Acquire an Education

Mergers and acquisitions can be a time of flurried frenzy for first-generation entrepreneurs, but drive home important startup lessons, find Shonali Advani and Vasumita S Adarsh
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.

With additional reporting from Jayadevan PK in Bengaluru

Source: The Economic Times
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Author:

Neeraj; an entrepreneur & a visionary in the field of Railway, Defense & Automobiles, is a graduate in commerce and a Harvard Business School Alumni. He’s an expert in govt. liasoning & contracting and has an exceptional network & connections at both local as well as global level. He’s an expert in Market Strategy & Planning and has served number of overseas companies as an advisor/consultant. He takes a profound interest in upcoming startups & is very receptive towards ground-breaking ideas & innovations. He likes to brainstorm those ideas and if the values & philosophies matches; he is even ready to invest his resources, serve as a mentor or act as an incubator to futuristic businesses.

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