First rule of first principle thinking, do not use first principle thinking when a mental model is available

Tag: Mergers And Acquisitions

My 10000 hours in M&A and Indian startups

Many months ago I had read this wonderful tweet by Kanyi Maqubela‏, a young VC from Colloborative fund on 10,000 hours of his being a VC and I thought to myself that is good way to document one’s learning.

Last 18 months my stint was as a Fellow-In-Residence (M&A) at iSPIRT (startup think tank), I spent my time on a big hairy audacious goal of leveling the M&A ratio of Indian startups to that of the Israeli ecosystem. Given the current market coordination failure of cross border M&A I had to challenge many assumptions underlying an investment banking model and run several different experiments. As part of it co-hosted two edition of StartupBridge India conference at Stanford in Dec 2016 & 2017. While I am yet to become an expert on the topic of M&A, like Kanyi here are my 10,000 hour reflections.

First and foremost, folks involved in M&A like to call it an art and they try to complicate it perhaps so that they can make a profit from that complexity. Personally, I found it to be quite straightforward.

“M&A is the story of when fear meets greed on a treasure hunt journey.”

Few things that make sense now did not before

Big corporation cannot innovate, startup rarely crack distribution and grow into a big corporation.

Every corporation big or small wants to innovate, in a large corporation market rewards it for being execution focused which means that it sheds innovation muscle. For it despite a best-articulated strategy of horizon planning (H1, H2 & H3) for innovation, acquisition is the most successful H3 strategy for innovation. Cisco proves the rule, and maybe Apple is an exception.

Why boring sounding companies also get acquired

Yesterday technology incumbent acquires a today technology startup. Today technology incumbent acquires tomorrow technology startup.

There is a supply and demand mismatch of startups between India and Silicon Valley.

Silicon Valley corporations wants to acquire the latest fads and trend, say a cutting edge AI & Machine learning startup now. Indian startups on the other are most prevalent in building business & workflow apps and must, therefore, look beyond the valley.

On who decides and influences

Corporate development folks are like the eyes and ears, and they should have seen and heard about the startup. It is the heart (VP Engineering or Product) and mind (SVP, GM, CEO) that makes the decision.

Experts may know but the novice may not

Companies are bought, they are not sold

Buying a product is different from buying a company; it is much closer to the sale of Art. Value is in the eyes of the buyer, and different buyer means different price. Therefore, the price is always discovered through an auction

It is not scale-invariant

The dynamics of < $1m, $1–10m, $10–25, $25–100m, >$100m are all completely different. Experience and lessons from one do not translate well to another.

Some startups may never sell

Yes, every company in the world is up for sale at the right price. But there are the fisherman type entrepreneurs who as a matter of principle will never sell. Does it bode well for them, only time will tell.

Big Corporates are from Mars and Startups are from Venus, it is a colossal failure of communication.

Corporate describe their product, their sector, and the world they see using a map, and their strategic leverage is winning in that map while startup founders focus inside to describe the guts on the glory of their product with microscopic detail.

It is a people business

Companies do not buy other companies; it is people that buy from other people. Past relationship and the new strong connection all contribute way more than anything else.

Product brand is different from a Company brand.

The two are conflated again because startups like to talk about microscopic details while strategics like to describe the map

Investors have an end game; it is useful for entrepreneurs to have one too.

Entrepreneurs only focus on next fund raise and never think about their end game, but it is in their best interest to do so. Every investor in the 4th year & 7th year of fund brings up a pivot question for a startup inside her portfolio. Investors have a cycle of 10 year by which time they have start returning the money, in the 4th year they want know if a startup is candidate for IPO or more suitable for M&A. In the 7th year again if the startup did not do an IPO, they want to decide if they should mentally write it off for their fund returns. Entrepreneurs unaware of this can get adversely affected.

Lead is to a customer what PSP (Potential Strategic Partner) is to an acquirer

What a lead is to a customer, a potential strategic partner is to an acquirer. For the former, sales lifecycle may take two months; the latter takes two years. Thus one has treat this as a complex sales process with such long lead cycles.

You won’t get a marriage proposal when you are a terminally ill cancer patient.

Startups start a strategic partnership or acquisition conversation way late in their journey, with just a few months away from the end of their runway. It is exactly the worst time to go out in the market due to both signaling as well as weak negotiation leverage reasons.

When you have an offer, two is one, and one is none.

