2) Identify and evaluate relevant startups (4 – 6 weeks)
Based on pre-defined cornerstones, a long list of potential startups is created. Researching market studies is a good starting point to get an overview of relevant players. National and international startup data bases, such as Spotfolio and Crunchbase, help to collect further relevant information and KPIs. Existing contacts, the personal startup and founder network should be leveraged to complete the picture. The goal should be to find as many relevant startups as possible to have a wide choice (that then should be narrowed down quickly and rigorously) – the number of interesting companies, however, highly varies with the entry barriers of the respective industry.
Along with the iterative development of the criteria catalogue – and therefore the definition of key criteria and show-stoppers – the long list can be shortened down piece by piece. We recommend to get in touch informally with the most interesting startups as soon as possible, by visiting startup conferences, panel discussions or directly setting up phone calls. In these first discussions, usually reasons for immediate rejection show up, e.g. that the management team is unable or unwilling to enter discussions, new show-stoppers are discovered or the startup simply is not ready yet to discuss potential collaboration models. After each interview, the criteria catalogue is updated, and the evaluation logic is refined, cutting down the list to 5 – 8 potential acquisition targets.
There is an important learning for the corporate here, which is that it needs to be sufficiently attractive to the startup as well. We see it all too often that startups, while seeing tremendous value in cooperating with corporates, refrain from even entering discussions because the respective corporate has a history of proposing and promising, but then not delivering. Having a reputation of actually moving quickly and pragmatically helps a corporate tremendously in gaining credibility with startups.
With the remaining startups, workshops are conducted to get information that cannot be collected through desk research, e.g. their F&E focus and budget, growth strategy, soft factors like company culture, and sensitive KPIs. Focus should be on the high-ranked criteria, e.g. relevant technology features or the maturity and scalability of the sales process, to create a sufficient assessment. Discussions on first potential collaboration models show with which constellation the corporate’s assets can be leveraged most effectively. After the first round of workshops it is usually quite clear which ones are the top 3–4 companies to start a more detailed discussion on a potential joint growth strategy.
Those discussions may also lead to a change of the strategic direction, e.g. if the corporate detects unforeseen synergies between two startups and decides to acquire both. Another outcome may be that starting with a partnership and acquiring later is the better choice, based on the startup’s potential in relation to its state of development and therefore the risk that the corporate is willing – or not willing – to take.
To get an external perspective on each company, which is the most important aspect of the customer-centric startup world and its methodologies, it is an imperative to conduct customer interviews. In a 15–30 minute, rather hands-on and pragmatic call, we discuss aspects like sales process, customer satisfaction, product and service request handling to cross-check the information provided by the startup. Furthermore, scanning relevant online forums and portals to analyze reviews and customer feedback completes the external perspective.
At this point we typically arrive at the prime candidate that has shown interest in an acquisition and opens its books for further and final investigation. The deep dive business model DD needs to be conducted, i.e. developing a scenario plan for value creation (case calculation).
Besides that, a financial DD and a legal DD will of course be completed as well. Both, however, should exhibit a similarly pragmatic approach as the process thus far. Otherwise there will still be a substantial risk of stalling. This may mean that both parties involved on the financial and legal side run a simplified and shortened process, ensuring that “bet-the-farm”-risks are minimized and major show-stoppers identified. It would also pay off to allocate more progressive finance and legal experts to these DDs than it would typically be the case in traditional M&A.