're going to show to buyers to get interested. You're also going to have your corporate pitch behind that, and put together a target list of candidates.” In many ways, this stage of the process is similar to fundraising.
Strategies for each candidate may look different, but generally, buyers look for uniqueness, revenue, profitability, a solid customer base, and a talented management/technical team. From a technology standpoint, Park states that potential acquirers want to see “differentiated, defendable, technology that gives them a strategic advantage.”
You must also be prepared to provide detailed information about your startup, including financial statements, product roadmaps, customer lists, and more. Park adds that “after the initial contact and meeting, you would typically want to introduce a mutual NDA at the next meeting as it would indicate a higher level of interest and allow you to share more information."
Before any acquisition can take place, the acquiring company will conduct due diligence. Park mentions that “there is a due diligence checklist that all acquirers are going to send to you that includes everything about your company from incorporation documents, financials, leases, and legal agreements, to employee agreements.” You can access Park’s Sample Preliminary Information Request List via email request here.
A definitive guide on M&A transactions from Carta, says that “due diligence in an M&A deal will be much more robust than the diligence experienced to date for a typical venture-backed company—think a diligence request list with at least 10 pages of categories, versus a two to three-page diligence request list in a typical venture financing.”
You can view an example of an M&A due diligence request list here as provided by Carta’s partner law firms.
To prepare for due diligence, first, ensure that your financial records are in order. This includes your income statements, balance sheets, and cash flow statements. Next, review your documents to confirm that you have a clear and up-to-date record of your legal documents, such as contracts, licenses, intellectual property, patents, trademarks, and copyrights.
Park also shares the importance of preparing a virtual data room “which is an area where you're storing all of your information for acquirers to utilize as a digital archive of the transaction.” Oftentimes, companies will hire external firms to upload and organize their data. However, sourcing the right firm comes with its own challenges, so Park and his team have put together a list of highly recommended firms based on your business size and goals:
Datasite- Best for significantly larger deals. Key features include unlimited users and storage, a high level of security, and a dedicated project manager.
Dropbox for Business- This option is cheap, easy, and basic. You will have access to unlimited data storage and a basic level of security.
Intralinks Dealspace- Intralinks is specifically tailored for use with M&A and offers a high level of security, variable levels of storage options, and in-depth analytics.
Firmex- Used typically for mid-sized transitions. This option has top security, a dedicated account manager, and unlimited users.
You can check out our fundraising data room checklist here.
Determining the value of a business can be a challenging task during an acquisition. While there are various methods for valuation, ultimately the value will depend on the perceived potential of the startup. For Park, what determines a valuation is how strategic a company is to the potential target and not necessarily the financials!
As an entrepreneur, it is important to have a realistic understanding of your startup’s growth potential and seek professional advice from valuation experts such as Kyle and his team at Harvest Management Partners to ensure a fair, accurate, and optimal valuation.
Once the due diligence and valuation processes are complete, negotiations for the acquisition can begin. To prepare for negotiation, it is crucial to have a clear idea of what you want to achieve from the acquisition. This may include financial goals, such as a specific purchase price or earn-out structure.
It may also include non-financial goals, such as maintaining your company culture or retaining key employees, since, as Olga Duka, General Partner at Improve Ventures mentioned during the Q&A, acquisitions are the “process of joining different teams and cultures together.”
This can be a complex process, and founders should seek the advice of experienced legal and financial professionals to ensure that the terms of the acquisition are fair and beneficial for your business.
Navigating Your Options
Timing, due diligence process, valuation methods, and negotiation strategies are all critical elements of the acquisition process. By understanding these key topics and seeking the advice of experts, startup founders and entrepreneurs can increase their chances of a successful acquisition and ensure the long-term success of their company.
“The current landscape is obviously tough,” says Duka. “I think we're going to see more consolidation happening in multiple sectors. A lot of companies who may not have the luxury of fundraising may have to consider acquisition.” In any market, winners always have options to buy or sell. Let’s focus on winning together.
*Angel Club members, sign up here to connect with Kyle and Olga to explore your options in the current state of the market. Not a member yet? Join now and expand your network through curated events, introductions, and mentorship opportunities from globally recognized investors, founders, and experts in the inclusive Angel Club entrepreneurship community.
A full version of the recording, in addition to investor and media databases, playbooks, templates, and tools can be found in the members-only Angel Club Resource Library.