How to Create a Positive Sell Side M&A Experience

Reasons for the first exit

When it comes to acquisitions, our acquisitions improved with each startup. Entrepreneurs also improve with every startup they execute. Mistakes made as a first-time entrepreneur are often not repeated in subsequent ventures.

It becomes progressively easier to build better teams, scale, and grow. This improvement is evident in our acquisitions. With our first startup, we weren't looking to sell until we began discussions for our series C round with strategic partners. 

That's when acquisition talks began. The interest was high, largely because 50% of our user base was from India. Dhingana, akin to the Spotify for Indian music then, had 10 million unique listeners from 100 countries, primarily focused on Bollywood music.

Many wanted to integrate Bollywood music and its vast user base into their Western music streaming services or enter the Indian market by acquiring Dhingana. We received offers both from within India and internationally. 

Ultimately, we chose Rdio, founded by Skype co-founders. We admired the product and felt a strong alignment with Rdio's executive team in terms of vision and personality.

Joining Rdio was a valuable experience. We launched a version of Dhingana in 35 countries, marking one of the highlights of our career.

The offer was excellent, but choosing between them was challenging. Faced with multiple offers, the decision becomes complex. Do you partner with someone who understands the Indian market and its intricacies, ensuring potential 10x growth? Or do you align with an outsider looking to enter the Indian market, where scaling remains our responsibility? 

The dilemma was choosing the right partner for the future. Our company had strong Silicon Valley influences, and we were inclined to nurture that aspect rather than becoming a solely India-based entity. That was our motivation.

Venture exit

Mezi was an AI-powered travel assistant designed for business travelers, available 24/7. Users could plan and book their entire trip through a messaging interface. With a simple message like, 'I'm going to New York, please handle my hotel and flight bookings,' Mezi would manage all reservations, learning user preferences with each interaction. 

If changes were needed, a quick message would suffice, simplifying travel for frequent travelers. After two years of developing this platform, we licensed it to American Express and other companies. The integration with American Express was so successful that it became their highest-rated NPS product launched within six months. 

Recognizing Mezi's potential for their Platinum concierge, discussions began, leading to an acquisition offer just two years after Mezi's inception. The offer was exceptionally good. We had to decide: do we sell at this attractive price, potentially higher than our valuation in the next five years, or continue building the company towards our vision? 

We evaluated our potential growth in two years versus the acceleration Amex could offer with their existing distribution. Partnering with Amex would allow us to scale the product 5X faster due to their vast user base of travel-savvy card members. 

Amex's focus on travel benefits made Mezi a perfect fit. After our acquisition, we went from serving a million travelers to reaching 10 million card members in just 12 to 16 months. The growth continued exponentially. 

Now, Mezi is integral to the Amex ecosystem, managing the travel concierge segment. In the Amex app, the messaging feature prominently showcases Mezi. The acquisition was truly remarkable.

Build to sell

Early on, founders should focus on solving a problem uniquely rather than selling or aiming for an IPO. As the company evolves, it may become evident that it's appealing to larger players who prefer acquisition over internal development due to differing corporate DNAs. 

Alternatively, founders might realize their company's unique offering could lead to dominating a market segment and going public. This usually becomes clear a few years in, influenced by external interactions and feedback, especially during venture capital meetings where VCs seek potential multi-billion dollar companies, not just acquisition targets.

Unfortunately, this means some innovative ideas, better suited as features rather than standalone products, might not secure funding. However, when starting a company, it's best not to be preoccupied with these end goals.

Reacting vs Proactive Exits 

It's essential to nurture relationships that can influence or benefit your endeavors, as you can't predict which connection might prove pivotal. In our experience, acquisition discussions have always arisen organically. 

As a founder, you're in a stronger position when someone approaches to buy, rather than actively selling.  This was our experience with both startups.

Our relationship with Mezi was unique. We had collaborated with them for over six months, and I had dined with AmEx's CEO at the time, Ken Chenault. The interest in Mezi came from the top echelons, including presidents and SVPs, signaling the acquisition's importance. 

