Founders who get fidgety
about flagging top growth can get tempted by bad acquisitions.
EXPERT OPINION BY HOWARD TULLMAN, GENERAL MANAGING PARTNER, G2T3V
AND CHICAGO HIGH TECH INVESTORS @HOWARDTULLMAN1
OCT 29, 2024
Entrepreneurs of all ages have a bias
toward action. It’s not something you ever outgrow. The best leaders are always
in motion and most of the time they’re moving in the right direction. I’m
convinced that this characteristic is due to an unholy brew of DNA – which can’t be bought or
taught – and ADHD, which is demonstrably a blessing and a curse.
The whole package is rolled into a big, tight, ball of energy and angst,
which makes for makers who simply can’t stand still. Ambition, imagination and
endless optimism are all contagious, and force multipliers as well.
We used to tell hesitant investors who
were more than a little put off by our enthusiasm that they should let our
sickness work for them. Things might not always work out, but we were the best
jockeys to bet on because we didn’t know how to quit. The startup world is a
lot like being shackled to a non-stop merry-go-round or a frenzied flywheel
fueled by equal amounts of adrenaline and anxiety. Action, for better or worse,
is an antidote to the despair and uncertainty that is a central part of the
process of building a new business.
All startups are risky and that’s a
built-in part of the bargain, but what very few folks understand is that the
far greater risks come down the line, when the music pauses, or the motion
stops entirely. That’s when the very desires and demons that drive these
fearless founders forward can lead them far astray. For so many of these
entrepreneurs, it’s the action – the stress, the juice – and not necessarily
the results or the outcomes that really drives the train. You never know for
sure what the consequences of the next action you’re considering will be, but
you know in your heart that if you do nothing there won’t be any results; or,
worse yet, you’ll start slipping backwards and losing ground.
When you’ve built and sold your story
on momentum and growth, it’s difficult to slow down, or settle for keeping the
trains running on time while feeling like the world is passing you by. But
that’s exactly what thousands of founders are feeling right now. They want to
get back in the growth game. They’ve been sitting on the COVID-19 bench for way
too long, there’s still the post-pandemic stench of stasis hanging around, and
they’re absolutely itching to do something. That’s not as easy or straightforward
as it sounds. In fact, this is a time when the path forward can quickly become
perilous and when it’s easy to talk yourself into deals, arrangements and
transactions that don’t make sense.01:42
With the IPO market going nowhere any
time soon, good, solid businesses built from scratch over a period of time, and
thus no longer “exciting growth stories,” are now finding that some version of
M&A is about the only game in town. But the pickings out there are slim and
the very last thing any founder wants to do is take on someone else’s problems,
in that their business and prospects are in no better shape than yours.
Combining a couple of decent companies
to grow the aggregated top line isn’t much of a plan when there’s little or no
margin improvement and a lot of prospective pain in the process. It’s critical
to remember that two warm cups of coffee don’t make a hot drink. Or as Barry
Diller says: we don’t believe in
synergy.
Yet the temptations to
act are very powerful and it’s easy to talk yourself into allegedly accretive
deals that don’t make any long-term sense. You’ll never make it up in volume.
If you really want to do something, you’ll find a way; if you don’t, you’ll find
an excuse. So, if you’re sitting on the fence and thinking about doing a
so-what deal, here are a few facts to keep in mind.
·
Lawyers just want to get any deal done
– they’re happy to bury the bumps and bruises so they become your problem down
the line.
There are hard issues, closet
skeletons, tech debts, and plenty of other concerns in any merger, acquisition
or joint venture, but somehow the lawyers on both sides manage to ignore, avoid
or gloss over these problems because their only real interest is in closing the
deal and getting paid. And, sadly enough, when you step on one of those land
mines down the road, it’s like an annuity for them because “who ya gonna call?”
to clean up the mess other than the guys who made it in the first place.
·
More deals go sideways during the
implementation than during the acquisition – everything is more complicated,
costs more, and takes longer than planned.
Thinking that your problems will end
when the deal gets signed is as naïve as believing we’ll have a clear-cut
Presidential winner on November 5th. In
most cases, the closing is the starting date for months of hard integration
work and disheartening discoveries on both sides of the transaction even if
both companies are technically doing the same things, in the same marketplace,
and often are prior competitors who should already know where all the bodies
are buried.
·
Leverage in deals like this comes from
layoffs, cost-cutting, and consolidation. None of this is exciting, encouraging
or pleasant work.
I’m not sure why anyone ever thinks
that growth and improved results in such deals will come from some alchemy,
synergy or bursts of innovation. The hard truth is that the first 90 days are
mostly about firing people, eliminating duplicate departments, functions and
resources, shutting down facilities and tightening the purse strings across the
board. There’s very little joy in the process and – especially with so many
remote workers – these essential steps are especially hard to pull off in any
compassionate or empathetic fashion. Worse yet, the initial survivors spend a
lot of their time looking over their shoulders and wondering if they’re next.
Booking a bunch of new business is on nobody’s short list.
·
When you have too many alternatives,
the tendency is to compromise and settle for second best rather than commit to
a single, stronger, solution.
There are plenty of mediocre firms for
sale these days, lots of “opportunities” just waiting for your call – since
they are likely to be in a similar position as you are. You can kid yourself
into thinking that some kind of fold-in acquisition is a safe bet, an
incremental move, and affordable. But settling for a second-rate purchase or
sale is not only a weak compromise, it’s a terrible strategic mistake because
it keeps you from focusing on the real prize.
M&A moves are traditional
responses and reactions. But what you need to set your business and your
future apart are transformational changes that could take place in the space,
in the market, or in the product or service mix. You don’t leapfrog the
competition or reignite growth prospects by buying or doing more of same.
Organic growth won’t get you there and “so-what” solutions won’t either. Take
the time, spend the energy and resources, and look further out to find a
solution that’s going to eventually get you to where you want to be.
Bottom line: Move
when it makes sense for you and your business. Don’t let anyone else talk you
into doing something just to keep busy or because there are “bargains” to be
had. Too many deals in today’s muddy waters are going to turn out to be 90-day wonders where you wonder a couple of months
down the road why your bargain turned out to be such a bust.