Why Founders Should Build Relationships With Corporate Development Teams
Many founders bypass building relationships with corporate development (corp dev) teams for several reasons — whether it’s thinking the stars aren’t aligned, the timing is off, don’t want to come across as weak-signaling, or they’re just not ready for M&A. But just because you (founders) are not ready to sell your company doesn’t mean you shouldn’t invest a small amount of time in building good relationships with corp dev teams now. There’s a host of benefits and advantages for you and your company down the line. In this post, we’ll explain what those are and what you should expect if an acquirer approaches you.
Start Now
The majority of exits are via acquisitions, not IPOs, and corp dev drives these transactions. Corp dev professionals are constantly shaping their M&A pipeline as their company strategy evolves. Getting to know these teams early on can increase the odds of your company being on their target list. The best time to do this is, well, when you don’t “have to.” Companies are bought, not sold. Begin building relationships well before you’re ready to sell your company, and call on your investors for help with key introductions. Your investors are there to guide you toward the right corp dev teams to speak with and can help facilitate introductions. At Vertex US, for example, we value our relationships with corp dev teams. We make it a point to have an ongoing dialogue with them to understand their M&A pipeline, product strategy, and gaps, allowing us to connect them with the appropriate portfolio companies early on.
Information Flow
A primary responsibility of corp dev teams is to build and maintain relationships with their ecosystem. They become a great resource for you to better understand the strategies that the broader tech acquirer universe is pursuing. Use them to obtain insights that you normally wouldn’t find in the public domain. You also get to learn about their company’s strategy, what product/solution gaps they have, how they think about filling those gaps, what companies they’ve met with, and so on. This will help you understand how you might fit into their long-term strategic plan. Best case, there’s a strategic relationship to collaborate around. Worst case, you learn more about them, the market, and build new relationships.
Beyond Acquisitions
Existing relationships with corp dev teams can put you on their radar and thus at a great advantage if and when an acquirer wants to buy in your space. But the benefits extend beyond acquisitions. Good corp dev teams have strong relationships throughout the company, including at the highest levels. They typically report directly to the CEO, business unit GM, or product exec, and if they know your product well, they will often recommend your company to fill a specific need. So, even if M&A isn’t on the immediate horizon, they can introduce you to the right people that can sponsor a strategic partnership (like an OEM or channel partnership) or a strategic investment. Any of these paths could drive meaningful growth for your startup and increase its value. Companies sometimes pay for a formal partnership given the cost, time, and resources needed to deliver the solution and go-to-market (payment can be in the form of NRE or an advance against future sales.)
M&A Process
If the timing is right for M&A, you should have a clear understanding of what moving forward might look like. Acquirers have varying decision-making processes, which can differ depending on whether we are talking about a sub $50m acquisition, a $50m-$250m acquisition, or a larger deal. However, there are two consistent signposts in the process:
1) A Letter of Intent (LOI) — The acquirer lays out the headline terms of the consideration of purchase (total dollar amount, a mix of cash and stock, paid out over how many quarters to retain the founding team). Remember that a LOI is typically non-binding.
2) The Definitive Merger Agreement (DMA) — The deal is effectively “closed.” The time between the LOI and DMA is a “period of exclusivity” where the acquirer does deep diligence, and you are not allowed to shop your company to any other acquirers.
Typically, some operational diligence is done before the LOI, and the acquirer works internally to come up with the terms of the LOI. Once both parties have signed, there is typically a 30–60 day period of exclusivity within which the acquirer engages lawyers, accountants, etc. to do legal, technical, and financial diligence and make formal job offers to the startup’s team. They’ll also create/dissolve legal entities for tax optimization and do deeper operational diligence (usually for “integration planning”). A sub $50m acquisition should result in an LOI within a few weeks from the first conversation and smaller exclusivity periods (~30 days). In contrast, bigger transactions will involve multiple quarters of discussions about “strategic fit” to get to an LOI.
Acquirers get bad reputations if they sign LOIs and don’t close the DMA, so expect frequent acquirers to behave better than infrequent ones (as they care about reputations). Other acquirers are known to kick tires endlessly before the LOI without an LOI ever materializing. This is usually because there is no strong sponsor within the acquirer’s organization to push the deal through while gathering information about your product and customers, and getting to know your team.
Companies Get Bought, Not Sold
So what should you do if an acquirer approaches you with interest? The biggest question is, do you want to sell? If the answer is clearly “no,” and you don’t care if, for example, the acquirer wants to buy your competitor, then the best move would be to politely inquire “why the interest?” and build a relationship with the acquiring sponsor — at least a VP/GM but maybe the CEO at the acquiring company. Who knows, you may want to recruit them, set up a GTM partnership in the future, or put yourself in a good position for an acquisition down the line after you have grown.
Qualify, Qualify, Qualify
If the answer is clearly not a “no,” then you’re indicating that for the right price you’d be available for sale. Figure out what your BATNA is if the acquirer doesn’t pay the price you are looking for. In other words, you should first qualify what your willingness to “go it alone” is — this should be a discussion with your co-founders and board members. Often it comes down to a majority of your founders and investors wanting liquidity and taking money off the table — so getting a fundraise done, perhaps with some secondary sales of founder stock, may alleviate the need to sell right away. Justin Kan has a great post about the process once you’re committed to selling your company and staying clear of bullshit offers.
When going through pre-LOI diligence, first, insist on an NDA. Next, qualify how serious the buyer is and how they are thinking about valuing your company. The acquirer’s corp dev team typically builds an M&A valuation model for the acquisition. This is an opportunity to frame the strategic importance and intent of the buyer and think of value beyond a multiple-of-revenue. At this time, corp dev teams typically introduce you to the sponsoring VP/GM or CEO, who is very likely going to be your manager post-acquisition. The more senior the sponsor is, the more likely they are taking your company and the acquisition seriously, so ask for an introduction to the VP’s manager or CEO. Use these conversations to imagine the “better together” story, and figure out how much OPEX the sponsoring executive will allocate to your team so you can be successful post-acquisition. This would also be a great time to hire a banker if you really need one, especially to optimize valuation and help you shore up your BATNA, etc. in bigger deals.
Final Words
Whether you’re ready to delve into M&A or not, building relationships with corporate development teams is an invaluable way to plant potentially lucrative seeds for your company’s future. If you find that you are ready to sell, know that selling your company is the trickiest negotiation you will engage in — and likely an emotional one. Selling involves rethinking the next several years of your life and weighing the value of maintaining your company’s cultural independence. Use the process to see if the acquirer’s culture is aligned with yours — you’ll likely be happier with the deal and the time spent integrating the company if so. The best acquisition processes are when both parties truly believe in the “better together” story and make concrete commitments (not promises) to realize the dream of your product or service.
All this in mind, it’s important to remember to use your time wisely. Be strategic about how much time you dedicate to building these relationships, take it seriously, and don’t shy away from corp dev, but don’t overextend yourself.
Special thank you to our corp dev friends who provided valuable insight for this post — Brian Scelfo, Morgan Kyauk, Dan Debow, and Dagan Josephson.
About the Authors
Both Domenic Perri and Sandeep Bhadra are Partners at Vertex Ventures US and spent part of their respective careers in corporate development (M&A) roles, Sandeep at Cisco Systems, and Dom at Juniper Networks, Tesla, and Dropbox.
About Vertex Ventures US
Vertex US starts and invests in companies that transform industries through software and data. With investments including LaunchDarkly, PerimeterX, and Desktop Metal, Vertex US brings pioneering experience to pioneering enterprises. For more information on Vertex US, go to http://www.vertexventures.com
