Hot Take #2: First Round Capital on Startup M&A

Great M&A advice for startups of all stages

If you haven’t already - get the second edition of the MBP here.

There’s a lot of gold in First Round Capital’s article on startup M&A. But there’re also a couple lumps of coal. We’re going to mine both. Before we dig in, one thing to note is that the article is written as an interview rather than a first person publication. As such I wonder if there’s a potential loss of fidelity between how the interviewee, Daniel Debow, might have worded things had he been writing the piece directly. We may never know! Either way it’s a popular piece and gives us a great deal to discuss.

The title

We have to straightaway deal with the elephant in the room, the title: How to Sell Your Startup: The Complete Guide to Running an M&A Process as a Founder. As we discussed in the last post on MBP.co, subtitled The cure for the sale process infection, the framing of the startup M&A conversation in the context of a “sale process” is as common as it is unfortunate. It isn’t to say there aren’t times when you’ll need or want to run something close to a sale process - but that’s way down the line (if ever). The first move when you're working in the Magic Box Paradigm is to develop an ongoing flow of conversations with Potential Strategic Partners (“PSPs”). Some of those conversations may develop into commercial partnerships, some into strategic investment, and some into M&A. The “process” isn’t one of selling your startup, it’s one of creating opportunities for your startup to be acquired. What’s interesting is that much of the body of the article is very MBP’ish in its recommendations - it almost feels like the title was “overlaid” on the article so as to make it jump out to the potential reader.

The lead

The lead into the piece is also a bit of a downer. The context as it’s set out is of a startup that “isn’t on fire,” one that “could find a landing pad,”and “is pursuing an acquisition as an exit strategy.” Let’s unpack this a little. First, as we discuss in Chapter 2 of the MBP book, acquisition is one of an array of potential growth strategies for your startup. It’s one of the ways you could access the resources you need to maximize your impact. In a Jobsian view, it’s a way to enlarge the dent you’re going to make in the universe. As such, if you’re following the MBP M&A isn’t something you consider once you’re out of gas, instead it’s part of your strategic thinking as soon as you fill up the tank! 

A core part of the MBP is the posture that startup acquisitions aren’t “exits” but are instead “entrances.” As it says in Chapter 2: “I want to suggest a mindset: Startup acquisitions should be seen primarily as one of the ways to access new resources—which is to say, as one of the alternatives alongside raising capital and forming commercial partnerships. For startups, an acquisition represents an “entrance” into much-needed new resources rather than an “exit” from the resources already accumulated.”

So to extract the real gold from this piece (which we’re about to do!) I’d like to propose that we reconsider the title and the initial framework. I’d flip the title to something like “A set of strategies for developing M&A opportunities for your startup” and in parallel flip the frame to “steps you as the founder should be taking from day one.” 

Break free of the sale process mindset!

Let’s get to the gold, and there’s lots of it

Right out of the gate the article makes a statement with which I couldn't agree more: “Navigating acquisitions is one of the more underexplored topics in company building.” Bingo! I can’t explain why the startup M&A topic is so underexplored, but it is, and that’s why MBP.co is taking the time to explore it. 

Debow goes on to make a fabulous abstraction, one that really sets up an MBP-way-of-thinking. He says “there’s no such thing as a company…there are people who work together as a group…you’re going to sell your company to a group of people who happen to work together.” By taking this step back you get out of what MBP speak would call Popsicle selling and you’re getting into the realm of building Partner Big Ideas (“PBIs”). You’re not thinking about selling your thing, you’re thinking about solving their problem. Debow goes on to extend this thinking when he says “One of the most important things for founders to understand is that you are selling something to an executive, who has a problem. And as the startup CEO — you are that solution.” Again, said in MBP speak - to be acquired you’re going to need to be a central figure in something that’s very important to the acquirer. As Debow says, founders need to “adjust their mirrors” for how they see startup M&A. It’s not like raising money or gaining customers - it’s its own arena and you have to understand the game if you’re going to play it well.

Relationship building is the process

As I discussed in the Hot Take on the article from TechCrunch, it’s all in the relationship building. Debow’s opening point that “You should always be thinking about building relationships with executives at large companies.” Is right down the MBP fairway. He even goes on to say something I say to my clients and prospective clients all the time: “Founders might find themselves in a tough spot if that phone call {the one to be acquired} is the first time they are making contact with an executive at a larger company.” 

Debow’s point that building “networking muscle and establishing rapport with the strongest relationships in your circle is a habit to start practicing regularly even in the earliest days of company-building” is right in line with the MBP. And it’s not only a-practice - it takes-practice. It’s not just the networking muscle, it’s learning how to speak to PSPs in their language and at their altitude. 

