TSVC is proud to announce the latest addition to its growing team. Spencer Greene has joined the company, bringing decades of deep M&A experience that will benefit the firm and its portfolio in an immediate and meaningful way.
Throughout his career, Spencer has had the unique opportunity to work closely with the M&A in the technology start-up world from both sides of the table. The scope and nature of each of the potential and closed deals are different, but he has found a very common thread that runs through each and every one of them. He has come to encapsulate these findings in what s calls his “Design for Exit” theory, and we are excited to share his perspective about the topic below.
There are a lot of companies looking to get acquired, however I have found that most of them have very little idea about what they are doing wrong in the process.
I developed this theory after doing M&A for more than four years and interviewing a few hundred startups. Through this experience, I had a number of very interesting and important revelations. First, some companies were much more valuable to us than others, and those that were most valuable to us was often not directly correlated to their revenue or other metrics they were tracking and reporting to us. Second, many of these startups had made choices that made them difficult to acquire, and in turn far less valuable to us and other buyers, without even knowing they were doing it. Finally, founders, management, and even many board members had little clue about the buy-side process and decision-making for a potential acquirer.
I’ve been giving this talk to give some insight from my personal experiences into why acquirers buy. The underlying premise is that in an M&A situation, your company is the “product” and the acquirer is the “customer.” Keeping this in mind, it is essential to understand customer behavior just as you would in any other sales scenario. The process is very much the same, but the stakes are far greater.
The core of this theory is that a smart acquirer buys for one of four reasons: Team, Technology, Product or Channel. They may tell you they are evaluating all four — in fact, they may even begin by evaluating all four with equal energy — but at the end of the day only one of these four is the determining factor that matters, and the relevance of the others is only important as they relate to and support the primary reason.
Once you know which of the four reasons is driving the acquisition process, many implications follow. One is that the acquirer always “plugs in” the acquired company one level higher, which means one of a few different options :
· I buy your Team to work on my Technology
· I buy your Technology to integrate into my Product
· I buy your Product to sell through my Channel
An acquisition of Channel is the least common, but may be done by a buyer that is product-rich and wants to market to a new segment, which looks like this:
· I buy your Channel to turn around and sell my own Product to your customers
It’s worth clarifying a few definitions here, as well:
The difference between a Technology buy and a Product buy is whether the offer to the customer remains intact for the medium to long term. If the acquired company’s product or service is bundled into the buyer’s product (like PA Semi into Apple), that’s a Technology buy; if it’s offered to the buyer’s customers in more or less the same form as before the deal, that’s a Product buy (Crescendo into Cisco, Instagram into Facebook).
The meaning of “Channel” is the entire customer-acquisition capability of the company, including installed base, brand, sales force, and any other assets that can be used to drive customer acquisition.
Spencer has been thinking hard about technology M&A for the last 20 years. While running M&A for Juniper Networks, he interviewed hundreds of startups, shortlisted dozens, and bought a handful. Prior to that, he founded and sold two startups, and most recently he’s been advising and investing in a few companies that excite him. His “Design for Exit” theory explains why a company’s “acquirability” is not always predicted by its business results — in particular, why some startups with relatively small revenue command high valuation, while others with higher revenue don’t sell at all.
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