Do you think the acquisition of technology startups would require a different approach considering that the target company and its owners may not be as well versed in the process as more established companies are?
I think the approach to acquiring a startup is slightly different. The process will remain the same, but the valuation will be based solely on future revenues. This is linked to a lot of risks, that the revenue promises will not be met. An earn-out with the founders of the startup should be negotiated.
The DD will also be shorter. Especially for startups with a few years of existence, the structures and the past should be relatively transparent.
I agree with Sebastien. Also to note the target company could have a much smaller employee population so some of the changes that the acquirer might want to make could have detrimental effects like increased flight risk of the employees. In a startup, one employee is more likely to do the job of 3-5 people, than in a bigger company that is more developed. That also means that the start up probably doesn’t have a full integration team like the acquirer might have so being conscious of how much time an integration could take for the key employees that also handle day-to-day operations could be really important.
I think it could also depend on the maturity/size/history of the start up.
The more mature/well-capitalised/larger the scale of the start-up, the more well-versed in the deal process it could be.
With start-ups that have gone through previous rounds of funding/acquisition, these start ups could be even savvier than a more mature company that has not been through the deal process in its history.
Having been through a few acquisition / investment processes with start-ups as managing M&A for a corporate, I would add to the good input from others that it is beneficial for an industrial acquirer to both explain how they work (slowly, processes, asking for very detailed information, difficult to handle focus on other things than profit margin e.g. Monthly Unique Visitors) for the start-up to be prepared as well as put pressure on the start-up to have things in order e.g. financials, taxes, legal docs. Without this, it is set up for tension between the parties in the process.
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