This is a guest post by Reed Taussig
Virtually all tech acquisitions are characterized by large companies buying small companies, often for cash. But why does this have to be the case? Why can’t small companies also participate in this bonanza of great technology destined for the trash heap? They can, but first all of the interested parties have to change their thinking.
Acquisitions: the exit of choice
In 2012, there were 39 tech company IPOs and 2,277 private tech acquisitions. Yet it is widely estimated that in 2013, more than 1,000 angel funded startups will fail to secure the necessary venture funding needed to continue operations and will be forced to close their doors.
Acquisitions have become the de-facto exit of choice in Silicon Valley. In fact, many angel funded startups formulate their entire business model around the hopes of being acquired.
They often plan their development strategy around attracting the attention of one of the usual suspects, such as Apple, Google, IBM or Cisco, and hope for a quick acquisition. This happens often enough to reinforce the behavior, making it a dangerous cycle.
Similarly, it is a misconception that most tech acquisitions make the company founders and investors rich. Many acquisitions are actually the result of a company failing to secure adequate funding to continue operations, forcing the startup to either close its doors or, for the more fortunate, sell the business to a larger company. These transactions typically take the form of asset sales to larger businesses looking to acquire much needed technology at very attractive prices. The founders are then rewarded with some stability, and the opportunity to continue building the angel funded technology that they are so passionately committed to.
Typically, the investors are not so fortunate.
How about partnerships?
Rather than calling it quits, it is often in the best interest of the entrepreneur, the angel investor, and the acquiring company to form a partnership with another private company in order to preserve the investment.
However, this is easier said than done. Private-to-private deals are always difficult.
Investors are reluctant to give up their preferred shares in exchange for common shares. Conversely, investors in the acquiring company most often will not dilute their preferred position to bail out a failed startup. Moreover, cash is king for all startups as equity financing is hard to come by and is always expensive.
As a result, the bailout for angel investors is a bet in the form of common stock at a price that is often arbitrary and with an uncertain future.
Despite these risks, it’s a better deal to hook your wagon to a train that is moving forward, than one that has no chance. The new company will have committed investors, and at least a future to realize an exit. Any return, potential or otherwise, is always better than zero.
The problem is that most struggling startups never see this as an option. All the reasons above take this option off the table, but there is value in these companies that can be realized. The technology can be preserved and new value can be created in the hands of the right company. This preserves the work done by the entrepreneur and some of the investment originally put in by the angel.
If your angel investment is in jeopardy, don’t just look for acquisitions from the usual suspects. A startup on the verge of insolvency cannot attract a Series A investment, and is a lost investment to all. There is a way to come out on the other end, it just might not be the route you originally set out on.
Reed Taussig is president and CEO of ThreatMetrix Inc., a provider of integrated cybercrime prevention solutions. In 2012, Taussig led ThreatMetrix’s acquisition of TrustDefender, an Australian-based secure browsing technology company, enabling ThreatMetrix to offer the most complete integrated malware detection and device identification solution on the market.
With more than 30 years of experience in the computer hardware and software fields, Taussig served as president and CEO of three other successful technology companies prior to ThreatMetrix.
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