Even When Desperate, Don't Settle for a Bad Deal
Another lesson they don't teach you in business school
Welcome to the latest entry in The Captain’s Log. You’re in good company with thousands of fellow entrepreneurs and innovators who have subscribed!
I’m your host, Bob, and my mission here is to share personal, behind-the-scenes stories of ups and downs from my career leading tech startups and corporate innovation.
I write to make you think, smile, and discover a shortcut to success or a trap to avoid.
Here we go…
As I write, things are more challenging than usual in the startup world. Last week, I suggested that founders near the end of their bank accounts be more open about networking their way into a potential acquisition. But that doesn’t mean you have to settle for an awful outcome.
As bad as things look and desperate as you may be, working with weak partners is never a good idea. It usually doesn’t take much effort to see what people are like. You have to get out of your head and pay close attention to what they say and do. Your gut instinct will point the way.
It’s a startup rite of passage to deal with a crappy acquisition offer and/or sketchy negotiator. These are mostly a waste of time, but they can teach lessons. No one ever talks about this stuff in public, but you deserve a story, dear reader. Here goes…
Desperate Times = Creative Thinking
It’s February 2016. I’m the co-founder/CEO of a social media startup, and things are looking pretty grim at the company we started a little over three years ago.
Over the past few months, my co-founder left the company, our bet to focus on Pinterest was turning out to be a bust, we were running out of money, and our investors signaled it was the end of the line for their support. Technically, I was still the “Acting CEO” as my Board held out the possibility of bringing in someone else to save the ship.
Thankfully, I had a team who could keep selling and serving our remaining clients. And I had a COO, Ryan, who gave me a shoulder to cry on and an outlet for my crazy ideas. And the ideas had to be crazy if we were going to get out of the mess we were in.
I contacted every potential investor I could find who might bridge us into a pivot. I went through my LinkedIn connections for any person who might be slightly interested in partnering with or buying our business. I took headhunter calls, hoping that during my interview for a job, I could use the time to pitch them to buy our company. It led to some “interesting” reactions…I wrangled my way into industry events—including not one but two same-day up-and-back dinners from Cincinnati to San Francisco. Saving money on a hotel gave us a few days of runway, and you can patch together snacks into a dinner at the Sky Club.
On one flight home from New York City, where I’ve been pitching a vendor to buy us, I run into an old contact, Rick. We don’t know each other that well, but the Cincinnati startup world is small, and we start a conversation while waiting to board. He is a fellow alum from the big company I worked at years ago and is now working with a VC firm in town. Rick shares that he is returning from another week working as acting CEO for one of the VC’s portfolio companies—a company that handles paid social media buying for big brands.
We’ve got a lot in common, including struggling businesses. I’m pretty direct at this point—there’s no time for dancing the dance. I tell Rick that we’ve got a killer team and product, but our 100% bet on Pinterest isn’t paying off. The platform is moving too slowly, and their team is not helping its official partners like us. We have some product features that could be game-changers on other social platforms, but not enough time or money to build several new integrations.
Rick takes my openness as an invitation to cut to the chase as well. He and his VC partners have invested a lot in this social business, but the company continues to be unprofitable and is also running out of runway. He confirms my belief that consolidation is needed in the paid social market, yet his company isn’t juicy enough to be a takeover target. Finally, Rick concedes that he has been technically retired for several years and doesn’t love this weekly commute away from home.
Suddenly, a thought strikes, and I share it aloud: What if we put our companies together and looked at rolling up other competitors?
Rick’s initial micro-expression is a smile. But it’s time to board our flight. We shake hands and agree to continue the conversation next week. I jump on the flight and review recommendations on employees we’ll have to lay off if we can’t get the client renewals we need this month.
“We want you to be the CEO.”
After another round of discussions with Rick, he says his boss, John, the founder and head of his fund, wanted to have breakfast with me at the Queen City Club. It’s a fancy, members-only place downtown with wood on all the walls, and the dress code is strictly suit & tie. I dust off my suit jacket and hop in my Honda Accord for the big meeting.
I check in at the front desk and am immediately whisked into the executive dining room where John holds court. Among the suited patrons, I see several bankers’ pins on lapels, our mayor at the table nearby, and not a person under 40—except for the staff. It's not my cup of tea, but, you know, whatever it takes…
John introduces me to his CFO, whom he brought along, and gets down to business:
“I’ve talked to some people we know in common, and they say you’re great. We want to acquire your company and for you to be the CEO of the combined business.”
I had heard John was a bit of a character, but this came before my coffee was poured. Based on my previous discussions with Rick, I knew something like this might come up, but not so quickly and bluntly. As he went through more details, a part of my brain thought, “OK, so this is how an acquisition starts.” Then I thought, “This is fast—he barely knows me…”
But I brush my second-guessing aside for now and we continue to get down to business. John speaks non-stop for most of our 90 minutes together. He lays out a plan for our investor groups to raise more money to power the combined company. Then he pulls out an org chart showing me his ideas on who would report to me—including Mitchell, an experienced head of sales that they just hired and are loving. I mostly nod with interest and excitement to give myself time to absorb and discuss later with Ryan and my Board.
