M&A involving startups
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Many times, a startup is successful and valuable because of its founder or founding team who has the drive and vision to lead the company. In the event where the founder cashes out and leaves the company upon successful acquisition by a bigger company, will the existing company then be able to remain competitive due to a change of leadership.
I would agree that the success of the post-merger integration and the success of the business immediately after that would depend a lot on the retention of the Founder(s) in this case. Another consideration here would be who else would likely leave the business along with the Founder. What impact will their departure have on the desire of others to stay post-merger?
For me this should be picked up in due diligence and then accommodated for in PMI. What I see in start-ups is that the business owner sometimes does the lions share of the work and manages things like key contracts/accounts and/or is the main client interface. And so, should they be looking to sell, as part of due diligence he or she should have to think about who will do that work when they are gone in the target business? in the Buyer’s business? and then this can be implemented as a key goal within the IMO.
In my opinion, this consideration should be part of the M&A process before the deal is closed. Generally, its best if the change of leadership and management is done gradually. In most of the M&A deals that I’ve been involved, we won’t acquire 100% right-out, usually we take a majority stake and have the controlling rights. We let the founder and his management team to run the business under our guidance, till his/her remaining shares are bought over which was agreed in the put/call option. Then when he/she leaves, we bring in a leader, at that point the transition would be smooth, most management staff would be comfortable to stay on.
In my point of view when this happen both companies will have some dificulties do manager this change. For example, the acquiring company generally bigger than startup companie will have a lot of rules, sistem and governance do to the things, and the other side, the target company (in this case, a startup) probably don’t have many rules and compliance, and this help him to do the things faster. This example, generally is the cause that why M&As fails, even if you keep the leadership, because the excess of rules, compliance and slowness that the target companie wasn’t used to, it is difficult to stay competitive.
There are several sides to this to consider. Yes, often the founder(s) are a large part of the success of the original company. This is true in terms of vision, management, staff retention, as well as customer attraction many times. So, keeping the founder(s) on the management team can be very valuable, even critical to the merger success. Often, though, the founder will not be as engaged, for reasons several here have noted. The founder is used to it being there company, being in charge. Moving to being a small part of a structured organization can leave them less than engaged, and wanting to leave. They usually do leave, well before they often say they will. This is true often of much of the management level of small organizations acquired by large companies. Sometimes, the leaders staying can be a negative for the new company, if they are not fully supportive, their presence can be detrimental to ongoing success. The acquiring company needs to evaluate all these options in depth as part of their change management of the integration.
The startup’s Financial Statements and Projections will need to be double checked and ensured that it’s properly auditted
It depends the role and the influence of founder in the target company. Is the branding or performance of the target company highly depends on the founder? Under a comprehensive due diligence process before the merger being completed, the relevant possible departure of founder would have been identified and a comprehensive PMI would have been in place. A good and comprehensive PMI would have covered the potential departure of founder if he is required to be in the company for certain post merger period including legal binding for the undesired consequence as a result of founder resignation if required.
If someone thinks emotionally or rationally, then it may sound like the startup company may not remain competitive if the founder/owner has exited the startup.
But at the same time, we can think that why would the startup will not be competitive any longer once it is acquired by a bigger company. If there are proper synergies in place or things go right, definitely, the startup may prosper. The startup has got the infrastructure of a bigger company and the acquirer has acquired for a reason by paying some substantial price. They would not let it die unless the acquisition process failed. I would rather think that the acquirer in this case bigger than the startup is BIG due to their process, technology, skills, etc, and has some vision. The vision for the startup by a bigger company may not completely align with the founder, but they may reach the place where they want to be in the world.Culture was found to be the cause of 30 percent of failed integrations. Under a comprehensive due diligence process before the merger being completed, the mission and vision of the new company should be identified and a comprehensive culture should be in place.
Success of the integration shouldn’t be relay on the existence of people but the Integrating Company Cultures leads and supports the objectives of the company.
One factor would be the maturity of the startup. If there is some structure, and product is clear, then there is a higher possibility the M&A would do more good than bad to the startup. Otherwise, if key decisions for developing the products are left to the bigger company, then the vision may be different, leading to a higher possibility of failure.
Hi Terry,
Thanks for the prompt.
While there are many great points above related to post-merger integration and the specific role/responsibilities of the founder(s) moving forward once the startup is absorbed into the larger company (acquirer), I think the success of the transaction hinges on the type of technology, solution, or service being acquired. For example, if the technology is highly sophisticated or complex (and possibly has plans for future iterations or extensions), then it may make sense to keep the founders (or most competent product/solution engineers) locked up for a longer period of time to ensure that the “know-how” and expertise can properly be absorbed into the acquirers’ business. Generally, acquirers will like to see founders kept on board for 1-2 years following deal closure, but ultimately this is negotiated. It also must be said that if the founders leave the acquired business (startup) post-integration, there is a greater likelihood that employees from the acquired company may also leave in the future.
Thanks for sharing!
Craig
I’ve been through a number of M&A efforts involving startups. They’ve always been super smart, scrappy, and driven. However, as they grow, operational effectiveness and ability to scale becomes the challenge. The acquirer seems to fight battling trying to be sensitive to the start up culture while enabling them for growth. There also seems to be sensitivity to balancing the founder/s of the startup and keeping them engaged, happy, and committed with the wishes of the acquirer to operate smarter and to follow a defined strategy. Not easy!
To bring in a start-up, it depends on the underlying reason – if the entrepreneur is the creative type who creates new ideas – its best to let him continue on as an entrepreneur and keep good relations with him so that we can buy his new start-up or ideas again. At different stages of a company’s life – it requires different leadership styles. We wouldn’t want a creative guy to keep re-creating the company – we would want someone who can build things up to the next level.
No one is irreplaceable – but to replace someone who is willing to work 18 hours/day across functions, it’ll take 2-3 people to replace him in terms of functionality.
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