I was lucky enough to be involved with two startups that were both sold to $1BN revenue businesses: iExplore was sold to TUI Travel, and MediaRecall was sold to Deluxe. In both cases, the investors were excited to get an exit and return on their investment, and the founders were excited about joining a big company to help accelerate growth. Despite the best intentions of parties on both sides of the transaction, integrating a startup into a big company can present numerous challenges that we will discuss in this lesson.
I think the key challenges revolve around: (i) having realistic expectations of what the big company can really do for you; (ii) handoffs between the people that negotiated the deal and the people integrating your startup into the big company; (iii) the slower speed of making business decisions; (iv) the bureaucracy and procedures of bigger companies; and (v) issues related to any earnout payments that may be paid down the road.
Startups can easily be “romanced” by the idea of getting tied up with a bigger company for very logical reasons. Big companies typically have bigger budgets to spend on product development and marketing, a bigger base of customer relationships to tap into and a well-known brand name to assist with trust and credibility of your sales efforts. However, unless specific support is well documented upfront in the merger or sale agreement, often times big companies will not bring the dramatic upside the startups expect. There are many reasons for this, mostly stemming from a big company’s focus on other more important areas of their business. So, “seller beware” and make sure you get everything you are hoping for detailed well in writing.
Related to my first point, the more drop-off of focus and support the further you get away from the people that actually negotiated the deal. Usually the people that negotiated the deal are not the same people that will implement the deal. Your future success is riding on people you have never met before who may or may not have equal incentive to see you succeed. Big companies are full of busy people, typically set up in various internal fiefdoms. The last thing they need is another project on their list to help a startup they have never heard of before. Make sure the people who will be implementing your deal are the same people involved in negotiating the deal. That way, nothing gets lost in translation in the handoff, which is important in the transaction to both parties. The deal has to be material in scope and equally important to both parties to succeed.
For all you fast-paced, A-type personalities that like to make quick decisions and move at light speed, get ready to jump into a pool of molasses by comparison. Big companies naturally take longer times to make decisions. They are consensus-building organizations that need buy-ins from the various stakeholders involved in any project. What used to be a five-minute decision could easily be a month long process. Make sure you are ready for this material shift in culture and personality.
Related to this is the higher level of bureaucracy and procedures that come from being part of a bigger company. Think about all the budgeting processes that now need to be approved and all the monthly financial reporting in consistent formats and new systems. Think about legal having to get involved to approve any new contracts and HR getting involved in any new-hires. For example, my CFO at iExplore said he lost 25% of his former startup by having to deal with all the corporate requirements each month. Get ready for these unexpected strains that may create additional needs for your business.
My last point relates to earnout payments negotiated in the deal. Earnouts are any additional monies the selling shareholders may receive from the buyer based on the future performance of your business post-sale. These payments can be tied to future revenues, EBITDA or whatever other mutually agreed upon metrics. The problem is, however, earnouts rarely get paid out, and when they do, they are materially lower than expected. Don’t get romanced by the deal value assuming the earnout will be paid in full, make sure you are happy only with any upfront payments made, assuming no earnout is ever paid down the road. If not, renegotiate the deal or walk away. This is a complicated topic, which I more fully address in Lesson #146.
In addition, be sure to re-read Lesson #135 on why big companies struggle with innovation, for additional considerations. Merging startups with big companies is often like trying to merge oil and water. Just make sure you are clear on what you are really signing up for as an employee of a bigger business.
The most important thing is to make sure both parties are 100% in agreement on: (i) why the deal makes sense to both parties in the first place, and (ii) the execution plan, budget and timeline after closing, to make sure no disappointments by either party post transaction. For example, if the big company is simply taking a competitor out of their way, prepare to die on the vine. Or, if the big company does not provide sales and marketing support for its other businesses, it most likely won’t provide much support for your business. If they do bring support, it may come a year down the road, not the month after the deal, given their pace of doing business.
Please do not read this lesson from the perspective that you should never do a deal with a big company, or that deals with big companies never work. That is not my intention, as these deals can often work according to plan and expectations. I only want to make sure you are aware of potential pitfalls to avoid.
This article was originally published on RedRocket VC, a consulting and financial advisory firm with expertise in serving the start-up, digital and venture community.
Image credit: CC by PinkMoose
