Ask HN: YC rejected. Now an acquisition scenario came up. Help?

https://news.ycombinator.com/item?id=6702832

by man_bear_pig • 13 years ago

35 41 13 years ago

news.ycombinator.com

Anyone out there that can help me?

So I found out the unfortunate news that I didn't get the interview for YC W'14. However, yesterday, I received an inbound inquiry on my startup from a global player asking if we want to sit down for a potential acquisition discussion.

Quick Background: - my company is in public beta and haven't even launched yet! No crazy traction, proprietary technologies, some revenue (nothing meaningful). - we're going to start our angel fundraising efforts soon - player is the largest in the space (I'm not even sure if I can disclose details/name that's why I'm not disclosing specifics). - they specifically said that their senior M&A team and C-level execs have been thinking about building a product similar to ours and would want to discuss potential for team/product acquisition.

There's a million scenarios/questions going through my head from fundraising to why I didn't even get a YC interview.

Anyone who can opine on the best way to approach this would be greatly appreciated.

Sujan2• 13 years ago

Do you love the idea and product?

man_bear_pig14• 13 years ago

I love the idea and product is coming around. People seem to like the initial product of what we are offering (beta test users avg time spent 9 min on site which I heard is pretty steller for what I'm doing).

I have 5 guys who all used to make well into six figures who are not taking a single penny and working 80 hours a week because we are passionate about the idea. If it was up to me, as long as I got enough funding to eating 3x a day and sleep 6 hours a day, I would love to work on it for a year to really see where this thing can go.

Sujan2• 13 years ago

Then do that. Getting the funding should be no problem at all with the people already working on it.

ye• 13 years ago

Is the offer that good?

If you do sell it now, do you have other startup ideas worth working on? (I assume this was your best one).

Is there any vesting involved, or is it a cash deal?

man_bear_pig14• 13 years ago

I have no idea what the offer would be like but I'm sure if they were to acquire me then they'll force me to work there for 3-4 years before anything vests. If it is just team acquisition then maybe it's just pay back seed investors and give us some bonus / equity options but I find that hard to believe as the outcome (if it happens) because why the hell would I ever take that deal considering that I can probably raise some angel funding to see it through and if it doesn't work out then I'll go to them and plead my case...

I have lots of cool startup ideas but this is my baby and I'm a specialist in it. Not a super viral idea though like a Snapchat or anything; it would take time to scale but just a big market if penetrated.

gizmo• 13 years ago

It doesn't hurt to be a cynical in this situation. They will want to do "due diligence" which means they discover many valuable things about your product before they have really committed to anything. This is certainly to their advantage. They are also likely to make you a low-ball offer if you come across as inexperienced or gullible.

When you engage in any sort of negotiation with M&A guys (who are bound to be much better at negotiating than you are) you really need some sort of leverage or you'll get a raw deal. So unless there are multiple suitors that you can play off against each other this is likely to turn out to be an expensive distraction for you.

man_bear_pig14• 13 years ago

Thanks for the insight. I'm pretty sure I can negotiate better than them as my partners and I have done a ton of complex M&A deals in the past so no one is going to fk me over in any way, but I do agree with you that this can be an expensive distraction. I was thinking whether to invite other suitors to play it off each other to make it worth my while and this in turn, can help with the fundraising side with the whole intention of just maximizing the deal structure and terms and amount raised w/r/t fundraising. Thanks so much for your input!

wellboy• 13 years ago

Will this be able to make $100M/year in revenue within the next 3 years?

If it won't probably be able to make >$10M rev/year, you're not super passionate about it and they want to buy it for $3M+, I'd go for it.

colbyh• 13 years ago

Are you properly incorporated yet? If so, ask for their specific legal advice and take the meeting. Don't disclose anything that the potential acquirers could use to build their own product and see if their interest is sincere. If so, then make a decision. Until then chances are they are really just trying to pick your brain for insights before they build their own competitor.

The way I see it is that if the fit is good and the money is solid then maybe it's worth it. If not you have at least one fantastic example of validation when it comes time to raise funds...

diorray• 13 years ago

If you don't love your product, just sell it.

christopherslee2• 13 years ago

From my experience, I would open the discussion with them and be honest about where you are trying to go with the product. Offer up potential partnership arrangements/rev share (whatever makes plausible sense.)

