As a CEO, rarely do you and your board get to choose when M&A happens. In many cases, M&A happens in one of two ways: i) a big strategic loves what you’re doing and offers you a premium to sell now; or ii) you run out of cash/new investors, and are forced to sell at a distressed valuation. It may seem counter intuitive but in the startup world, very rarely does a board get to decide when to sell, hire a banker, and start an orderly process. So, when a big strategic comes knocking on your door to purchase you, seriously entertain the offer. If you don’t, the outcome could be similar to the story I’m about to share with you.
We’ve been watching a company for a while that had some fantastic technology. The tech was so good that the likes of Salesforce, Oracle, and others wanted to buy the Company at various points over the past few years. Even though investors and the CEO would have made money, at every instance the offers were quickly turned down because everyone wanted to go for the home run, not the double or triple. The thesis was that if these acquirers want us today, they’ll definitely want us tomorrow when we’re an even bigger, better, badder technology. Fast forward to today though and things are totally different: because the company said no Salesforce and the other acquirers went out and acquired competitors at premium valuations or built a team themselves. Now that the company needs to sell (it’s out of cash and unprofitable), these potential acquirers have no interest as they already have a solution in house. Given that the best strategics are now gone, the company is being forced to sell at a valuation that is less than 20% of the offers originally proposed, the outcome will be disappointing for everyone, and some of the company’s early investors are going to get nothing.
Making the situation even worse, the business was not built to be profitable, so the company is selling as its running out of money. Acquirers smell blood and as expected are fully taking advantage of the company’s challenged position, offering valuations that are well below the capital that went into the business.
Even though the company didn’t want to sell when it was hot, looking back with perfect hindsight, it should have. That said, in most cases if someone shows up and wants to take you out at an attractive price, you’ve got to consider it. Keep in mind that the architecture and framework on which your tech is built today will be obsolete in 3 years, surpassed by a new competitor who will have built your solution cheaper, better, and faster than you did because the tech to do has improved exponentially. This fact of course means time will slowly erode the premium you think you’re going to get upon a sale. As Rick Page wrote in his book, Hope is Not a Strategy, “in today’s high tech world, product superiority may last only a couple of months, and competitors react quickly to reach demo parity. The shrinking half-life of technology means the window of competitive advantage for products is getting narrower.”
The lesson here is that any opportunity for an exit should be seriously considered, the premium at which your business would sell for today will likely erode over time as nimbler, better competitors enter the space, and nobody ever got mad about a double or triple.