Finding the Right Startup for your next Acquisition

When it comes to starting a Merger & Acquisition process, you will have to do your homework first and go through a few preliminary steps. Once you are settled, you will need to find the company that is the right fit depending on your strategy and needs.

Below are a few ideas to help you navigate the wide ocean and find a match.

1. You don’t want to kiss too many frogs
2. Getting insights from the field
3. Leveraging databases
4. Building the love
5. Reading between the lines
6. Validating business objectives
7. Patience is a deal virtue

1. You don’t want to kiss too many frogs

At Google, they have a documented sourcing manifesto, called the toothbrush test. Don Harrison, president of corporate development, explains it at the Startup Grind Global event "the toothbrush test is simple: is [the product] something you use daily, does it solve a real problem and can it scale to millions and billions of users? Any product that meets that test is something we are interested in. That product focus drives all the M&A decisions”. For Google the initial interest is not so much driven by financials but by the long term potential of the product. When you look at Google’s acquisition history, they did a pretty good job following their mantra. Nest, Fitbit, Youtube, Android and Doubleclick all passed the toothbrush test smoothly.

Finding the needle in the haystack is a challenge and the one thing you will need is to build some discipline in the sourcing strategy to avoid kissing too many frogs. Determine upfront what constitutes a red flag for you and why. It will help you to not fall in love with the wrong target and will limit irrational acquisitive behaviors. It could be things as simple as companies that are not profitable or do not have a credible short term path to profitability. Other red flags can be geographical criteria, revenue size or employee size caps and floors. Valuation and the amount you can afford will obviously narrow or expand the type of targets you can go after.

For smaller acquirers, the sourcing challenge is a bit different. They do not have a volume problem as they are not over solicited by sellers. They need to find the targets by themselves. There are a few ways of getting it right.

2. Getting insights from the field

Todd Neville, manager of Corporate Business Development and Strategy at IBM shared to Techcrunch his advice to startup founders and it’s quite simple “Do something cool to one of the IBM customers. If they rave about even a POC, we’re interested.”

Working with your field and product team is a great way to get insights on the market. Sales and marketing folks know who they lose deals up against. They regularly meet direct or indirect competitors and partners in trade-shows and are capable of giving a pretty good vision of the market landscape. Product and client teams can share the types of needs that are escalated from customers that are not currently addressed by your organization. They are good at finding opportunities for new partnerships that could later turn into an acquisition. As you already know, acquisition success increases when companies already have an existing relationship.

3. Leveraging databases

As a last resort when you are lacking options, you can look into databases. We’re saying at a last resort because trying to acquire a company that is not on the market and that has no connection with your business can be a long shot. That said, database checks can be a good way to compare your shortlist to what the rest of the market can offer. Just to make sure you haven’t missed any striking opportunity. You never know, you may be lucky.

Linkedin is the best source today to find these unexpected targets. You can mirror the work done by Venture Capitalists from that perspective. Their job is to find great innovations and fund them before they get too big and unaffordable. It is quite similar to what a mid-cap corporate development manager needs to do. Crunching Linkedin helps you find lookalikes to your ideal targets, look at their employee growth rate and overall traction. You can then check in Crunchbase if they have reported any funding before and when was their last round. It will give you a sense of their current valuation and the level of cash they have in the bank.

4. Building the love

During the early talks you will discuss vision, product, customers maybe valuation but most importantly you will see if you can picture yourself working with this startup team. Are they genuinely interested in working with you to build on a shared vision? Will you be able to count on them to run and integrate the business with as much enthusiasm and energy as they did before they had the money? 

You will not get these answers right off the bat. Some great entrepreneurs may be defensive or not open to share much your first encounter, it will take a bit of time to build trust.

Just come prepared and build a friendly environment where entrepreneurs feel comfortable openly discussing strategic intent with you (i.e sign NDAs, be upfront about your strategy, show that you are serious and prepared for acquisitions).

It is then common practice to set up a series of workshops between the buyer’s and target’s executive teams to start discussing all the aspects of a future collaboration.These workshops are the right moment to unearth and deal with the early signs of integration challenges.

5. Reading between the lines

Xavier Minakawa teaches us how to read between the lines when speaking to founders. “Check at their behaviors, are they asking a lot of questions? Are the founders pulling in other people or do they want to run the show? Are they collaborative ?” We have seen that authoritative founders do not last very long in a new org unlike those who are more invested in the success of the team who are more likely to stay.

Take these conversations to identify some early frustrations. They need to be considered fast to avoid any false starts: a founder who is getting less than his co-founders, a manager who has experienced a bad exit before, a concern with office location. 

As said before, you need to show that they care and are welcoming feedback and suggestions.

6. Validating business objectives

Beyond validating the fit with the teams, these early conversations should also help validate business objectives. Set-up strong gatekeepers, it’s better to spend a bit more time qualifying an opportunity rather than moving too fast and wasting your team's time. 

To make sure you are not missing anything, you can use models like the Business Model Canvas proposed by Alexander Osterwalder. It is a good way to qualify a business around 9 simple pillars that you will find in any company. It’s pretty generic but it will help you evaluate what you have in common with the startup and where they can bring value.

Source: Strategyzer

7. Patience is a deal virtue

You should be ok with the idea of walking away fast if an opportunity does not feel too good. It takes time to find the right match and you’ll have to be patient before the right deal occurs. Sometimes the perfect startup is not ready to sell on your timing and that’s ok. Change plans, just partner with them, the board may realize that they will be better off exiting rather than trying to remain independent. Patience is a particularly important virtue when it comes to valuations when the markets are high. BigPharma companies were pretty good at keeping a cold head and not pursuing many transactions during the biotech bubble between 2019 and 2022. After valuations started to go back to more acceptable numbers, Bristol Myers Squibb CEO Giovanni Caforio said on an investor call on April 2022 “Our experience is that whenever there is some type of realignment in market values, it always takes a little bit of time for those values to really be the values that boards of biotech companies look at in terms of their valuation”.

Being patient does not mean being slow, when a deal seems right and checks your qualification criteria, move fast. There is a competitive advantage for the buyer who will shoot the first serious Letter of Intent (LOI). To elaborate further on the topic, here are the 5 steps you can take to practically approach the “Build, Buy or Partner” framework.

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