MBP Book Discussion #2: Chapter 1 - The Popsicle and the magic box
The cure for the sale process infection
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Most discussions of startup M&A start with some variation on the concept of “how to sell your company.” It’s the wrong frame for your thinking. Chapter 1 of the MBP book breaks down when something can be sold and when it must be bought. It’s very hard to sell startups, especially for an attractive price. If you want an outperforming valuation, you’re going to have to be bought.
This doesn’t mean there aren’t times when you may want, or need, to press the issue with Potential Strategic Partners (“PSPs”), so you may end up somewhere close to a sale process. But a sale process is most certainly not the place to start. Your first move should be to create the environment for being acquired. In fact the “selling” mentality is virulent and it will infect critical aspects of your thinking and strategy.
You give yourself a false sense of certainty
When you take up the belief that at some point you can “sell” your startup you infuse your thinking with a false sense of certainty. The frame of reference you’ll probably use is your experience raising money. That there are a set of potential buyers out there and when the time comes that you want, or need, to sell the company you’ll set out a process to approach a number of these buyers. Because you’re working on super cool stuff, it will be the case that some number of these buyers will make an offer to acquire you. Then you’ll parlay these potential buyers into an auction, get the best price, and close the deal.
In reality, things rarely work this way. Startup acquisitions are driven by a Partner Big Idea (“PBI”) into which your startup fits. They aren’t buying you for who you are, they’re buying you for what you can help them accomplish. PBIs take a lot of time to develop. As such they’re highly unpredictable. Startup acquisitions are anything but linear progressions.
The byproducts of the sale process mindset are damaging.
You see the selling motion as a discrete process
Timing is the first thing to be infected by the “sale process mindset.” You start to see the sale process as a future activity and one that’s discrete from your normal course of business. In fact you start to see PSPs as entities to be approached if-and-when you want to be acquired, and not otherwise. So you hold off on building these key relationships – as you’ll get to it when you’re ready to run your sale process – and that’s still somewhere off in the future.
You don’t want to be seen as for sale
So if talking to PSPs only happens when you’re in a sale process, then that means if you’re talking to PSPs you’re obviously for sale. But you don’t want to be seen as being for sale. What would potential investors think? What if your competitors find out you might be for sale? Heaven forbid your team gets an inkling that you’re on the block! You don’t want there to be market chatter about your situation and prospects. So, you shy away from PSP conversations as you’re not quite ready to be for sale - and that’s what talking to PSPs would signal. Further, when you are ready, you’re going to move fast and get in front of these potentially damaging dynamics.
You don’t build PBIs
The Partner Big Idea is the magic in the box, it’s the engine of the deal, it’s what powers an acquisition. However, in a sale process you’re going to run a tight exercise to present what you are to the market, and to find buyers who are interested in you, as you are defined in-and-of-yourself, today. Speed is going to be key. But if you’re moving at that speed there isn’t going to be enough time to develop deep and powerful PBIs with PSPs. It’s going to have to be about you, not them.
How to cure this infection
First you have to break free of the sale process mindset, it’s a virus and it’s infecting your strategy.
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