MBP Book Discussion #1: Prologue
Startup Alpha makes all the wrong moves
If you haven’t yet - get the second edition of the MBP here.
One of the things we’re going to do as we get rolling with MBP.co is discuss each of the chapters in the Magic Box Paradigm book. There’s more to the story!
The Prologue to the MBP book is about the all too familiar scenario where a startup receives some preliminary acquisition interest and proceeds to make what they think are all the right moves. Moves that actually turn out to be all the wrong ones.
Many, many deals are tanked by seller missteps. Let’s break this failed deal down and see how the MBP would have given it a much better shot.
The instinct once you get some acquisition interest:
Immediately and aggressively reach out to other potential buyers to let them know you have an offer in the works and that they should act fast - you do this because you believe there are many big players who would love to own your startup
Let the original buyer know you have interested parties - you do this because you believe the best way to increase price is through competition
Send the potential buyer uninspiring information about yourself - you do this because you feel like being responsive is the best way to keep the conversation going
Press the buyer to formalize their offer in writing, through an intermediary agreement like a term sheet - you do this because you believe that written offers are more serious than verbal ones
The MBP says your instincts are wrong, and here’s why:
Other buyers probably know very little about you. Big companies don’t buy startups just because someone else might be interested in them. They buy startups because they have a really big idea and they need the startup to advance it - and ideas that big don’t form overnight
Competition isn’t the driver of outperforming valuation, finding the outlier is. The outlier is the potential strategic partner (PSP) who needs you more than all the rest. So the question at hand would be: “do we think the buyer at the table is the outlier, or do we think there are much better potential partners out there?” And then by extension: “how long would it take to develop a big idea with them?”
Once you let a buyer know there are other interested parties you change their entire approach. You’ve flipped into deal mode, and by extension you’ve flipped them into deal mode also. And once a buyer is in M&A deal mode they are going to hit you with an exclusive provision and lock you up. So, if you want to try to engage other parties you need to slow-roll the buyer at the table, not supercharge them - engaging new PSPs takes time - sometimes a lot of time!
Sending over a bunch of deep dive data on your startup is a trap. You want to be building the big idea - not drilling down into your financials as an independent and small company - sending internal info out of context and with no parallel thesis develop process in play is almost always going to take the conversation in the wrong direction
PBI development will almost certainly involve a much smaller group of people than the full cross-organizational due diligence Alpha set out on with BigCo - and thereby limits damage to organizational morale if the deal does fall apart
And for heaven's sake don’t get anything in writing right out of the gate - once things go on to paper they become really hard to change - you’re just at the start - keep developing the thesis - a term sheet isn’t binding anyway - if they want to do the deal they will - if they don’t they won’t - a term sheet doesn’t change a thing
So here’s what startup Alpha should have done…