Today, CTOs are on the hunt for the latest innovations and they’re bringing the financial big guns. For technology startups, there has never been so many opportunities to sell to enterprise firms and it can offer great rewards.
It can also be a treacherous and long-winded series of negotiations and interrogations. So, if startups have any intention of selling to a big enterprise firm, they need to make sure their infrastructure and attitude is matched to a potential acquirer.
Correy Voo was previously CTO at UBS and has managed numerous technology acquisitions for enterprise firms. His advice is clear: “Be aware, and be appropriate.”
“If a technology startup is looking to sell into a large enterprise, they have to be aware of how they’re portraying themselves - they must show they have the same outlook as a bigger firm in terms of professionalism, stability and standardisation.”
This level of professionalism and standardisation is crucial in terms of minimising liability in the business, the number one concern of any acquirer.
“There will be due dilligence - a startup might sell a good story but if it doesn’t stand up under scrutiny then there will be a problem. Expect people to be crawling through every element of your business, second guessing everything. It’s all about risk - the acquirer has to ensure the business they’re going to be working with isn’t a liability.”
For Voo, there are three key mechanisms an acquirer will go through when considering risk and ultimately, whether a startup or its technology is worth the dollars.
Data management and financial management There has to be no doubt here that the data is stable, complete and secure. Ultimately, the question will be: “Do you have the right tools in place, are you going to manage my data securely and effectively?” If the answer is not clear, then concern will creep in.
Relationships - a business’s relationship with its suppliers and the reputation of its third party connections is crucial. Voo recalls one company that went bankrupt simply because they tried to do things on the cheap and sacrificed quality: “They partnered with companies that were risky because they were cheap. I wasn’t happy with that and that created a lack of trust.”
Location and operations - Think about where you’re managing your business and the risk that might pose - so, where is your processing done, is the location secure? This can come down to being concerned with geopolitical issues or economic instability.
What else might an acquirer be looking for? One of the simplest checks they will do is to see if the startup is leveraging its own technology. Voo says: “If someone came to me with a security product but weren’t using it for their own business, then that leads me to a number of assumptions - either they don’t trust their own technology or, maybe, they know something about the technology they’re not telling you.”
No start-up is an island - and being professional about the obligations it has is vital when preparing for sale. All businesses have what Voo calls ‘hard obligations’ and ‘soft obligations’.
For a larger enterprise firm, hard obligations will be regulations and standards that they have to meet. Any startup has to be aware of these and comply with them, even if they’re not relevant, so they don’t pose hurdles later down the line.
Equally as companies become larger their soft obligations become greater. These are obligations in terms of reputation, relationships and in particular, customers - the more customers you have the greater voice they have, and as Voo said “they can bring you down”.
The opportunities for technology startups are plentiful but this also means only the sensible businesses will succeed. No startup can afford to be ignorant about the issues that will be relevant to an acquirer - they must put themselves in the acquirers shoes.
According to Voo, the “number one lesson is to always be appropriate about what you’re doing. Yes, invest in infrastructure to derisk your business, but don’t over invest or it will appear that you’re being stupid with your investments. Showcase your business acumen first and foremost”
A technology start-up may see themselves as an innovator, or disruptor, but when it comes to big enterprise they just want to know you’re not a cowboy.