Acquiring a Start-up? Date First Before You Get Hitched
Not vetting a potential match before you propose could spell disaster
PHOTO CREDIT: Getty Images
A critical component of the start-up entrepreneurship story in Southeast Asia is the mergers and acquisitions (M&A) market. Even if M&As were not part of your start-up’s growth strategies at inception—but let’s face it, they very rarely aren’t—these deals are bound to come up as you go about the business of scaling your operations and entering new market segments.
Such is the case of Indonesian start-up YesBoss, the country’s first SMS-based personal assistant service. Less than a year into the company’s operations, and shortly after the company received its initial round of funding, co-founder Chris Franke relates that they were approached by a Philippines-based early-stage start-up HeyKuya for a potential deal. “At that time, the Philippine team had the same business model as ours, which was interesting for us to expand regionally. Even though we were not actively looking to acquire other players back then, we started exploring the opportunity to buy our counterpart from Manila,” shares Franke.
YesBoss and HeyKuya eventually went steady by March 2016. Less than a year later, however, both companies struggled to make the business model work, eventually leading YesBoss to shut down HeyKuya’s service in the Philippines and pivot its Indonesian business into an artificial intelligence (AI) B2B chatbot solution called Kata.ai.
In his article at Inc., Jim Schleckser, thought leader and author of the best-selling book Great CEOs Are Lazy, shares that “while there is likely no one answer for why so many deals fail, it does point out at least one flaw in how companies seem to rush into these kinds of deals without deeply vetting the potential match first.”
Schleckser avers that getting into an M&A deal with another start-up entails the same level of discernment—and due diligence—as one would in deciding a potential life partner. “Just like you would want to date someone before you marry them,” Schleckser writes, “it makes sense for companies to ‘date’ each other before deciding to join themselves at the hip through an acquisition.”
Quite like how the oft-nebulous world of dating is beset with frustrations, seeing a once-promising M&A deal go up in flames can be emotionally and mentally exhausting for everyone involved. Start-up founders share these seven rules to avoid getting burned:
1. Start by playing the field
While the idea of dating multiple people at the same time is frowned upon, Schleckser writes “it actually makes good sense when it comes to your business. In fact, it might be a wise move to have different kinds of relationships with multiple companies all at once.”
Striking up a co-branding collaboration, for one, is a good way to learn a lot about a company and explore if there’s synergy among your businesses. “The key is a low-commitment interaction that won’t be painful to pull apart,” writes Schleckser.
2. Putting your best foot forward never works
It’s natural to want to let a potential partner think you’re a unicorn, but more often than not, this sets you up for disaster. “There has to be full transparency on all ends,” asserts Franke.
Either be honest about your company’s baggage, or the deal is a no go. “All numbers, metrics, learnings about the market, setbacks, campaigns that did not work in marketing, or loopholes in the business model—it has to be put on the table. If things are discovered later on during the process or in due diligence, the trust might be gone and the deal is off,” he says.
3. Nobody likes a gold digger
There’s no tiptoeing around the fact that M&As inevitably involve a lot of money, but sometimes bringing up the matter immediately can be a turn-off. “Talking early about the price range of an acquisition is generally a good thing, but bringing it up after five minutes of talking in a Starbucks is a no-go,” shares Franke.
Another red flag? Worthiness issues. “Founders who are not really willing to sell but just want to explore their venture’s market value,” puts in Franke. M&As are very time-intensive, he says, “entering acquisition talks just to be able to put a price label on your start-up is a waste of both our times.”
4. Red flags? Don’t be afraid to walk away
Concurrently for entrepreneurs looking to sell, you’re not obliged to say yes to the first VC that comes along. According to Aldo Carrascoso, founder of global business payments start-up Veem (formerly Align Commerce), “if you don’t like the deal, always—and I mean always—be open to walking away. We’ve walked away from a lot of buy-out offers, and something that I have personally seen is that as long as the company is executing on our milestones, the offer gets better.”
Carrascoso also points out that most companies looking to acquire fail to recognize that “buying a business isn’t just about forecasting the acquisition cost. It’s also about the improvement, turnover and transitional cost of integrating that business into your organization.”
5. Be clear about your motivations
For Carrascoso, it’s critical that you’re clear about the purpose of the M&A. Whether it’s getting into the deal to acquire the talent and/or technology, or because you want to expand your market or enter a new segment, “prioritize each according to strategic importance. The ones most important are usually valued higher during diligence and negotiation.”
Structuring the deal correctly is sometimes more important than the strategic value of the deal itself. Says Carrascoso, “Buying or selling companies is all about the deal and its implications to everything else outside of the business and strategy. Make sure these deals are done with the proper legal and tax diligence it deserves—poorly structured deals may not only fall apart, but come back to haunt both buyer and seller in the future, especially warranties, earn outs on milestones, and representation.”
6. Be open to change
Relationships are transformative—change, whether you like it or not, is part and parcel of the entire process. “Being involved in an acquisition requires an understanding and openness for change and transition for both parties,” says Franke. “If the person I’m talking to goes into the acquisition unwilling to explore changes in the management structure, the product roadmap or discuss how our companies can grow together, then either it’s not the right time for the founder to sell or for me to buy.”
7. Know when to let go
YesBoss and HeyKuya had all the ingredients for a successful merger. “We shared the same beliefs and mindset when we talked about how we want to make a difference in people’s lives with the products we’re building. YesBoss had built a strong technology behind the business, while HeyKuya had a great brand and needed the technology to scale up. Bringing together both companies and combining the knowledge seemed to make sense to grow both ventures faster and lead in the space of SMS-based PA services in Southeast Asia,” shares Franke.
But sometimes, even the most promising relationships end—and for different reasons. All things considered, in the case of YesBoss and HeyKuya, maybe the timing just wasn’t right.