Startups get bought, not sold


M&A

This is for all the men and women who have started or are starting terrific companies. You believe in yourselves, your teams, and, if we’re being honest, the idea you’ll reach that magical mountaintop called an IPO.

For the next 1,200 words, I’d like you to suspend your belief in that last notion.

Here’s the reality: Just five venture-backed U.S. tech companies went public in the first eight months of 2016, according to data from Dealogic. Yes, there are some well-known names waiting in the wings, but most don’t have the size, potential, or resources to meet the regulatory burden of going public.

That makes the situation pretty simple for most other companies. Assuming they don’t go out of business or get auctioned at fire-sale prices, an acquisition is the most likely exit route. So why is getting acquired so hard for so many entrepreneurs?

kelefant
Ken Elefant, managing director, Intel Capital. Photo courtesy of the firm.

One of the biggest reasons is they don’t have the relationships they need when it matters most. They get to nine months of cash in the bank and only then try to drum up a meeting with a business unit general manager from a large company, hoping to swing a transaction. At this point, they’re likely out of options and out of time.

Avoiding this fate is a two-step process. Starting earlier is the first part, and the easiest. The second is gaining access to people who will listen to your pitch, vet your product, back a trial use, and vouch for its performance. This group is often comprised of the business unit general managers with whom you need to develop a rapport.

Earlier this summer, one prominent VC opined that money from a financial venture firm trumps dollars from corporate investors, whom he argues are less involved. But when it comes to getting you in the door at big companies, I couldn’t disagree more with him.

Sure, traditional VC firms have good contacts. I can say this from experience, having spent more than a decade in such firms. But corporate venture funds, the investment arms of well-known brands from Alphabet and Microsoft to Novartis and Bertelsmann, typically know hundreds of senior leaders at Global 2000 companies. With one phone call, they can put you in front of the right people with the specific need for your technology.

What’s in it for them?

There are three basic reasons corporate venture funds invest. The first is to gain access to technology that can make an existing product better. Take Microsoft Ventures, which bolstered its artificial intelligence capabilities by buying a stake in CrowdFlower.

The second reason is to break into other markets, an approach that guards against missing out on new opportunities. Alphabet, for example, has invested well outside the search market via stakes its GV fund has taken in startups like Carbon3D, which focuses on 3D printing, and ride-sharing giant Uber Technologies.

Finally, corporate venture funds invest to acquire. I’ve saved this one for last because too many times it’s the first thing that goes through the head of an entrepreneur. They see a check from a corporate venture firm and think an acquisition is all but guaranteed. It’s a possibility, but never a certainty.

Venture funds typically make an acquisition when their parent companies are trying to build a well-integrated collection of products and technologies for one or more areas. Intel, for example, recently acquired Itseez from the Intel Capital portfolio to help with its efforts in the Internet of Things and automotive markets. But of the nearly 1,500 startups we’ve invested in since 1991, Intel has acquired only a relative handful.

What’s in it for you?

In a nutshell, faster time to credibility and viability. Consider just three things most corporate venture firms provide.

At the earliest stage, a startup needs to get grounded. It needs feedback on its product, design process, and market. Accelerators and other focused-development programs sponsored by a fund’s parent company can provide instant access to everything from engineers and lab researchers to market analysts.

Intel, for example, has created the Israel Cyber Security Center of Excellence and the Intel Security Innovation Alliance, both of which help security startups integrate Intel technologies and take advantage of our go-to-market activities in the security space. Intel has similar efforts underway in its datacenter, IoT, and new technologies business units.

A new company also needs to test its work in a live environment and build relationships with those who might buy its products. This is where the deep and broad Rolodex of a corporate fund comes into play. Last year, for example, we brokered nearly 5,000 engagements between our portfolio companies and Global 2000 firms.

Less appreciated about these kinds of business-development meetings is how they can lay the groundwork for an acquisition. I had this experience last year with AtHoc, a portfolio company that provides crisis-communications technologies. The company wanted to fast track its business development relationships in preparation for an IPO. A traditional way of doing so is to work with investment banks; corporate venture funds work regularly with these banks and are a natural fit for making connections with them.

AtHoc hired an investment bank that helped develop the relationships with potential partners. In the course of those conversations, talk moved from an IPO discussion to one of acquisition. BlackBerry ended up buying AtHoc, creating significant value for itself and the company’s original investors.

But I want to change the world

I get it. The amount of hard work, courage, and patience to bring a company to market is staggering. You built something so people would come, not so you would walk away.

But if you do things the right way – that is, build your company to be a long-term, sustainable success – you will likely receive several acquisition offers along the way. What’s important to remember, and what many entrepreneurs don’t realize until it’s too late, is to not only nurture the fundamentals of your business, but to develop relationships with GMs of Global 2000 companies along the way.

Because trust me, you’d rather get bought than sold.

Ken Elefant is a managing director at Intel Capital who focuses on software and security. He can be reached at [email protected]

Photo illustration courtesy of ©iStock.com/Topp_Yimgrimm

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