Just like in a fundraising situation, when you have an offer, the value gets determined through a reverse auction process. Startups must have multiple offers in hand.

It ain’t done unless it ain’t done.

Managing own psychology during the process is very critical. A combination of euphoric possibilities and the uncertainty almost grinds execution to still not just for the founder but the entire team. It is very important to put rhythm of making progress. It is at the time of a deal that the velocity of growth should be historically highest for high valuation of the deal.

My own biggest surprises.

Word ‘Exit’ is a misnomer

It is not an exit, but an entry for scale or growth. A startup can do well on solving problem & product, aligned with a strategic, it can solve distribution.

Most Corp Devs become VC’s

Corporate Development career seems to be the least rewarded in finding mispriced optionality. No wonder most people seem unfulfilled and hence find VC as the next logical career option as that allows them to set the incentive structure right for themselves.

Big old Indian corporates do not have technology FOMO

Indian corporates are not threatened by technology, nor do they have FOMO. At least not yet. It may be quite some time before ‘Dabur’ might act like ‘Gillette’ and cough up a billion dollar to sweep a new business model.

Indian products are world class in engineering and product

Indian Startup Product and engineering in sectors they operate are world class; they beat Silicon Valley and their Israel counterparts. In the last few years, they are beginning to catch up on marketing, positioning and packaging themselves well.

Balancing between fighting fires and strategic thinking is universal to startups.

Coaching startups on the importance of packaging is hard. A universal trait applies to SV/Israel startup, nothing specific to India.

Bad exit problem is poor entry problem

My biggest Aha has been that a bad exit problem is not just a structural issue but also a manifestation of bad entry, i.e., initial venture allocation thesis.

Things no one will talk about explicitly.


Importance and significance of geography in the discovery of strategic conversation.

Startups, investors have grossly underinvested in that. One of the biggest differences between Israel and India startups is the investment in Israel<>US bridge including efforts by the government. StartupBridgeIndia is some headway doing once a year match making, Israeli startups do this every month

It is indeed questionable that 2007 vintage funds from India have 20% IRR at the end of 2018. There are not enough M&A or no supportive public market.

Raising more funds reduce optionality for startups, and it removes meaningful exits for founders

A series A investor would typically expect 10X of the post funded valuation for an acquisition deal to be attractive, for series B it is 4–7x, for series C it is 2–4x.

Venture capitalism is anti-fragile, a VC may be not.

I am convinced that structurally, the system will take care of itself. As NN Taleb says Entrepreneurship is anti-fragile, but entrepreneurs are fragile. Similarly, venture capital is anti-fragile, but individual investors are fragile. It is not surprising that no Indian venture investor is on the global Midas List.

Most frustrating parts

Most startups handle inbound poorly, they underwhelm or overprice themselves leading to wasted cycles for corporates & startups and everyone involved. First-time folks initially stumble but learn after 3–4 failed discussions.

In every deal conversation there is an awkward situation where the board & investors incentive are aligned with the founder and the team, it is the founder who must step in to make the right decision for himself and the investors.

Indian regulation is most poorly optimized for exits and acquisition. Every founder may hire top lawyer their money can get, and it may still not help.

One must find a deal buddy, a recently exited entrepreneur who can advise on dealing with misaligned incentives and how a recent regulation issues must be resolved etc.

Finally four things any startup must think about

if M&A ever crosses their mind.


  • What is the map in which the startup & corporate is operating?
  • What is the narrative of the startup and the unique competitive leverage it possesses?
  • What Air Game will help the startup come on the radar of the Corporate/ Strategic?
  • Ground game — Who in the network can broker trust to kick off an initial conversation between strategics and startups to explore partnerships?

A useful book to read further is Magic Box Paradigm, a framework for startup acquisition

CoCreation — important keyword

The most critical tool that an entrepreneur has in his arsenal to change the trajectory and valuation of any deal is co-creation, yet it is poorly employed and understood.

After a startup has built a stable product via a well-assembled team, it is useful to invest in the strategic partnership.

In addition to the book linked here is a handy deck I created for startups to help think through the process of activating strategic partners

https://www.slideshare.net/rajan/activating-potential-strategic-partnerships

Liquidity of Indian startups compared to US & Israel

[original post 3 Apr 2017, migrated from Ubedge.com]

Recently was having a conversation with a Private Equity friend and was trying to explain the challenge that has captured my imagination and full attention, ie exits for software product startups in India. He felt that the data about the exit structural deficit that I was trying to point out felt too bearish to be true. My counter argument was that my intent is not to sound bearish but instead be a realist, after all acknowledgement of a problem is first step to solving one. Post that conversation I thought should put this data out publicly so that through crowdsourcing can at the very least improve my understanding if it is off by wide margins.