Knowing this gave us confidence in the acquisition's future success. We were familiar with the quality of talent and executives at Mezzi and saw a strong alignment in our problem-solving approaches, ensuring seamless collaboration post-acquisition.

By the time we joined Amex, we had already built relationships with key stakeholders during our pilot project. The acquisition discussions focused on our shared vision for growth. Having this prior rapport is more advantageous and comfortable than initiating talks from scratch. Maintaining these relationships throughout your journey is crucial.

When choosing the right buyer, as a founder, it's not just about the financial gain. Consider employee retention and the product's potential trajectory in the coming years. It's also about the legacy you leave. Aligning with a respected and trusted global brand like American Express allows you to become part of their storied history, which is truly exciting.

Using bankers during exits

For Mezi, we skipped bankers, but for Dhingana, we used them. Bankers are helpful when you have an offer and want to engage with multiple parties. If you lack certain connections, bankers can open doors and manage relationships until they become serious, streamlining the process. 

With Mezi, we were transparent with Amex. We believed in our combined potential and communicated our price point clearly. We emphasized that they were the ones buying, and we weren't actively selling. Instead of using a banker to inflate the price, we proposed a mutually beneficial figure. 

A simple way to determine a price is by considering the company's valuation during the last funding round. Our acquisition was an all-cash deal between 120 to 150 million, which was transformative for many at Mezi. Beyond the financial aspect, the value Mezi would bring to Amex and its integration ensured its longevity, potentially for decades.

There are two approaches to working with bankers: partnering with major firms or collaborating with scrappy bankers. For smaller companies, I recommend scrappy bankers. They're hands-on, often communicating daily, and can open doors. 

We received at least two acquisition offers through them. Depending on your bandwidth, they can also handle discussions, reducing your involvement. The choice ultimately depends on your needs.

Hardest part of selling a business

The hardest part is selling the business itself. When you've nurtured a company from its inception, handing it over feels like parting with a grown child. We always ensured our lock-in periods post-acquisition were no longer than two years, anticipating our eventual move to other ventures. 

Both parties were aware of this, and transparency was key. The challenge lies in entrusting your creation to another entity, uncertain of its fate after your departure. Pre-existing relationships with the acquiring company can be invaluable in this transition.

I recall when the president of Amex visited our Mezi’s office in Sunnyvale. Contrasting this with my experience at the Amex office in New York, which felt like entering the White House, highlighted our different corporate cultures. Despite these differences, the president assured me of their commitment to preserving Mezi's identity. 

They even agreed to retain our email addresses and brand. Such gestures are significant. If an acquisition erases everything you've built, it's painful. However, with mutual respect and understanding, it can be a rewarding experience.

Managing diligence

In both scenarios, managing internal acquisition discussions is a challenge. Initially, it's best to limit the information to a select group who can assist with the process. Once the talks become serious and there's a mutual understanding, that's the time to inform the broader audience.

Sharing prematurely might disrupt internal operations. It's crucial to maintain momentum and continue succeeding during the acquisition process. Thus, having a dedicated, small team focused on the acquisition is essential.

Even if you have bankers the majority of the lift is on your side. Especially when you're dealing with companies like American Express, just the legal team from their side is around 50 legal folks. So it's a whole different ball game and bankers can't do anything to help you there.

It is also best that the buyer understands the process needs to be as painless and as fast as possible. Demand a definite timeline on the due diligence process, so the buyer will only focus on the must-have items.

And once there is not understanding that we want to move fast people will start to take things seriously. Do you move fast on the checklist and they don't need to be super big, they only need to include the must-have items.

And you don't need to negotiate this because when the interest is top-down, a lot of things can be simplified. If the CEOs and the president want this deal to work and finish it as soon as possible, they will have a mandate. 

Lessons learned on diligence

A vital lesson, relevant for acquisitions and VC funding, is diligent record-keeping. I manage a data bank as the company grows, keeping all records in a dedicated Google Drive folder for due diligence. This includes contracts with partners and employee offer letters.

By organizing documents in this manner, the due diligence process becomes more straightforward. While you might find that some data is missing, having the majority organized saves significant time and reduces stress.

