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Selling your start-up to a tech giant, without selling out

3 Sep 2018

Helpful advice about selling your business, from Octopus Ventures

Being an entrepreneur is hard. It’s also a lonely thing to be. You have to be driven, passionate, believe in your product and your people – even when nobody else does.

But what if you find yourself in the fortunate position of fielding an acquisition offer from a larger competitor? And how would you cope if that competitor was a global giant, a Microsoft or a Google, for example? That’s a whole other level of pressure.

Catching the eye of a tech titan should feel like universal validation, and negotiating with a view to selling your business for a huge sum should be the pinnacle for any entrepreneur. But the sale process itself is likely to generate a mixed bag of emotions. Throw in some admin and personnel complications for good measure, and selling your start-up business can result in a whole load of upheaval and stress.

Which is why some of Europe’s brightest entrepreneurs have been glad to receive not just investment, but also help and guidance from Octopus Ventures.

Having earned a reputation as one of Europe’s largest, and most active venture capital (VC) firms, Octopus Ventures can also make a strong claim to being one of the most successful. It’s still very rare for a VC firm this side of the Atlantic to have sold four of its portfolio companies to four of the world’s most well-known tech companies: Amazon, Microsoft, Google and Twitter.

Having helped to manage a number of successful exits, to tech titans, they know some of the pressure points and the pitfalls. We asked two members of the Octopus Ventures team, Luke Hakes and Jo Oliver, to outline some of the issues an entrepreneur is likely to face when looking to sell your start-up to a tech giant.

Expect to be outnumbered

The tech titans don’t really do understated. And whoever you sell your start-up to, will inevitably send large teams to pick over the details of your enterprise. After getting a throughout understanding of the technology of the business, discussions will then move on to an assessment of your accounts, legal structure and paperwork.

Technical teams will scrutinise every piece of code, every algorithm and query every decision you’ve ever made. It’s not quite an inquisition, but it can feel like it when you’re surrounded by suits from the mothership.

It’s intimidating and exhausting, which is why it’s paramount to see the process for what it is – due diligence. As painful as it will feel, it’s a necessary course of action. After all, you wouldn’t buy a house without looking in every room, would you? Potential buyers need to know that any investment they make will be worth it.

As an entrepreneur, your business is your baby – from concept, to teething, right through to the point at which it might leave home. Chances are, like most parents, you’ve turned a blind eye to characteristics that could lead to future problems. But just like any critical grandparent, due diligence lawyers and technical experts won’t be afraid to tell you about them.

With that in mind, defensiveness isn’t the best plan of attack – rise above it, grab the opportunity for insight and use it to your advantage.

Know your value

Being coy and bashful won’t get your business anywhere, although knowing your company’s true worth definitely will. But totting up the value of your prized assets can be tricky.

Which is why gathering and gaining external insight is one of the positives to come out of the due diligence process. It’s an opportunity to view your business as others see it. It’s also key in getting to the crux of what your potential suitor wants – tech, talent, or platform.

Manoeuvring yourself into a strong position means getting your business in order. That means being clear on long-term goals and having an aligned team that is tactically prepared. Not getting to grips with the basics can lead to the very real possibility of underselling your business.

You might not be afraid of taking entrepreneurial risk, but the danger of capping the value of your startup is one risk you really don’t want to take. Nevertheless, it’s an easy trap to fall into if you’re not prepared. Tricky questions, obstacles you didn’t see coming, and a lack of contingency planning can all throw you off balance and weaken your hand.

Keep it close

Keeping things confidential doesn’t mean whispering in corners and making everybody paranoid. It does mean being considerate to the needs of your team and balancing this with the necessity to keep things under wraps. When it becomes essential to introduce key players to your potential buyer’s team – trust and transparency should be your new mantra.

It’s all about trust

Being an entrepreneur means you already know that trust can be a hard commodity to come by. Whether you’ve had to earn it, inspire it, or give it, you know how easy it is for suspicion and fear to erode it.

But when you’re in the middle of a potentially life-changing buyout, trust (in all directions) takes on a whole new meaning of mammoth proportions.

So, exactly how should you play it?

The most practical approach is to maintain a ‘business as usual’ mindset. Your startup still needs to function from the top down. Ensuring the show goes on will enable your team to work freely, maintain their creativity, and showcase to your buyer exactly what a self-contained gem of a business yours really is.

There will inevitably be a time when you need to break the news of the possible buyout to your wider team. Needless to say, you should be as honest and transparent as possible, taking their questions and concerns seriously. You won’t be able to answer every question about the acquisition, but not acknowledging their worries will set the rumour mill into overdrive.

When selling your startup, the biggest trust exercise comes from having faith in yourself. Trusting that you’re doing the right thing needs to be the single most important truth to believe. But as the Octopus Ventures team knows from experience, even the most confident entrepreneur can expect to question and doubt themselves.

