Fieldnotes on Tech Deals
The below is intended as advice for anyone engaging in capital transactions at any point in a company’s lifetime. It is based on my observations of a wide variety of international deals in the last decade. I believe that the recommendations are as valid for start-ups that are raising their first round of funding as they are for mature companies that are contemplating complex M&A transactions.
- Take time to prepare. Abraham Lincoln once said: “Give me six hours to chop down a tree and I will spend the first four sharpening the axe”. This adage is particularly true for capital transactions. You usually get only one real chance to talk to any potential investor or business partner. Even when you have a series of conversations, a poor performance at any stage can be fatal. Therefore, it is important that you tell your company’s story well and that you get it straight the first time. You should develop a compelling and consistent narrative about your business — contradictions will sow serious doubts about the company’s leadership and strategy. Moreover, you should be clear about the company’s strengths, but also be cognizant of its weaknesses (and develop a plan to proactively address and mitigate them). You will never be able to anticipate every complication that will come up in the course of a deal, but initial preparation will go a long way towards maximizing your chances of success.
- Articulate the future in terms of numbers. The best narratives in business are reinforced with numbers. The goal isn’t necessarily to make accurate predictions about the future (although good forecasting is important and valuable). The goal is to demonstrate that you have rigorously thought through your business, that you understand all the relevant variables and that there is a plan. You should at least have clear hypotheses about where growth will come from, how your KPIs will develop and how money will flow. Crucially, you cannot delegate this kind of exercise to outsiders — no one can or should understand your business better than yourself.
- When you move, move quickly. Speed is incredibly important in closing transactions. Even when two sides genuinely want to consummate a deal, a successful outcome always depends on many minds and circumstances that can change at any moment. People who move quickly can often close deals even if slower competitors promise better terms. People who take their time expose themselves to the vagaries of fortune, which can often mean re-negotiated terms or the loss of an opportunity altogether.
- Never sacrifice good operational performance. Running a business is hard and time-consuming; executing any deal is also hard and time-consuming. You should resist the temptation of focusing on a transaction at the expense of operational performance, but instead be prepared to do double duty. First, your business performance will be most scrutinized during the deal process: underperformance will jeopardize the closing, while outperformance will work in your favour. Second, deals unfortunately can and do fall through even at late stages for a wide variety of reasons (sometimes despite everyone’s good will and best intentions). If you lose out, then you still want something to fall back on until the next big opportunity comes along.
- Hire experienced advisers. Whether it be lawyers, bankers or tax advisers — you want the best help you can get. Mistakes in capital transactions can be very costly and consequential, so you should seek the counsel of people with relevant experience (even if this seems to cost more money upfront). Moreover, inexperienced advisers can create false obstacles that experienced advisers know how to pragmatically avoid. It is not uncommon for deals to get stuck because one party receives bad advice, which is very difficult to solve.
- Be willing to learn. Capital transactions are generally quite complex and no two are ever the same. Even people with decades of experience face a learning curve every time they engage in a new deal. The silver lining here is that everyone is grappling with some element of the problem set for the first time. Therefore, you should not be deterred by unfamiliar topics, and you shouldn’t assume that understanding all the key elements of a transaction is beyond your reach. The dangerous attitudes are at the extremes — thinking that you already know everything or that everything is too complicated (and relying on an adviser to completely handle matters on your behalf).
- Try to be a mensch. “Mensch” is a Yiddish word used to describe a person of integrity and honor. You might be tempted to view any high-stakes deal as an isolated zero-sum game, and, therefore, try to maximize your personal gain at all costs. Of course, every negotiation does have the elements of a game — there are better and worse possible outcomes for all involved, there are different possible tactics, there are sometimes winners and losers, etc. However, all is rarely won or lost in one negotiation. Capital transactions are also usually the beginnings of long, complex and serendipitous relationships. Therefore, your overall goal should be to earn the trust and respect of people with whom you will do many more deals in the future.
I’ll admit that the above recommendations are the kind that are simple to give, but hard to follow. However, experience definitely counts in transactions, and you will improve over time. Lastly, it is important to note that no one ever does it alone. Even though some individuals are recognized as rainmakers, great deals are always the work of great teams.