Also, it's essential to have a trusted legal team that can negotiate on your behalf, especially regarding intricate legal terms. A legal counsel who understands the founders' personalities and can anticipate their decisions is invaluable. 

We've been fortunate to work with the same legal counsel, David from OMM, across all three startups. His familiarity with our preferences, knowing which clauses to accept or challenge, has been instrumental. A strong rapport with your legal team accelerates the process.

And lastly, it's crucial to continually invest in and build relationships with external companies, partners, and individuals. Networking is key. Opportunities arise from conferences, VIP dinners, intimate events, and panel discussions. Being active in these circles allows for more relationship-building. 

Sometimes, connections form during fundraising rounds when a party shows interest in your venture. For instance, our relationship with Amex began when Amex Ventures invested in one of our rounds. In contrast, Amex competitors partnered with us without investing. Deep, incentivized relationships often lead to swifter outcomes.

Keeping and building relationships

Building relationships outside the confines of a conference room is essential. Dinners, drinks, and coffees often lead to more meaningful connections than formal office meetings. Personal bonds foster genuine relationships. 

I invest personal time with key individuals at Zeni, spending evenings together during conferences and hanging out as friends. This approach to relationship-building also applies to external partners. I advise founders and those I invest in to choose a VC with whom they can share personal moments. 

Such relationships enhance board-level chemistry. Without this personal connection, interactions can feel impersonal and transactional. In challenging times, a personal bond can mean the difference between blame and support. Adding a personal touch is crucial.

Role of sellers in integration planning

In the case of American Express, there were numerous stakeholders. We were acquired by American Express's digital labs, but our technology had to integrate with the Amex app on both iOS and Android, involving the mobile team. 

Additionally, our platform needed to merge with the MX platform, requiring collaboration with another distinct team. We also had the challenge of integrating our travel concierge with their existing concierge service.

Furthermore, geographical considerations were key. Our U.S. and India teams had to integrate, operating across various countries. As a founder leading this, top-level support from the acquiring company is crucial. They should facilitate introductions to help build relationships with all  key stakeholders.

Both sides must be actively involved in the integration planning. With a dedicated team from the acquiring company and core executives from the acquired company, it's essential to set clear goals. Regularly measure progress, understand the necessary steps, and ensure all parties are aligned to achieve a successful outcome.

You always need one or two high-level champions who can act when issues arise, such as when a process has been stalled for an extended period. There's typically someone whose reputation is at stake with the acquisition. When someone is held accountable, they often produce remarkable results.

Program management is essential for overseeing all integrations. At American Express, Phil Norman, the VP at Digital Labs, played a key role in our case. He effectively addressed any roadblocks and used his internal relationships to ensure smooth progress. This approach is vital for successful integrations.

Reasons why integration fails

Firstly, if there's no pre-existing relationship, you must prioritize building one before starting the integration. Without a solid relationship, both parties operate with separate agendas. Their success isn't linked to yours, and vice versa. 

They'll focus on their roadmap, leaving you to navigate challenges alone. However, by fostering relationships and emphasizing that everyone is part of one team aiming for a successful integration, energies are directed appropriately, ensuring everyone moves in the right direction.

Alignment is arguably the number one thing you should get right and it starts pre LOI. If you're genuinely concerned about your product's trajectory post-acquisition, you must address critical questions. 

• What will the first three to six months look like? 
• Where do we envision ourselves in one or two years? 
• What are our objectives and key milestones? 

Initiate conversations with stakeholders and inspire them if they're not enthusiastic. We spent significant time engaging business leaders about Zeni, including presenting at their all-hands meeting with tens of thousands of employees. This effort to generate internal excitement happened after the LOI was signed.

Worst exit experience

Yes, in our first startup with Dhingana and RDO, Snehal and I made a significant oversight. We had two distinct products: Dhingana for Indian music streaming and RDO for Western music. The plan was to merge and introduce a single product, RDO, to the Indian market. 