In my opinion, if they could (and it's rare that they would) knock you off overnight, then maybe you don't have a business to begin with. YMMV with that one, but thats what I generally think about it.

Although everyone will say, don't let it be a distraction. It's a HUGE distraction. Your motivation to continuing building the product may wane, you may start to devote a lot of time to the negotiation strategy. It's a distraction.

Now should you get to the point where you think the acquisition is a good route for you, really the only way to improve the offer is to have other offers (whether that's raising money, or a different acquisition offer.) If you have little revenue to speak of, I'm not sure how you argue you should get a 5000x multiple instead of a 300x multiple.

man_bear_pig14• 13 years ago

I play in a multi-winner space if you play it one way; a winner-takes most space if you play it another way so I'm not too worried about competition. They're actually worried about another competitor who just got in so they want to build out something similar (is my guess).

Do you think that this in any way helps me to be able to raise money or would real investors just brush it aside (i.e. does it provide any real validation of concept)? Thanks!

spinlock• 13 years ago

Investors look for validation from peers, competitors, anyone. Having interest is good as long as you can win in terms of executing on the product.

christopherslee2• 13 years ago

I can't say whether or not an acquisition offer is validation of an idea from an investor's perspective.

To play devils advocate, I could also argue that if you are considering it, then you weren't hockey sticking, and thus i shouldn't invest in you.

Also, one thing to consider is, and this is my opinion, that taking early investors could potentially be an impediment to an acquisition. The reason being is that your investors are interested in getting some kind of multiplier on their return. If you were considering a talent acquisition, not having investors means that almost any sum of money could be worth it to you.

When my-cofounder and I were shopping around for investment before, we were at a point where we weren't sure if we needed to hire a sales force to help us grow our customer base. So we put together a plan for what kind of money we needed.

One kind VC gave us the advice to try doing the sales ourselves for the summer. If it worked out, then we wouldn't need to raise any money. If it didn't work out, then at least we would know it was really hard, and then we could go try to take outside money. Either way we would know something.

Fortunately for us, we ended up trying to do sales that summer (it was hard.) And because we had been so open with potential partners (and acquirers), we ended up with a deal that worked out well for us. I'm not sure it would have made sense had we raised any money.

alexjarvis• 13 years ago

Had a friend who was recently in a similar situation minus the YC part and basically it turned out to be a massive waste of time (and legal fees) when they decided he wasn't the 'right fit' for their culture. It was more of an acqui-hire, but the lessons learned are still relevant here. Start discussions but don't let it take over everything as they might just be testing the water.

So in summary, continue business as usual while you negotiate and be skeptical of their motivations.

man_bear_pig14• 13 years ago

Thanks for the insight! Please let me know if there is any way for me to be able to reach out to your buddy.

accountoftheday• 13 years ago

uninformed prediction: "pg called us to correct their mistake, we got an interview and we're in" by the end of next week, though you might be asked not to talk about it in public. meanwhile, nothing will come of the "acquisition" talks.

lbr2• 13 years ago

uninformed speculation: this is the hope of the author of this post. and intention behind this post.

But too hard to say if this is realistic, without nothing about the product or founders.

tostitos1979• 13 years ago

Wow ... HN is too cynical some days.

man_bear_pig14• 13 years ago

very true. i wish i could reveal a lot more. at least my product and what i'm going for and have the yc community tell me their honest opinion.

founders on the other hand - from the tech end nothing extraordinary but solid. on the business end, pretty top-notch caliber (i.e. 99 percentile in their respective fields).

man_bear_pig14• 13 years ago

haha. i wish he would! if i got into YC, i would definitely not care about the large player as much and play hardball with them instead of the other way around : (

arkj• 13 years ago

maybe this way you'll get some attention; but that too is an oversimplification ;). goodluck!!!

quizotic• 13 years ago

1. Why are you still mourning YC'14? 2. Why are you asking for uninformed advice on a public forum?

In situations like these, I like the Mathew Looks rule.