VC vs Exit for US, Israel & India


VC vs Exit, deep dive on India


VC Software Products in India (in $m)


Exit (i.e M&A) Software Product in India(in $m)


Source iSPIRT M&A Report https://www.slideshare.net/ProductNation/india-technology-product-ma-industry-monitor-an-ispirt-signalhill-report?ref=http://startupbridgeindia.com/

VC vs Exit, deep dive on Israel


VC Software Product in Israel (in $m)


Exit (i.e M&A) Software Product in Israel (in $m)


Source IVC Report, http://www.ivc-online.com/Portals/0/RC/Survey/IVC_Q4-16%20Capital%20Raising_Survey-Final.pdf

Above data indicates that Israel was able to generate 1.8X of the money that went in while in India in the same period only 0.2X. The right comparison is exits from 2012–2016 with VC investments from 2005–2009, iSPIRT report does that comparison but results are even less encouraging.

Exits follow a power law, however in India it seems like a power law’s power law.

Not only is the volume of exit is challenge but also the structure, any ecosystem exits follow a typical power law. For every $1 bn exit, there are ten $100m deal, for every $100m there are hundred $10m deals.

Top 7 deals in India account for ~$2.5b of the $4b in exit. About 250 of 391 deals total a deal volume of $97m which means the size of an acqui hire i.e in long tail is about 0.5m, which is inadequate even for an angel investor. Lack of many $10–100m deal means there is a missing middle of the long tail.


Source iSPIRT M&A Report https://www.slideshare.net/ProductNation/india-technology-product-ma-industry-monitor-an-ispirt-signalhill-report?ref=http://startupbridgeindia.com/

M&A is the story of when fear meets greed on a treasure hunt voyage.

[posted on 28 Mar 2017, migrated from ubedge.com]

“Startups are bought never sold”

Like many others I have used this aphorism in every M&A Connect conversation in last 8 months. It sounds intelligent, pithy making some one saying that look very smart however I was stumped when my 7 year old nephew asked me what does it mean ? I was at loss of words trying to explain it to him. In an attempt to simplify the explanation that can pass his comprehension test this is how I started describing it.

M&A is the story of when fear meets greed on a treasure hunt voyage.

Imagine that you have a small boat (startup) sailing on an unruly sea (uncertain conditions) with the mission of reaching a dream island where you have been told is buried treasures a bounty of immense riches.

To reach there many things would be needed.

You will need a map (aka business plan); have to identify a tail wind that will propel you forward; hire or inspire men to join as your crew ; convince another set of people on the shores (venture capitalist) to finance your voyage. To these folks you will tell a narrative of how your boat with a powerful engine (product), detailed map and unique navigation skills (strategy) will help you find the treasure.

In the same sea you will find big Titanic ships heading to their own treasure island. In this world there also people who are crystal ball gazers (Gartner, Influencers such as Robert Scoble) who make prediction about changing tailwinds & tell folklore about new dream islands.

When the Titanic gets a whiff of this new folklore (ex IOT is the next big thing), they then either create a radar ping in new direction or change the course of their entire ship towards that island.

And then it becomes a race of many towards this new island, boats of all sizes i.e small boats and Titanic are now competing in the race. This race is a dance that oscillates between fear and greed in strengths and weakness of a David and a Goliath.

The Titanic is always cognizant that it has many direction to handle and its huge size allows it only a certain pace. Also doing anything inconsistent of its past will get it rattled by other kind of men on shores (public investors).

Small boats on other hand do not have enough fuel and have to depend on the men on the shore (venture capitalists) to give them money for fuel constantly to take forward their quest.

Sometimes small boats realize that they can’t become big Titanic themselves, typically happens after 4 years.

At which stage they tell the Titanic that getting new engine from this small boat will help the Titanic reach the new island faster and set stage for joining forces.

Things to note though

Only when Titanic shifts in direction startup is after that the Titanic would be interested in a conversation.

If the small boat is not in geographical proximity of the Titanic and yet trying to get to the same island but from opposite corner of the world, the startup will not be in the radar. This problem particularly plagues Indian startups.

https://www.slideshare.net/rajan/startups-are-bought-never-sold

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