Editor’s note: Ted Summe is the founder of Discoverly, an enterprise tool that puts social data to work. Earlier in his career, he worked with enterprise software companies at Morgan Stanley and bought them at Salesforce.com. You can follow him on Twitter @tsumme.
Having slung enterprise software companies at Morgan Stanley and bought them at Salesforce.com, I’ve got some perspective on what it takes to sell an enterprise software company. It’s no secret that before you even get started, there are a number of things to consider. Who will fund your mission? Who will join your tribe? And how will you price and distribute your product?
While these are all important factors to examine early on, there might come a time when you will start to plan for your exit. When the time comes, you’ll need to take into consideration your location, stack, uptime, how lean your team is and, of course, the legal stuff. Of course there’s nuance to all these considerations, but they’re the main themes to consider when positioning yourself for acquisition success in the future. For those building toward a thriving standalone business, this information can be a helpful part of your contingency plan.
Surprisingly, location might be the single most important factor in engineering acquisition success. The fact is most acquisitions fail due to poor integration and location can be a big part of that. If you’re acquired as a small company or acqui-hired, you’ll likely be expected to relocate. But if you’re acquired as a larger, more established company, location can become more of a challenge. For the integration to be successful, leadership from the buyer is going to have to make frequent trips to your office location. That means you want to be headquartered in a city that is either convenient, strategic, or particularly desirable – executives will volunteer for the work trip to Paris but not to Topeka.
This is pretty simple. You want to build your software in the same language as your potential buyer(s). If a company’s software is written in Java, and yours is written .NET, you’re not appealing because they don’t want to support another language and don’t have the engineering talent to do so. You might as well move to Topeka.
One of the major differences between consumer M&A and enterprise M&A is driven by the SLA (Service License Agreement). SaaS enterprise software companies make uptime commitments to their customers, and if they fail to maintain them, they incur significant costs.
Big companies already have fat; they don’t want to pack yours on, too.
When YouTube went down occasionally after the Google acquisition, users would say “bummer” and come back later. When MSFT sells Yammer to its customers and it goes down, customers say “WTF, I’m running my business on this and you’re screwing me.” As a result, the buyer will need to invest in your product to meet the SLA requirements you’re contractually obligated to fulfill. The amount they have to invest can vary.
If your technology is reasonably hardened, the buyer will likely maintain your stack and invest to get it up to their standards. This investment increases their calculation of the cost of the acquisition and thus reduces the amount they’re willing to pay.
Say your technology is young and your codebase is relatively light. The buyer will possibly just rewrite your code on their stack to reduce the uptime risk. This costs money and slows their time to market and thus reduces the amount they’re willing to pay.
The worst case is that your codebase is heavy but not hardened because then the buyer will have to invest significantly to either rewrite or harden. This will make your company a risky acquisition and thus significantly reduces the amount they’re willing to pay.
Strong And Lean Team
Whether its an acqui-hire or a straight acquisition, the composition of your team is important. Startups are able to recruit talented, driven employees, and buyers love to pay them extra money to stay around after the deal. But only if the team is strong and lean. Big companies already have fat; they don’t want to pack yours on, too.
Don’t Forget The Legal Stuff
Big companies aren’t nimble like startups, and that is in some part because they have deep pockets weighing them down. Because people can come after those deep pockets, the big companies have to be bogged down with worries about IP and whether other companies could have patent-infringement claims against them, now or in the future. Many startups overlook this piece, since few companies will sue a startup based on IP, but those liabilities will become real upon acquisition. As such, monitor your IP exposure as you grow.