And then the piece strikes gold. You want to develop relationships with colleagues, not see the key leaders at PSPs as distant strangers. As Debow says, you want the M&A conversation to start with “a routine phone call to a peer.” And I’m going to collapse a few points made in the article into one follow one point along these lines: It would be better to have your first outreach to a PSP be a call to seek a piece of advice than have your first interaction be an all-or-nothing “we’re for sale, do you want to buy us?” outreach. Could not agree more.

These are all things the startup should be doing from day 1! There’s nothing in what Debow is saying that’s exclusively part of a sale process, or something to consider when you’re looking for a soft landing. The steps Debow is articulating lay the same groundwork for a ten million dollar acquisition or one that’s going to be a billion - and if you lay Debow’s groundwork you have a way better shot at being the latter. As Debow says: “these are business development relationships, partnership relationships and yes, maybe they are acquisition relationships.” The relationship building is the process, take an open-ended approach to the conversations.

It’s about advancing product strategy

As it says in the MBP book, there are three keys that all need to turn to launch a startup acquisition: product strategy sponsorship, corporate development engagement, and executive visioning. Debow speaks largely to the first two (product and corp dev) at the start of the article and then really expands on the third (executives) later on. In particular Debow has a great deal to add to the startup M&A conversation about engaging PSP technical teams and the product-centricity of startup M&A. I really enjoyed this point: “At Shopify, we don’t even call it M&A, the team is called ‘product acceleration.’” That’s right on the money.

Being acquired vs being for sale

The article has a backbeat of all these steps being the setup for sale maneuver. This is probably the biggest divergence from the MBP. In the MBP all these steps are the setup for an acquisition offer - with the PSP coming to you, not you going to them. What the MBP would say is missing from Debow’s progression is the development of the Partner Big Idea (“PBI”). He hits all around the PBI (you solve their problem, etc.), but doesn’t get to it directly. The engine of a startup acquisition is the buyer’s big idea, a big idea that you power. Your job is to help them bring that idea into existence. The PBI is going to be so big and so urgent that the PSP is going to make the first move to acquire you. 

It’s personal

The human factor in startup M&A is woven throughout the article. As it says in the MBP book: M&A is deeply personal. Debow’s perspective on the numerous people-dimensions of startup M&A are great reading and important for founders to internalize. You need to be confident, but you also need to be someone with whom the PSP team can see themselves working - and above all - arrogance is a deal killer. 

Both the MBP book and this article advise using an “interview” approach to M&A conversations - but we mean it in slightly different ways. Debow means it a bit more literally and uses the frame of a job interview. The MBP’s use of the interview concept is a bit more broad and is really about teasing out areas for follow up and eventually the building blocks of the PBI. But in either and both cases the core concept is that you’re trying to bring an open mind to the conversation - with an emphasis on learning and discovery. 

Debow also points to the importance of sponsorship and the quality of the engagement you’re getting with the PSPs executive team. As we say in the MBP (in this case in reference to trips to visit the PSP): If the CEO takes you to dinner the first evening, you’re probably already pretty well positioned. On the other hand, if after a couple trips you haven’t met anyone above a lieutenant, your deal probably doesn’t have the executive sponsorship it needs. M&A deals are big, risky, and visible - you’ll never get one over the line if the key executives at the PSP don’t see it as both transformational and critical. Debow shares lots of wisdom along these lines.

Executive sponsorship is a leading indicator of a strong PBI and as the article says “always treat the company that’s most interested in buying your startup as the most viable option, even if it’s not your favorite.” Said in MBP speak - you’re only going to get a deal done with a PSP that has a strong PBI - and if senior executives are heavily engaged, it’s very likely a big idea is in the works.

Be prepared and be honest

Both the article and the MBP align on the importance of being prepared, well organized, and responsive. Having your ducks in a row means you can not only move the deal faster, but you’ll send the signal that you’re a well run operation - which may very well get you better deal terms. I also really appreciate this point: “If there is something you are worried about, air that out early. You’re not going to fool them into buying you.” As it says in the MBP - it’s better to deal with the tough topics early in the conversation when things are still on the upswing, then to hold them for later when they run the risk of pulling you down.

Valuation, offers, and optionality

Oh boy. The article and the MBP diverge bigly when it comes to valuation, creating offers and competition vs optionality. This is where the sale process mindset instead of a PBI-powered acquisition comes home to roost.