Venture capitalist Tomasz Tunguz has sold about $5 billion of startups over the past few years. In this article, he details ten lessons he has learned about mergers and acquisitions along the way, and it is an instructive read for those looking to sell startups and those looking to acquire them.
Among the lessons:
We tend to think of startups as being acquired by companies.
Startups are sold to individuals, not to companies
While that may often prove technically true, Tunguz argues that ultimately it is personal relationships and personal insight that prove most vital. “Startups are sold to individuals, not to companies,” he writes. “The champion—often a product leader, the CEO, or a general manager—risks their career by buying a startup.
The deal sponsor must construct a business case, forge trust with the startup’s team, and amass enough conviction to overcome inertia and internal friction to consummate the sale.”
The deal isn’t done until the money is in the bank
Tunguz also cautions against prematurely concluding an acquisition is completed. “The deal isn’t done until the money is in the bank. I’ve seen acquisitions fall apart the day of the close, out of the blue,” he writes.
Once the term sheet is signed, the startup’s leverage vaporizes
For startups, timing also is important at the beginning of the sale process because that is when a startup’s influence on the prospective deal is greatest. “Once the term sheet is signed, the startup’s leverage vaporizes. The startup must plod through the days or months of maximum weakness: the exclusivity period between the term sheet signing and the definitive agreement. Negotiate the crucial points before signing the term sheet,” Tunguz urges startups.
Never underestimate the amount of time that regulatory reviews of transactions can consume
Nor should large technology companies ever underestimate the amount of time that regulatory reviews of transactions can consume. “Most mergers close on time,” Tunguz writes. “But should a transaction be subject to review by the U.S., the EU, the UK, or other jurisdictions, the closing period can take many months, a year, or longer.”
These and other lessons associated with experience associated with Tunguz’s multi-billion dollar merger and acquisition deals over the past few years offer some valuable first-hand insight shared by a successful startup dealmaker.
