Idea in Brief: For B2B software companies, an intelligently crafted partnership strategy can often be the best pathway to a premium acquisition.
The old adage of "companies aren't sold, they're bought" has played out numerous times in my personal experience, both as an operator as well as an advisor and investor. For example, when we sold Pluck to Demand Media we were in hyper-growth mode and weren't looking to be acquired. Yet the team, capitalization, deal structure and growth opportunity with Demand Media made an early company sale an easy decision.
Behind the scenes, what happened with Demand Media and Pluck was that we first began a business development conversation. Pluck owned a product (BlogBurst) and Demand Media became interested in our technology and content partnerships. As we engaged in reseller/OEM conversations, it became clear that an outright acquisition made sense for both companies.
While acquisitions often have an element of serendipity (and the Pluck deal certainly felt blessed by luck at times), an intentional business development strategy can often be the best pathway to a downstream corporate development opportunity.
So, how do you approach things? Below are a variety of tips and best practices.
C + BD = W. Strategic partnerships absolutely need to be sponsored, directed and led by the CEO (C). But the possible selling company should have a business development (BD) leader (early on, this can be the VP, Sales) who is clearly focused on escalating partnerships through stages that can lead to an acquisition win (W).
Bet Big. While your company should work opportunistically with a myriad of organizations in your ecosystem, a single, big/bold bet can enable disproportionately positive returns. For example, BuildForge, a build process management software firm, realized early on that IBM was the right company to buy them. Accordingly, they developed a tight and unique partnership with IBM that fostered information exchange and trust.
Start Small. A mistake that early stage software companies often make is that they skip steps in the partnership evolution process, forgetting to start small and grow. While things aren't always 100% consistent and linear, the steps that often occur are:
- Integration: a startup invests resources to read and/or write to an API provided by big company.
- Marketing: the startup then spends money touting the integration (advertising, social media, white papers, collateral, webinars, customer events, lunch and learns, etc.).
- Sales: with a proven integration and awareness growing (along with at least a handful of joint customers), a savvy startup will move to developing sales relationships with the big company's account executives. While the AEs won't initially earn commissions via direct sales by the startup, the smart ones will want to be educated and knowledgeable. They'll both want to offer perspectives to their customers and be aware of deals happening within their accounts.
- Channel: with integration, marketing and sales humming, the business development team at the startup, with CEO and product team involvement, can begin to pursue a reseller (non-branded) or OEM (white label) channel relationship. In my experience (e.g. with Motive and eventual acquirer Alcatel), these partnerships require multiple layers of effort (product, technology, sales, BD, C-suite, etc.) and a high degree of commitment and sophistication to drive forward.
Build Trust and Show Value. With a channel partnership in place, the startup has a strong reason to invest in the enablement and success of the big company. Daily emails/activities, weekly update calls, quarterly onsite business reviews and more enable teams to get to know one another. Often, the startup will even want to tee-up and/or push over, deals. Overall, it will be important to set mutual targets and then work maniacally to overachieve, demonstrating the trustability, like-ability and revenue potential of your company.
Dance the Dance. At some point, ideally with the big company seeing significant revenue (and growth) from the startup, a conversation about a strategic financing event can organically occur. In many cases, I've seen these happen over nice dinners between CEOs. The startup may be ready to pursue Series C financing and asks the big company executive if they might recommend a new lead institutional investor. From there, the logical question is often, "what if we invested?" And from there, the strategic partnership model often can find its way to an outright acquisition conversation.
The model above is a fairly simplistic overview on what can often be a multi-year, complex, circuitous path. But if finding a major home for your startup, and a solid return for your investors and employees is a goal of yours, starting the business development to corporate development journey is well worth it.
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Steve Semelsberger is the Founder of Alder Growth Partners.