Strategies: Always be Planning: Founder’s Approach to M&A

Yair Snir is a managing director at DTC focused on investing in early-stage companies across Israel and Europe. His current investments include companies such as Lightbits Labs, Pecan.ai, Swish.ai, and VAST Data.

Good companies get bought, not sold.

This saying is conventional wisdom passed down through generations of entrepreneurs. But it doesn’t tell the entire story. While the IPO is characterized as the pinnacle outcome for venture-backed startups, far more companies see successful exits via an M&A process than by going public. Being bought by the best acquirer for you takes thoughtful planning and yes, selling.

As an entrepreneur, you probably started your company because you wanted to make a big impact. You’re building something that you truly believe will shift the world in a positive direction. And yes, there’s also an implied financial outcome there. People – maybe your investors, the media, your team – will often focus on the exit strategy in a financial outcome context. In my experience, many founders are more motivated by impact potential. For these kinds of founders, my advice is to always consider acquisition as an option. It might not be obvious at first, but an acquisition can be your best path to massive scale.

Prior to becoming an early-stage investor at DTC, I ran business development and M&A activity for Microsoft across Europe and Israel. I was on the other side of the negotiations as Microsoft looked for innovative teams and technologies to bring into their fold. The founders who were able to capitalize the best on the acquisition process were those who’d planned for it from day one.

Planning for a potential acquisition is not a defeatist attitude

Planning for all eventualities means you’re prepared for when it’s time to make decisions. Companies are 10x more likely to be sold than to IPO. This isn’t said to discourage you from having a plan to build, IPO, and then continue to your company for decades into the future. That’s one of many perfectly valid plans. If you are prepared, being bought by the right acquirer could mean a healthy financial outcome for you, your team, and investors and an even larger impact for the product and services you’ve worked hard to bring to life.

With that out of the way… I suggest to founders that they take a 360-degree view of possibilities and eventualities.

Understand your position in the world at any given time

You’ve done all kinds of product competitive analysis, but it is just as important to understand the macro – and micro – landscapes.

• Where is the overall market heading? Are companies buying new technologies or are economic trends pushing them into, “Nobody ever got fired for buying IBM” territory?
• What shifts could make your company significantly more valuable? And which might nullify your competitive advantage? Either state could mean becoming an attractive acquisition seemingly overnight.
• Last but not least – how are you fairing? Being an entrepreneur is incredibly hard and staying in the startup business for a decade plus isn’t possible for everyone. Regularly checking in with your cofounders and leadership team, your family and yourself to understand your current life goals and your ability to engage and meet them is probably the most important exercise in this list.

Make a list and revisit and revise it regularly

Any investor or mentor will tell you that when a company says they want to buy you, the right answer is, “We are not for sale.” And that’s true. But there are still many reasons to keep a force-ranked list of which market leaders might be acquisitive in your space. This puts you many steps ahead when you get that acquisitive call.

• Create a list of companies that need technology like yours in their product lineup to stay competitive.
• On that list, highlight the ones that may have a “buy over build” philosophy.
• Then, look at how “day two” has played out for recent acquisitions by them. Did they retain leadership? Was there a successful integration of team, product, and culture? Underline which, if any, of these companies feel most aligned with how you’d like a successful acquisition to go.

If you’re approached by a company that tops your list of potential acquirers, you’re still not for sale. But maybe this is an opportunity to explore a partnership or strategic alliance (more on that in Part II of this). Either way, with your understanding of who might be acquisitive and why, you’re more prepared to engage in the conversion.

Lean into the possibilities

Understanding all the possible acquisition eventualities does not mean you’re any less dedicated to other types of successful outcomes. It does put you in a position of strength where you will be better able to maximize your impact and to capitalize on the value of what you’ve created. This is what I want for every founder.

Part II talks about how to think through the very beginning of a potential acquisition and how to leverage your board and investors throughout the process.

This article originally appeared as a part of the TechCrunch+ series on building startups.