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How Fundraising Experience can be Useful for Startup Founders to Prepare for Future M&A Deals

Published November 2020


As companies enter the growth stage of the startup cycle, founders must start to consider a new aspect of business: M&A deals. These deals could take the form of a strategic company acquisition to expand product offerings or gain market share (buy-side), or getting acquired by a larger company (sell-side). Although there are differences between financing and M&A processes, founders may want to consider building up fundraising experiences to better prepare for future acquisitions, be it from a VC or PE fund. This will help founders understand how to engage and negotiate with buyers to generate long-term benefits for the company, while tapping into the expertise, networks, and capital of existing financial backers to maximize deal outcome.

When raising capital from investors, communication is crucial to align goals on both sides. Investors look for viable companies that can provide a compelling return, while startups need the capital to scale up the business. With a lot of capital at stake, there are due diligence and accountability-related processes that founders may need to navigate for the first time. Founders without fundraising experience may not know what investors are looking for, making it hard for them to prepare for investor meetings. In contrast, founders that are well-prepared would have identified relevant metrics to focus on, or would have created systems to track certain metrics. Furthermore, they will be able to think early about topics that investors commonly consider: what competitive advantage does the startup have, how strong the management team is, whether there is customer validation etc. When faced with an opportunity to get acquired, startups that can consider the perspectives of the buy-side will be in a much better position to prepare and make a good first impression, allowing them to enter negotiations on the right footing.

Typically, investors represent a VC or PE firm, offering industry expertise and a strategic network in addition to capital. Founders that work with investors will come to realize what they look for from investors, as well as how to evaluate potential investors for these traits. CircleUp’s founder Ryan Caldbeck published a stinging email sent to one of his investors / board member, in which he outlined several instances of the board member causing damaging disruptions to the FinTech firm.[1] These actions include voicing out blatantly wrong comments at board meetings and talking with someone else while calling into a board meeting, with the speakerphone still on. Caldbeck acknowledges that he should have met the investor before accepting the money, a lesson which helped him to better evaluate investors later.

Advice based on experience and expertise may prove to be more valuable than capital for startup founders. Chris Sloan, an attorney and Chair of law firm Baker Donelson’s Emerging Companies Team, notes that “experienced investors often serve as strategic advisers to their portfolio companies’ management teams. Particularly when the management team is relatively inexperienced, that advice and mentorship can be invaluable to help entrepreneurs make key strategic decisions or avoid common mistakes.”[2] In comparison to M&A deals, the acquired or acquiring company can offer resources or synergies for continued growth. Knowing how to evaluate investors is a strength that can be useful when evaluating the management team of the other party in a deal.

Other than industry expertise, a fund that operates narrowly within a few sectors often have access to relevant contacts that can help the firm grow. A fund that has invested in a startup can also tap into its network of private equity firms or strategic buyers to identify suitable buyers for the firm. Since PE firms manage vast amounts of unallocated capital, there is plenty of opportunities for a PE buyout, sourced through a startup’s list of existing investors.

Should startup founders be eyeing a public exit, they will do well to meet certain criteria in annual revenue growth and profit targets. Financial backers, as co-owners of the enterprise, can push for financial discipline to keep startups on track to successful exits. A funds’ focus on returns can help to counterbalance a startup’s natural focus on the product, pointing out gaps that have a negative impact on the bottom line. In addition, founders can start to familiarize themselves with SEC regulations and disclosure requirements, since IPOs tend to have stricter rules compared to capital raising.

Certainly, working with a financial backer will also be useful when a firm eventually undergoes a sale process. Since financial sponsors are incentivized by successful monetization of their investment, sponsor-backed firms will be under pressure to strengthen their M&A processes, including deal compliance management and post-acquisition integration planning. By leveraging the experience and resources of the financial sponsors, a firm can increase the likelihood of a successful and attractive M&A deal.

In 2017, Information Management software provider Hyland was eyeing an acquisition of Perceptive, an Enterprise Content Management (ECM) business unit of Lexmark.[3] There was a problem: Lexmark was pushing to sell its entire ECM business, not just the Perceptive unit. Hyland’s President and CEO Bill Priemer consulted with its parent company Thoma Bravo, the private equity investment firm. Eventually, Thoma Bravo was able to deploy its resources to purchase the ECM business and then sell the Perceptive unit to Hyland. Without the support of a financial sponsor, the deal would have faced significant hurdles.

As a startup transitions from financing deals to the M&A stage, there is a learning curve that founders will need to overcome. Having substantial experience with fundraising and working with venture capitalists can be extremely useful when preparing for an acquisition deal. With support from investors, founders would have focused on answering the right questions (including from a financial angle), while also understanding how to evaluate the management team of the other party before pursuing an acquisition. In addition, they may also be introduced to ideal exit opportunities (strategic acquisition or buyout) through the current investors. Finally, as markets have become increasingly uncertain in recent years, a financial sponsor may provide valuable support to help craft an exit or acquisition strategy. This can take the form of structuring existing financing processes, providing unique industry insights / advice on industry positioning, and devising strategic approaches to increase the likelihood of success.

[1] https://docs.google.com/document/d/17tEc9ETL4tjfTmNbpwJJ5OSx1c4j10ZBgeYXWGzO30Y/edit

[2] https://fitsmallbusiness.com/venture-capital-advantages-and-disadvantages/

[3] https://www.smartbusinessdealmakers.com/articles/topic/hylands-game-changing-deal/