Maintain a positive relationship with the acquirer

Conversations with a large acquirer no doubt began with someone high up the food chain telling you what you want to hear. But agreeing to a sale in principle often means them stepping away from the centre of operations. Instead, they’ll hand over the reins to their corporate development team and suddenly, those reassuring chats about your future are a distant memory.

As special as you think your startup is, corporate development teams have been through the process countless times and to them, you’re just another acquisition. It’s harsh, but the bottom line is – their job is to get your business for the best possible price. They want a good buy, just as much as you want a worthy sale and a future for your team.

The resulting conflict can dramatically change the mood of negotiations, particularly if you feel you’re being made to do or agree to something you’re unhappy about. Talks can become less transparent and the erosion of trust between parties can lead to uneasy and challenging scenarios.

Don’t be railroaded

Scoping out your ideas, illustrating how to get there, along with possible pitfalls and contingency plans, will anchor you in a position of control. If conversations take a difficult turn, it’s easy to get ground down. But while it might be hard, digging deep and reigniting the mantra of business as usual – is the only thing to do.

Part of your entrepreneurial success is selling your vision – inspiring others to believe in your passion. Remember that it’s your vision that made the business so desirable in the first place, so it’s more important than ever to stand your ground.

When you’re going through the process of selling your business, corporate development teams will prod, poke and challenge you in areas where it hurts. It’s not a process to catch you out, it’s about ensuring your vision is as robust as you’ve made it out to be.

Of course, there’s a fine line between determination and stubbornness. But time and again, experience demonstrates that a united front and clarity of vision wins hands down.

Negotiations can be costly

It’s always worth remembering that negotiations are pricey, and that good advice doesn’t come for free. The cost of working with legal professionals during a complicated acquisition process can quickly become prohibitively expensive. The Octopus Ventures team remembers when a portfolio company saw its legal expenses escalate to $100,000 in just 48 hours.

Above all – be patient and pragmatic

The overarching theme in any sale is patience. But the process is exhausting, it’s time-consuming and it’s stressful. To the uninitiated, being ‘acquired’ is a bit like being compressed into a box with walls you can’t see out of.

Add to that the need to maintain calm under such intense scrutiny, and it can push you beyond the limit. Which is why it always pays to keep a cool head, especially when you’re faced with the agonisingly slow turn of corporate cogs.

For vast organisations, time is other-dimensional. And, while you’re used to making snappy decisions, it’s easy to get irritated when faced with delays and periods of deafening silence. Being pragmatic means knowing that certainty isn’t always guaranteed.

Lawsuits and buyer insecurity have been known to scupper many deals right at the very last moment. It’s nail-biting and hugely frustrating, but collapses have often paved the way for bigger, better deals – proving that what’s meant to be, will be.

Patience, pragmatism, alignment, and trust should be your watchwords. A good sale is one where everyone benefits – including your team. Your people have helped get you here and being pragmatic means getting the best for them too.

So, you’ve signed the deal – now what?

The end of any roller-coaster ride is bittersweet. You’re relieved that it’s finally all over but suddenly aware you miss the exhilaration of anticipating the next stomach-lurching twist.

And while you probably don’t want to do it all over again, there’s that little pang of disappointment that it’s all come to an end.

No matter how crushing the anti-climax, depending on the deal you’ve negotiated it may well still be business as usual – but better. More resources, the same motivated team, coupled with the support and belief of a Herculean enterprise, it’s the stuff of startup dreams.  

Buyouts aren’t synonymous with relocation anymore and mega-corps are less insecure about having teams located outside base camp. One example very close to the hearts of the team at Octopus Ventures is that of Cambridge-based artificial intelligence company Evi, which built the machine-learning software that lead to the launch of the Amazon Alexa virtual assistant. Evi used to be an Octopus Ventures portfolio company, before being acquired by Amazon in 2012.

In different times, Evi’s founders would likely have been expected to uproot themselves and move to the Silicon Valley to continue their ambitions. Instead, they were able to stay right where they were. Cambridge is now at the centre of several of Amazon’s tech projects after an investment of more than £6 billion in the area.

“Amazon wanted to invest in the UK, to keep the team where it was and grow it in Cambridge. That made them a much more attractive acquisition from our perspective.”
Evi founder William Tunstall-Pedoe

Another example is the sale of Edinburgh-based Skyscanner to China’s Ctrip.com group. The £1.4 billion acquisition deal has meant more investment, resources and security to what was, a fledgling travel comparison website.    

Case studies aside, once you’ve made the decision to sell your start-up, the deal you shape is the one you’ll have to live with – consequences and all. And, while as an entrepreneur you’re used to boldly stepping into the unknown, it’s prudent to have the counselling of an experienced mentor or VC partner on hand to help you through the process.

Finding the right answers can have the biggest impact on the outcome of negotiations, and can help prove that when it comes to selling your start-up, with the right support entrepreneurs can indeed have their cake and eat it.

Thanks to everyone at Octopus Ventures who contributed to this article.