Last December, I got into a longer conversation at a social event with someone who had lots of corporate M&A experience in tech. She said something to me that lodged into my brain: “Generally speaking, we have no interest in VC prices.” As that quote snaked its way around my brain, it dawned on me how, when considering the VC “business model,” M&A is one of the two traditional exit routes and critical to making the VC model work. Of course, this should be obvious, but replaying this quote in my head made me think, perhaps, it was forgotten during a generational transition. And, as companies stayed private longer before IPO, and as valuations rose beyond what many companies were willing to pay, I thought to myself: “I need to more people who have done this work.”
So, I spent the first quarter of 2016 trying to meet and learn from as many corporate development and M&A groups at various consumer tech and enterprise tech companies in the Valley. People were very gracious with me, making time to meet face to face or at least by phone, and being quite candid in their responses. Of course, I would never share the details of any conversation and/or tie them to a specific company, as strategies differ quite a bit between companies.
As I’ve reflected on those conversations, I’ve tried to find parallels among different companies and distilled the key takeaways as follows:
1/ Core, Adjacent, or Irrelevant: Acquiring companies are mostly interested in acquiring small teams (not taking on huge CapEx) where those team members will easily integrate into a core area for the company (say, for Facebook, live video) or an adjacent area that could be emerging over time (say, for Google, open source software). Companies view small acquisitions of talent here as an accelerant to traditional recruiting done 1 by 1.
2/ Types of Landings: Larger, material acquisitions over $100m (that need to be reported by public standards) are a different matter, which I’ll address below. For those under $100m, most of them are for specialized talent (say, cloud infrastructure experts who land at Amazon), but the smaller acquisitions of, say $20-30m, are not as common anymore. The landings are a bit harsher, say $1M or so for the key staff at a startup — i.e., not everyone on staff. Often these offers are below what the startup has raised on a theoretical “cap” in a series of seed rounds and extensions. (Some companies mentioned to me that they wanted to meet small teams who were just raising seed rounds to offer them a buyout right away — I actually referred one company to an enterprise buyer after passing on the round and they were scooped up by the company despite having trouble raising their round!)
3/ Pulling the Strings: Who makes the larger acquisitions happen? Either strong product execs from these companies, or the executive leadership itself. Benioff famously told his M&A team that he wanted RelatedIQ, and the team executed to fulfill that desire. Catching the eye of a CEO can move the needle in a very different way; for the product teams, it usually requires a bit more strategy and time, which I’ll address in #5 below…
4/ Anchored Prices Are Irrelevant: I mentioned earlier that many soft landings offers come in below what the seed stage company has mentally anchored around re: their price or value. This can continue and magnify once a startup has taken on Series A funding and beyond, especially over the last 4-5 years. In short, M&A departments have essentially zero regard for these prices, but the psychological anchoring around these prices from companies and their investors — not to mention a board’s ability to block an offer — can put the company on a path to nowhere.
5/ Relationships Matter: In #3 where I mentioned product leaders at companies holding court in M&A direction, those discussions usually start off with a relationship between the high-level execs and the particular product team. That requires a relationship. It could be a BD deal, or an API integration, or simply a cultural fit. The marketplace approach many companies have used to raise their rounds to date won’t really work here. This was an interesting finding because so much of the startup narrative is to avoid partnering with companies — and while there’s no doubt truth and limits to this, it also can grease the wheels for a better landing down the road.