Beware of fishing expeditions

A number of our portfolio companies have been fielding calls from strategic buyers expressing an interest in acquisition.  This is great news since many of the better acquisitions come when companies are bought and not sold.  For a startup, it can be quite flattering to have a large competitor or suitor express an interest in buying your company.  However, as an entrepreneur you have to be skeptical as many of these calls end up as just another fishing expedition from the strategic buyer. I have seen too many companies get overly excited about these acquisition feelers and waste time educating the potential acquirer only for the acquirer to either do nothing, build it themselves, or buy a competitor.  In fact, you have to recognize and assume that many of these initial calls are just fishing expeditions where a strategic buyer is just trying to get as much information as they can about a market and the competitive landscape.  You have to assume that they are talking to all of your competitors as well.  Before taking your first meeting, make sure you get as much information you can to gauge the real interest in your company.  Here are some questions you should be asking or thinking of during your initial conversation.

1. Who is calling you, what is their role, and what have they acquired in the past?  You need to determine whether it is just a junior person screening or if it is someone with real clout and decision making power.
2. Why do they want to enter this market and what is the decision making process by which they will make a build/buy decision?  If they are early in the process, you have to be concerned about wasting your time, educating a potential buyer about your market, and going nowhere with your conversations.
3. Have they talked to anyone else?  In many cases, an acquirer may already know who they want to buy, but will still talk to other players to fully understand the market and the competitive landscape and to use you as negotiating leverage.
4. What are they looking for in terms of an acquisition?  Revenue, product, management, both?
5. Who is responsible for making the acquisition work, and how does the acquirer intend to integrate your company into the existing infrastructure?  Will the acquisition be run as a separate, stand-alone unit or will it report to a certain group.  Knowing this will further help you understand the decision-making process of the acquirer, and who you may need to influence to get a deal done.

Before your first meeting, here are some questions you should have answered yourself:

1. What other acquisitions have they done, what multiples did they pay, and how recent were the deals?  If the buyer hasn't done many acquisitions or if they paid low multiples do not start thinking about pie in the sky valuations for your company.
2. What is the company's market cap and how much cash is on their balance sheet?  If your selling price is too high for the buyer based on the buyer's market cap or cash on hand, don't waste your time educating them about your product and the market.
3. Use your network to talk to some of the management or venture investors of companies that were recently acquired by the buyer to determine what their process was and to figure out if the opportunity is real or just a fishing expedition.
4. What is the corporate culture?  Does the acquirer have an NIH (not invented here) syndrome or is there a history of openly collaborating with partners and looking outside for new technology?

Once again, it is always nice to have a large company call you and express acquisition interest.  That being said, go into the conversations with a skeptical eye and make sure you do not waste your time as these strategic discussions can quickly lead to a dead end if not managed appropriately.  The tricky part of the dance is trying to establish early in the process a range that the acquirer will potentially pay for your company assuming everything you tell them is true.  The sooner you can get to this answer the sooner you will know if you should continue talking or just walk away.  If you manage this process appropriately you may find yourself in a great place as many of the best acquisitions happen when companies are bought and not sold.  The downside is that these discussions can suck up lots of your precious resources and be a tremendous distraction to your management team.