Santa Cruz Tech Beat

Companies

Under-appreciated Ingredients for a Successful Startup

By Joe Katzman
Special to Santa Cruz Tech Beat

July 11, 2015 — Santa Cruz, CA

Lessons Learned: Acquisitions

Don’t be the person who puts years of heart and soul into a rare start-up survivor, only to have all of your rewards evaporate when the firm is acquired. Santa Cruz Works’ recent “All About Acquisitions” panel offered attendees a window into Jeff Shood’s successful experience with Intuvo, alongside hard-won wisdom from the financial (David Doolin, PP&C) and legal (Bill Richter and Patrick Reilly) sides. At the same time, it explored some under-appreciated ingredients for a successful startup.

This blog post can’t convey all of the insights from the panel. Or Design by Cosmic’s cool Cooper Street space and hospitality. What it will do, is sketch out some core themes for local entrepreneurs to keep in mind.

Founders need a relationship that’s strong enough to absorb a fair bit of damage

The first theme is a very human one. Successful startups often have co-founders who have worked together before, and know each other well. Otherwise, it’s very difficult to handle everything. The flip side is the hard truth that founders need a relationship that’s strong enough to absorb a fair bit of damage. A startup is an inherently hard thing. The acquisition process is a hard, stressful, and long-running event. Tempers, and people, will be frayed. Laptops may take flight.

Buyers know this. Bill Richter said that one of an acquirer’s goals is to “completely wear you out.” He wisely recommended a financial war chest, to cover both operations and professional services during the acquisition period. To survive, founders will also need a “warchest” of common belief in the firm, belief in each other, and trust in the relationship.

A good founder match matters, and there are resources that can improve your odds before and after. Find them. Use them.

Oh, and get a great VP Sales. It’s often a founding team’s most important hire. Intuvo was lucky to get a former credit union CEO with lots of industry contacts. That was their new focus market, and the firm began growing rapidly within about 6 months.

The other broad theme that emerged was the importance of having an organized corporate backbone as you search for your sustainable business model. Startups are real corporations in every sense, and need to be run that way. They just have a different core mission.

Anal-retentiveness in at least one founder is helpful

Jeff swears that anal-retentiveness in at least one founder is helpful. He’s right. So look around the room. If you can’t spot the anal-retentive founder, you’re elected! (Been there.)

Experienced financial and legal professionals are even more helpful, and early over-reliance on do-it-yourself options was costly to Intuvo later on. Paying $2,500 for a 45 minute legal call, as a small portion of the cost of converting to a C corporation mid-stream, hurts. So:

  • Is your tech and intellectual property (incl. logos) fully owned or licensed in advance?
  • Do you know exactly who has which options?
  • Have you structured your employee contracts and options correctly?
  • Do you know how buying your founder options affects your future personal tax bills?
  • Do you know why you need full documentation for Qualified Small Business status, before you walk out of any company you’ve sold?
  • Does anyone you’ve ever dealt with have a corresponding NDA and/or agreement re: intellectual property rights?
  • Is this especially true of people involved with your hardware or code?
  • Even if you don’t have patents, do you have a list of intellectual property?

In the spirit of repenting one day before your death, it’s best to have this stuff in order… one day before an outsider shows interest in your firm.

Unknown unknowns ==> known unknowns ==> knowns

The right professional will quickly go through these “unknown unknowns” with you, turning them into “known unknowns” and then into things your firm knows and does. Sure, it’s painful to pay a $2,000 services bill when you’re paying yourself $1,000 per month. But establishing a good relationship with an experienced independent provider has 4 big benefits.

4 big benefits

One benefit is that you can pick up the phone later, and have a few 2-minute conversations that could save you thousands or millions. “What’s our time limit to file a patent after we release something to the public? XX months? OK, thanks!” A good service partner will make very good money on an acquisition or other liquidity event. You should expect that kind of give in the relationship – if you establish yourself as a serious customer.

The second benefit is that getting these things right can make a big difference to your company’s valuation. Indeed, Patrick Reilly pointed out that your IP strategy should be guided by, and reinforce, your marketing strategy. That verified and potential Intellectual Property matters to acquirers and investors alike. So does a corporate and option structure that are optimized for stability and growth.

The third benefit is that you avoid being gouged in negotiations or lawsuits. If you’re rushing to get key releases and agreements in place for an acquisition, it’s amazing how high the price can go. Worse, misleading or mistaken representations and warranties can lead to a lawsuit worth more than your firm’s purchase price.

As the saying goes: “Don’t be that guy.”

The final benefit comes from thinking through a future acquisition’s questions and requirements. It gives you great guidance for running the administrative side of your company!

Product/market fit and sustainable business model is priority #1

Finding product/market fit and a sustainable business model remains priority #1. Even so, proper organization and processes can build value just as easily as finding a new customer. Cash flow and learning opportunities on one side, plus long-term value if you can keep the customer. Certain long-term value on the other side if you survive, plus you avoid diverting your time later on unproductive fixes. Those fixes tend to become emergencies when your company has more momentum, and the opportunity cost is higher.

Every founder makes and justifies these kinds of choices about their time. Just know the real trades you’re making.

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Joe Katzman has been involved with several startups in Canada and the United States, as a founding member and a consulting advisor. Joe helps companies with marketing, strategy, operations, and the successful use of technology; and is happiest when people tell him variants of “I had never thought about it that way before.”

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