At this point, I’m ready to hop back in the Honda and get back to the office, but John wants to move quickly. He asks if he and his CFO can return to our office to continue the conversation with Ryan and I. Again, my attitude is to stay open, and I agree on the urgency, so we head over.
It’s a small, open office, and many employee heads turn when I walk in wearing a suit, escorting a gregarious 70-year-old stranger. We take over the big conference room for another hour-plus until it’s time for me to lead my weekly “Ask Me Anything” fireside chat lunch with the team. I figured it would be good for John to see our group and me in action leading them, so I invite him to sit in. I introduce John as one of the city’s leading investors—and it doesn’t take long for him to steal the show. He pulls up a chair and starts telling stories. I wistfully think I’ll tell the story of this moment when looking back on how our successful acquisition started…
Warning Signs Flash
The next few days are a flash as we spend hours digging deeper into each others’ businesses. Ryan and I start to get excited about how we could drive efficiency in the combined companies. We both had run very profitable services businesses in the past (for me, an agency that did a ton of social media). We see several obvious ways to improve their business immediately. For starters, we wouldn’t need an expensive office in Manhattan where clients never visited—and we could see their employees were eager for a cultural boost that we could offer.
On the other hand, I recognize this will be a big turnaround challenge. I’ll be the guy spending most of my time in the Big Apple, away from my family. My wife, Stephanie, is a great sounding board as always and is supportive as long as I believe this is the right path.
In between meetings, I take some time to chat with the people I trust most to give strong advice and keep things ultra-confidential. A fellow exec at my last company says I should go for it. A board member warns that two struggling companies joining can be like two drowning people hanging onto each other.
Four days after that big breakfast meeting, it’s Sunday, and we’re in John’s office downtown. The main goal is to see the acquisition term sheet they have in mind. They have already warned us that it will be an all-stock deal, with our side contributing the remaining cash in our coffers and a pledge of additional funds from our current investors. This is far from an ideal exit, but both sides need a solution.
They outline the terms with little explanation: Our company gets 10% of the combined stock, and they get 90%. My macro-expression was a big frown. If judging by revenue, we should be at 25%, and if you count how our SaaS business was valued versus their service business, we’d deserve damn close to a 50-50 split, not to mention that our leadership team would be running the business. I ask a few probing questions about how they got to the number, but they uncharacteristically keep their mouths shut.
Oh, about that….They say they love the new sales leader, Mitchell, so much that they want him to be the CEO of the combined company. They’d like me to be the Chief Strategy Officer instead. Wha???
Ryan and I leave the meeting, saying we’ll consider it. But I make it clear that 10% won’t cut it.
Maybe They Don’t Know What They’re Doing
The following day, I wake up and have a thought in the shower—that’s when and where the best thoughts hit you after your unconscious has had a chance to marinate overnight.
My thought is: I don’t think these guys know what they’re doing. (No one does)
They don’t seem to understand the difference in valuation between SaaS and service companies. And they couldn’t come up with any rationale on how they valued our businesses—which I’d need to put in front of my board as bullet point number one in making the case.
I also start some reverse due diligence on the VC firm. I think back to the meetings and remember that they didn’t understand many of the operational elements of their business. Fund-wise, I discover that most of the companies they have invested in have gone belly up, none have had a decent exit, and their funds have frequently failed to return their initial investments.
And I can’t stop thinking about suddenly making this new guy the CEO. That’s a rookie move to offer me the captain’s chair and then turn around and give it to someone else. So I also do some research on this superstar, Mitchell. It just so happens that one of my sales directors used to work for him at a previous company. I find a subtle way to ask if he knows him well. He tells me that Mitchell was an awful leader who was eventually fired after falling asleep at his desk. It was the culmination of much ineptitude.
Maybe there was a method to their madness. They could have been taking a flyer and trying to pick us for scraps. Our extreme transparency and high excitement could have easily been interpreted as desperation. It’s an old-school power play—you know, like wearing suits at the fancy club downtown…
And as I paused to pick my head up after a whirlwind few days, I started to see prospects picking up within our business. My investors showed us some love and began discussing a small fund raise to keep us going. A few other, better partners replied to my outreach and set up a time to talk, and the influencer marketing product we started selling a few months ago closed several new deals.
John and Rick followed up a few days later with a slightly sweeter offer but no further rationale. Ryan and I listened, thanked them, and haven’t spoken with them since.
I couldn’t help but keep track of their progress now and then over the years. They ended up forcing a different merger among their portfolio companies. That combined company was shut down eventually. The VC was unable to raise another fund. It still has a landing page, but that’s about it.
Our team survived, advanced, pivoted, got profitable, and had a successful exit. Instead of getting $4 million in stock and a CEO who slept through meetings, we bet on ourselves and sold for $50 million in cash.
While that potential acquisition failed, it served a purpose. It helped us shake our investors up at a critical time. They got to see that someone wanted us, even at a low price, and I think it tipped the scales toward a final fundraise that bought us time to finish our pivot from Pinterest to Influencer Marketing.
This experience also made me a better leader. I got to practice the dance of high-stakes negotiation. I build a stronger relationship with Ryan through the process and pressure. I gained confidence in my ability to lead through challenges. And I learned that my gut instinct is pretty strong.
In the game of startups, staying alive for another day is a win. And a lot can happen in a day.
How we might work together…
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