Mathew was a USCF expert on my high school chess team, trying to teach me to be a better player. He set up a chess position with chances for both sides, and asked which side I liked better. "I have no idea," I replied. "That's why you lose. It doesn't matter whether you're right or wrong. It matters that you have an opinion."

Form your own opinion about this situation. Like it. Feel confident about it. Then follow through, as well you can.

It doesn't matter what anyone else thinks. It matters what you think.

man_bear_pig14• 13 years ago

1. not mourning but stating a fact and also successfully got people to comment and provide feedback.

2. as an uninformed participant, even if 9/10 are deemed irrelevant information any incremental and relevant information will be beneficial in my decision-making. I have my own opinion but opinions are usually just that. Opinions formed through ignorance when there are market participants willing to provide insight in order to help me better prepare for what's to come is a naive way to attack this problem.

I simply asked for advice. Insight. I know when to pull the trigger and know how to pull it. I just want to know before I pull the trigger, do I have as much information to form my own opinion. When you don't know enough to even form you own opinion, then what good does going with instinct do?

mtabini• 13 years ago

What do you want out of this?

Unless you can answer this question, any advice is essentially pointless. In my experience, you can imagine up all the scenarios in the world (I know I have many times), but reality depends on so many factors outside your control that things are likely to go in a direction you do not expect anyway.

Regardless of whether you want be acquired or not, you should take that meeting. You have nothing to lose, and everything to gain: Even if nothing comes of it, it will be an opportunity to gather valuable information, create useful connections that could be useful later on, or lead to other business opportunities that aren't even on your radar right now.

Most importantly, you need to look at this and every other meeting you take as the beginning of a negotiation—even if you never discuss an actual business opportunity. And the trick with being a good negotiator is not necessarily to win, because nobody wins all the time. Instead, the trick is to stay in control of the process. Talk to these folks, and see what they want. A company that is serious about acquiring you will want to get to know you first, understand your strengths and weaknesses, and so on. Your job is to steer the discussion in a direction that's worthwhile to you and never, ever, ever, ever (ever!) let it take more of your time than it deserves.

So many of the other folks who have commented seem to worry about this being a waste of time, or the other company attempting to steal your ideas and businesses through the due diligence process. But how else are you ever going to get a deal done if you don't interact? In my experience, due diligence is the last step of an M&A exercise: after the parties have agreed on all the terms, its role is to simply make sure that neither party is trying to pull one over the other. And it's an expensive process, so no-one really wants to do it until they're sure they want to go ahead with the deal.

So, nobody is going to start a serious negotiation by asking to look at your financials or read through your source code (and, if they do, you should probably walk away) until they are willing to put a commitment of their own on the table. In the meantime, just let the discussion take its course and push back, firmly but politely, every time you feel that the process asks more of your involvement than you feel is warranted at that particular time. Again, any serious businessperson won't mind—heck, they may even try to measure up your worth by seeing how far you're willing to be pushed before you start pushing back.

Oh, and you should run—_run_—and find a good advisor. This is the kind of discussion you want to sound off with someone who can help you examine your specific situation… which is hard to do in a public forum like HN :-)

man_bear_pig14• 13 years ago

Thanks so much for your insights. This one is my favorite so far! Actual meat in here for me to chew on.

What I want or what I want for my company? I work with a team, not for myself and even though my team works for me, I like to think that I want to do what's best for my team because at the end of the day, without my team, I have no company. If I had it my way, I wouldn't even consider it as for me, it's all about going big or going home. However, some of my best friends are part of this team, those who do not have luxury career hedges that I am fortunate to have, and for some of them, even an acqui-hire would do wonders for their careers.

I do agree with you that I should take that meeting. The meeting, I found out, was referred internally by an insider who knows my team and my qualifications - so she would not advise us to waste time knowing that we're about to embark on a fundraising process; and I don't think she would have referred us to talk to them if she didn't think it was serious (at the minimum a great opportunity to learn and network).

I've worked on enough deals where a lot looked promising and serious but just didn't make it to the finish line. I'm fine with that. I just have no idea what the process is like, what the expected probabilities are on a timeline, what is appropriate for me to push back on, what are these type of companies looking for, etc. On top of that, if there is any way if this gets fairly real, I can maximize the value of this company with respect to fundraising. But even there I have no idea as to how investors perceive these kind of things and what impact it may have (i.e. do I go talk to investors and say hey look X company wants to potentially buy my team out? But I'm just getting started and so I want your money and really make this thing take off? Or does that make me look foolish because they simply don't care?

