Acquire an Education
Mergers and acquisitions can be a
time of flurried frenzy for first-generation entrepreneurs, but drive home
important startup lessons,
The founders of document-viewing
startup Bookpad were taken by surprise last year when they got a takeover offer
from Yahoo.
“Till due diligence is over and a
term sheet is in your hands, it always feels like the deal could fall apart any
time,“ said cofounder Niketh Sabbineni, 25. In the end, they sold their
one-year-old firm to Yahoo for `50 crore.
Kunal Shah, founder of FreeCharge,
wasn't as anxious during sale talks with Kunal Bahl of Snapdeal, but was aware
throughout that a tiny misstep was enough to sink the deal. After many secret
meetings in coffee shops across cities, they shook hands for India's biggest
consumer internet buyout. “Deal is done when intents are aligned from day one.
Then, the rest is formality,“ said Shah. “Trust is the key ingredient of any
deal.“
Shah and Sabbineni represent a small
but growing crop of entrepreneurs who are achieving the ultimate glory in
startup lore building and selling a business. That apart, as they deal with
the multiple complexities involved in deal-making, the founders emerge wiser,
picking up valuable business lessons.
The foremost lesson, according to
entrepreneurs and investors alike, is to stay on course with the business and
ensure the company meets financial and other targets factors that influence
the ultimate valuation of a company. Other priorities are to retain paid
customers and protect intellectual property, given that lawsuits surrounding
patent infringement claims by opportunistic entities are known to increase
around impending acquisitions. When Sabbineni realized the Yahoo deal was becoming
a distraction to his team, he along with cofounders Aditya Bandi and Ashwik
Reddy decided to insulate Bookpad's employees from acquisition discus sions.
They ensured it was business as usual at the year-old startup, and carried on
with regular activities in cluding funding options. “I participated in the deal
discussions with Yahoo on behalf of the team,“ said Sabbineni, who also
recognized that losing focus on core product development and custom core
product development and customers would be a fatal mistake.
Founders of other acquired startups
such as Little Eye Labs (LEL), Hoopz, iViZ and Impermium also said they had
learnt important lessons that they value highly apart from the actual
validation they got for their innovations. “Keeping the cap table of the
company more simpler, using an online demat format for shares (instead of paper
format), having a legal team right from the start of the discussion essentially
knowing the entire process beforehand will help avoid surprises that we hit
along the way,“ said Kumar Rangarajan, cofounder of Little Eye Labs of his
learnings from when Facebook acquired his company.
While acquisitions have glamorized
India's startup ecosystem, the run-up to a deal is often fraught with
heightened anxiety and uncertainty around the future of the entrepreneurs and
their teams. If not handled sensibly, this additional baggage can be
detrimental to the deal itself. “Awareness is low when it comes to M&A
among startup entrepreneurs in India,“ said Sharad Sharma, cofounder of iSpirt,
a thinktank for the software product industry. “There is low preparedness when
it comes to speaking with corporate development teams that look at
acquisitions.“
“With the excitement over startup
acquisitions and deal money, entrepreneurs can easily miss the implications of
a deal, ending up in a wrong situation,“ said Ravi Gururaj, chairman of Nasscom
Product Council. Startup founders, he said, need to be aware about their
responsibilities towards other team members, as nontechnical staff often face
the sack in such acquisitions.
Rehan Yar Khan, managing partner of
Orios Venture Partners, cited the example of a mobile application company that
got acquired two years ago by a Silicon Valley-based mobile video streaming
startup. The CEO got so engrossed with the acquisition process in the US that
his team was neglected, causing multiple senior executives to leave. “Most
mergers fail not because of technology but because of people integration issues
and founders' focus on dollars, not to mention dealing with two different
company cultures one is big fish, and one small,“ said Khan. “The fear factor
is the tricky part of (M&A),“ Khan added. “When you sell, you're no longer
boss. Entrepreneurs have to first accept and deal with the whole emotion, and
then transfer that to the team.“
Also critical is bringing all
stakeholders on the same page, particularly investors and attorneys, who play a
crucial role in architecting a deal. “In India people keep their cards close to
their chest. In the US the culture is different and founders don't do anything
without their attorneys involved that makes transactions go smoother,“ said
Shantanu Surpure, managing attorney and founder of Sand Hill Counsel, who
represented GSF Accelerator when Facebook acquired its portfolio company LEL.
For Akash Sureka, founder of mobile
ad platform Hoopz that was bought by Persistent Systems last year, the big
lessons came from realizing his mistakes “I was scaling up too early and did
not have a cofounder.Aligning with the right investors is also important; technology
startups need time for product development, and hasty exit demands turned into
a problem for us.“
Founders also need to realize an
acquisition does not necessarily mean an instant `happily ever after.'
“Entrepreneurs need to look at the risk factor of getting acquired by looking
ahead three years post-acquisition,“ said Sharma of iSpirt. “Payouts don't just
happen instantly. There's a 2to 3-year contract deal where the entrepreneur has
to stick it out with the company before getting his deal money.“
As they say, it's not over till it's
over.
Shonali Advani and Vasumita S Adarsh
With additional reporting from
Jayadevan PK in Bengaluru
ET10APR15
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