It is the clichéd finish of most investor pitches: a slide listing a few household-name companies as potential acquirers. It is not uncommon to hear a founder say, "We'll hit year three, then Microsoft will buy us, because they build software, too."
Casually rattling off names of potential acquirers is little better than having no exit strategy at all. Well-prepared entrepreneurs should be able to answer as many questions about potential acquirers as they can about their own operation.
Understanding the acquisition patterns of target companies is a matter of research. Acquisition data is readily obtainable for many of the largest conglomerates, through either public filings or media coverage derived from investor capitalization tables. There are three areas in which a founder should be prepared to answer questions when identifying an acquirer.
1. Does this company actually grow by acquisition? [How frequently do they acquire? Legitimate prospects have demonstrated that they acquire often--or, even better, have a committed merger, acquisition or strategy arm. In general, larger diversified companies are viable possibilities because they typically have greater cash flow, as well as a size and scope that makes internal innovation more difficult.
2. What is the typical acquisition profile? Once it is clear that a firm intends to grow by buying others, the next step is to figure out what they acquire. Does their acquisition history uncover trends about size and stage of targets? If a company generally buys others for $50 million to $100 million, how does that mesh with your company's goals and timelines? Aside from market cap, what other metrics--types of revenue, head count--stand out? Translating those major patterns into a justified window of opportunity is a critical second step.
3. What is their reason for acquiring, and does your company fit that rationale? Would this be a diversification (horizontal) or penetration (vertical) play? How does that jibe with the trends identified earlier? For instance, of the 100-plus companies that have been acquired by Google, few are related to online search. That suggests that Google typically acquires to diversify its businesses, and thus might not be a credible target for a new search engine. In contrast, when Sprint bought Nextel it expanded its subscription base, suggesting the company might be in the market for other carriers that could add market penetration to their existing cellular business.
Investors make money on exits. Knowing the ability, frequency and buy-profile of potential acquirers not only conveys that an exit is your goal, but contributes substantially to shaping your business to meet that goal one day. Your investors are thinking about it, and so should you.
Sam Hogg is a venture partner with Open Prairie Ventures, a Midwest-based venture-capital fund investing in agriculture, life-science and information technology.