I wish I had an advisor to ask these specific questions! Hence, why communities like YC would have been great for where I am at this point of my startup.

Thanks again.

dsugarman• 13 years ago

Acquisition talks are usually a huge distraction. They will likely drag you out and hurt the moral of the team to get a sweetheart deal if they really are that interested.

OmarIsmail• 13 years ago

YC's advice around these kind of talks is that they're a colossal waste of time. If you're interested in an acquihire situation then there may be some value in meeting, but otherwise the chances of something meaningful coming from this is very low.

Remember, for these M&A guys, meeting people like you is there job. For them having these meetings is a productive use of their time. It costs them nothing, and they only gain more insight into the marketplace.

What do you get out of these meetings? They're not going to tell you anything special/secret about their product/market.

What I've seen some people do is have an initial call/meeting (don't travel for it) for about an hour to feel things out. If it seems like there's genuine interest then have there be a "break up" penalty. i.e. if things don't work out they pay you $5-10K.

That way you get something for your time if it doesn't work out, and if they're not serious they won't agree to it.

man_bear_pig14• 13 years ago

Hmmm. That's interesting (breakup-fee). Is that market or would you say it's an exception for startups in acqui-hire situations?

My only reason why I would take this a bit more seriously is that I know the following: a) a friend of mine who plays in the similar space - she has had talks with them for couple of months earlier this year about starting something similar for them before her business got got acquired by someone else. She told me that they seemed to be pretty serious and have been contemplating for a while how to get it started. b) there's also not many players who really understand that market and/or are in the market. c) they have precedence of similar behavior in different part of their business within the past 6 months (early stage acquisitions - one was series a then 6 months acquired but they're definitely on a talent or talent/hire acquisition spree).

Thank you so much for your advice!

mst• 13 years ago

Rather than a break up fee, perhaps it's worth charging them consultancy rates for explaining what you're doing to them - after all, they can't unhear that information so why not charge it at rates matching the value to them in their conversations with the next company if you end up not coming tot terms?

joshfraser• 13 years ago

If you decide to ask for a breakup fee, I'd add a zero or two to your ask. You're risking more than just your time. You're risking educating a competitor who sound like they would be a formidable force if they decided to take your information and build it themselves.

andrewhillman• 13 years ago

If you are looking for a job, take the meeting.

man_bear_pig14• 13 years ago

haha. love it. if that job pays 200k a year with 1m+ option vesting over 3 years... i'd have to think about it for a day. otherwise, it'd be npv negative for the risk i've already undertaken to do a startup in the first place!

genwin• 13 years ago

if that job pays 200k a year with 1m+ option vesting over 3 years...

Assuming they can't fire you and leave you with nothing, not even the technology you created.

alexnewman• 13 years ago

The "YC advice" is similar to the oversimplifications I have heard, pawned off as wisdom. Take it as a chance to listen, learn and develope a relationship with those guys. Just make sure you understand who the decision makers are, and only deal with them.

man_bear_pig14• 13 years ago

cool. Thanks!

gametheoretic• 13 years ago

Disclaimer: I don't know anything about anything.

my company is in public beta and haven't even launched yet!

Buy low, sell high. You don't approach this early for no reason.

they specifically said that their senior M&A team and C-level execs have been thinking about building a product similar to ours

That was meant to scare you. Ironically, if you're smart, it achieves the opposite. "Ok, so why don't you? What does a 6-man startup have that a global player doesn't?"

My tentative vote, pending further information: Nay. From your thread comments, you seem psyched about the product - see how far that enthusiasm can push your product before you risk losing it. When you're enthusiastic, you want to "control your own destiny," as they say in college football. Also, beware "best case scenario" bias. If it were me, I would promise you creative control, teams on top of teams beneath you, fair captain. But where do you see that. Google acqui-kills 100 companies a year.

Ask HN: YC rejected. Now an acquisition scenario came up. Help?

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