Great pointers on positioning your startup for acquisition - today's only real exit option...

This is a short but VERY good and practical article on positioning your startup for acquisition. The pointers at the end are right on the money!

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May 4, 2009, 6:32 PM ET
Want To Position Your Start-Up To Be Acquired? Follow These Tips
Venture Capital Dispatch HOME PAGE »

By Scott Austin
Last August, Hewlett-Packard Co. signed a letter of intent to pay $360 million cash for LeftHand Networks Inc., a venture-backed provider of storage systems. A few weeks later, Wall Street’s collapse sent the economy in a tailspin and threatened to knock the screws out of the deal.
But after a two-week pause the two sides got back together and in November closed the acquisition on the same terms. Asked how LeftHand was able to command the same price despite the uncertainty created from the financial markets, an investor in the company said, “Maybe it’s because every Sunday I went to church and lit candles. Faith and religion are very important in the sale process.”

Jokes aside, LeftHand was able to hold its ground because it had proven itself valuable well before Hewlett-Packard offered to buy it. H-P had been reselling LeftHand’s software on some of its servers for nearly three years, and realized it couldn’t do without it.

The deal signifies the importance of setting up strategic relationships with possible acquirers, especially in this environment, said the aforementioned investor, Matthew McCall, a managing director with Draper Fisher Jurvetson Portage Venture Partners.

“When you’re hair’s on fire as a corporation, you’ll try anything to make the pain go away,” he said. “Now’s a great opportunity [for start-ups] to enter partnerships, distribution agreements, and dialogues with larger corporations.”

McCall was on hand at the National Venture Capital Association’s annual meeting in Boston last week to provide some pointers on how start-ups can position themselves effectively for a possible exit. McCall, who says his firm has scored 10 exits in the past 18 months, offered a few “key elements” that have helped his portfolio companies exit the past couple of years:

-Form a strategic relationship with a potential buyer. “Companies that have been successful in this enviroment are great at identifying who the strategic players are out there that would rather see you alive versus dead. Some of our portfolio companies are aggressively approaching them as a sugar daddy, as a protector in the market place. They’re going to them and saying, ‘We’re going to get a production line out for you, but getting lease financing is very difficult, would you do that for us?’ And we’re seeing some of these guys come up with corporate lease lines for them or helping guaranteeing those lease lines.”

-Look at it from the acquirer’s perspective. “Too many people try and sell from the position of fear. Especially in this marketplace, instead of saying, ‘How can we sell this?’ you need to get into their shoes and say, ‘Why do they need to buy it?’ One of our most successful sales in the last year happened because this was a critical piece of the buyer’s portfolio. You could see this was a hot part of the market, that they didn’t have a strong position in it and there are two or three competitors. If you can identify that and position it accordingly, you’re in a great position.”

-Identify the alternatives. “If you’re the clear superior company in the market and there are no alternatives, you’ve got leverage. If you’re the No. 2 or 3 technology out there, you can push as hard as you want, but they’re going to push back on you. And then at the end of the day they could buy one of your competitors and could really put you in a bind.”

-Make sure at least two mortal enemies are bidding on your start-up. “We had a company that was looking to sell, and went to a potential acquirer and said, ‘If you don’t move now, so and so will.’ They said, ‘Go ahead sell to them, we’d love to kick their ass in the market.’ About three weeks later we engaged their mortal enemy - the two had a Coke/Pepsi type of relationship. Two weeks later, we signed a letter of intent and closed it in six [weeks], at twice the original bid.”