I’m fresh out of a pitch from a group of bankers we thinking of appointing at one of our portfolio companies and on my way home I was working through our selection criteria. In this case at least I think it comes down to three things (other than fees):
- The story – do the bankers understand why this company is valuable above and beyond the cash flows
- Access – have they had recent regular contact with senior people at your target buyers
- Fit – is there a good fit between the target size of your deal and the bankers you are thinking of working with
All three of these are important, and if any one was missing I would seriously think about working with someone else, but I list them in this order because I think the story is the most important. Good venture capital is all about selling companies for big revenue multiples and that requires big stories – you need to be able to explain why your company is important to the acquirer and most of the time that won’t be because of the immediate financial contribution. The most prolific aquirers are Cisco, Google, HP, Microsoft, IBM and Oracle and very few startups have the scale to make a difference to their financial statements at the point of acquisition.
Some common stories:
- ‘revenue pull through’ – i.e. post acquisition every dollar of sales from the acquired business will pull through say $50 of sales from the acquirers other products. That way your $20m revenue will make a $1bn impact.
- ‘account control’ – for companies with large suites of products filling a gap with an acquisition enables them to keep competitors out of their clients business. This was the logic AOL had when they acquired buy.at.
- Finally, another common story is that acquiring a company will allow the acquirer to enter an strategically important market. This can be a hard sell when the startup is still small.
Different potential buyers will have different strategies and different reasons why they might be interested in making an acquisition. A good banker will appreciate that and craft different stories for different suitors.
To close, it is worth reminding ourselves that these ‘stories’ need to be real. A far fetched ‘I have the cure for cancer’ story will get initial interest and meetings but will come undone during due diligence.