7 mistakes I see corporates make when choosing a startup to buy
Professor Mark Logan has advice that both founders and corporates can learn from.
21 October 2020 • 4 minute read
- Vanity and pride can drive acquisitions
- Strategy can be ignored in the eagerness to acquire
- Corporates should put the CFO in charge and beware the CEO’s influence
- Startups should look out for acquirers’ mistakes.
Professor Mark Logan has been on both sides of the acquisitions process, including selling a startup to Cisco and growing travel business Skyscanner through acquisitions before a successful $1.5bn exit. Here he shares insights he has gathered as a founder, investor and advisor.
Many startups look to be acquired. But the sobering fact is that more than half of acquisitions fail. Depending on your definition, that failure rate can be closer to 90%. Those failures are not just bad for the buyer, they also mean a lot of pain for the founders and staff of the acquired business.
Understanding the mistakes that organisations make when choosing companies to acquire can help startups ensure the process runs smoothly and avoid subsequent failure. It can also help them choose between potential buyers, and further down the line it could help them acquire businesses themselves.
Further articles will look at due diligence and integration. For now we’ll focus on evaluating strategic fit between a startup and the business that’s looking to buy it.
Management vanity
There’s a lot of vanity tied up in acquisition. CEOs get to be on the front page of the trade journals, demonstrating how strategic and proactive they are. We all want to be demonstrating our business acumen – but personal and corporate pride can easily creep into the decision making of an executive. This pride and vanity can contribute to many other mistakes made when choosing the right business to buy. Startups should look out for such behaviour – they may not want to bring it to anyone’s attention, but it should raise a red flag that the processes involved in their possible acquisition may not be entirely objective.
Allowing opportunity to drive strategy
It’s easy for businesses to spot an opportunity to acquire an interesting startup and then post-rationalise their strategy to make sense of the acquisition. A company may have 3 million customer emails that would come with the purchase, but if the acquirer hasn’t identified building its email list as a strategic aim then it’s probably not a reason to buy. If something looks like ‘a good fit’ at first glance it is all too tempting to turn a blind eye to issues that make the deal questionable. Rigorous and detailed analysis is required in assessing every possible acquisition. As a startup, you need to really understand your potential buyer and demonstrate your strategic fit.
Being swayed by a bargain
Startups sometimes run out of money and face failing. This can be seen as a great opportunity to buy; the price is low and they key staff haven’t left (yet!) But the question needs to be asked, why has the business reached the point where it can’t raise any more money?
For startups the challenge is to be realistic about when to look for an acquisition and the value you give your business.
Letting the CEO influence the process
A very common mistake is for a corporate CEO to meet a startup, have good chemistry with the founders and put their acquisitions team on the case. Their endorsement of the acquisition may not be explicit but it’s all too easy for their enthusiasm to unduly influence the whole process, including due diligence. Their staff assumes the answer needs to be ‘yes’ and work towards that outcome. Such chemistry can be great news for startups but don’t let it give you a false sense of security. Make sure all your case to bought will stand up to proper scrutiny.
Not having a rigorous process
Using a fixed process is the best way to make sure businesses don’t talk themselves into the wrong acquisitions. It’s often a good idea to give the CFO ownership of that process to ensure the focus is on the bottom line rather than excitement and momentum that can push the wrong deals through. Startups should seek to understand this process as much as possible – both so they can tick all the boxes, and also to learn from in case the acquisition is never completed.
Incentivising the wrong behaviour
Acquisition teams are rarely rewarded for the financial success of an acquisition. This can lead them to care more about what’s going to play best with senior management (and bring in the biggest bonuses) rather than what will drive real growth. One solution is to take the current bonus system and put a multiplier on it. If the acquired company makes money, then bonuses go up – if doesn’t, then they go down. And the timescales could be relatively short. If an acquisition isn’t making money within 12 months then perhaps it wasn’t such a good buy. The responsibility for the startup is to balance optimism with pragmatism to ensure the acquisition is attractive while not creating unrealistic expectations.
Not giving a veto to senior management
One of the reasons for the high failure rate of acquisitions is that senior decision makers hedge their bets and don’t object to questionable deals with enough force to stop them from happening. Giving these people the power to veto an acquisition clarifies their responsibilities. It means that if the acquisition fails they can’t say, “Well, it wasn’t up to me” or “I told you so”. Linking their bonuses to the success or failure of these acquisitions is then easy to justify as the power is in their hands.
By looking out for any or all of these mistakes, startups can try to stay one step ahead and predict possible difficulties. They may even reach the conclusion themselves that there isn’t the right strategic fit and walk away. Whatever the outcome, by understanding the mistakes the corporates make, founders put themselves in a stronger position throughout the process.
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