The CEO presented a choice: either integrate our product with theirs using our engineering team or continue running both products, incurring dual costs. We decided to shut down Dhingana and focus on RDO. However, abruptly discontinuing Dhingana angered many customers. 

In hindsight, a gradual transition would have been wiser. This abrupt decision negatively impacted 10 million users worldwide, and it's a decision we deeply regret.

Making integration successful

To ensure a successful acquisition, you must commit to its success for the next one to two years. Otherwise, your creation may lose its impact. To leave a lasting legacy, deeply integrate into their ecosystem, ensuring they derive value from your product, which ensures its longevity.

The primary motivation should be to uphold that legacy. While a solid two-year retention plan for employees is crucial, founders' continued presence is vital. If founders leave shortly after acquisition, the deal is unlikely to succeed. Success comes from the team and founders working in unison.

Do’s and don'ts of buying a company

To persuade a company to acquire you, consider the following:

1. Paint a compelling future for them, one that's more impactful than what they envision for themselves in a shorter time frame. This gives you leverage in shaping their vision.
2. Ensure the deal feels advantageous for both sides. A successful deal is when both parties feel they've won.
3. Instead of just acquiring the product or people, buy the entire company. Maintain the startup's unity and culture. This chemistry is a startup's secret weapon, and if preserved, they'll continue to excel within the larger organization.

Identifying cultural fit

The culture fit is something you should understand before closing a deal. It's risky not to. It's essential to spend quality time together.

You can't decide to commit and then determine compatibility afterward. It's crucial to determine if you're compatible, if your thought processes align, if your styles match, and if your visions are the same. If this hasn't been established, take the time to do so, preferably outside the office, like over dinner.

It was during a dinner that Amex expressed their interest in acquiring us at one of our favorite Thai restaurants in Mountain View. That restaurant became significant even post-acquisition, with Amex team members often suggesting it as a meetup spot.

The memories and approach towards a team are vital. It's essential to build that chemistry and relationship before an acquisition because if it doesn't happen before, it's unlikely to happen afterward.

Additionally, If you have that authentic relationship with them, they will actually tell you what are the good things and what are the bad things in the company. And then your goal as partners is to maneuver the bad things with their help and then capitalize on the good things so that you can distribute yourself faster.

Right time to sell

The best way to assess when to sell is whether you can drive value today that you anticipate having X years in the future.

By capitalizing on the value and return now, you set yourself up for the coming years. If that value multiplies in those years, it's beneficial. Firstly, you've achieved a value much higher than before, resulting in excellent returns, which is cause for celebration.

If it continues to grow, it reflects the quality of the product and team you've built. Such growth not only boosts your credibility but also positions you favorably if you decide to start another company in the future.

Stories of successful acquisitions circulate in influential circles, enhancing your reputation among investors and team members. Every positive action you take benefits you, often returning in multiples.

If you attempt to act when the momentum isn't there, it won't be effective. You should sell when you’re in an amazing phase in your company, and you have built something that is attractive to a lot of people. Capitalize on that.

When your company is performing exceptionally, it radiates a certain energy. Meeting potential acquirers during this time means your team will be more enthusiastic and confident in their interactions.

Positive energy is contagious. When everyone believes they're excelling, it's evident in their demeanor, driving up perceived value. The excitement from potential acquirers will also grow, potentially increasing offers. This dynamic can be leveraged in negotiations.

Advice for first exit

First, View your exit not as a once-in-a-lifetime opportunity, but as a milestone enhancing your credibility for future endeavors. Selling Dhingana led to Mezi, which rapidly grew in AI. Without selling Mezi, Zeni wouldn't exist, and it's now even more significant. Each startup can have an exponentially growing trajectory.

Recognize the network effects of each acquisition. Size isn't the main factor; even a modest one boosts credibility and opens doors. Repeated successes amplify this, connecting you with influential individuals. These connections can lead to unique opportunities, benefiting your startup, employees, and investors.

For instance, when we launched Zeni, we secured a $13 million series A with no customers, employees, or website, solely based on our reputation from past ventures. Our Series B round of $34 million closed in just 10 days. The journey, team history, and relationships built over time are crucial to these successes.

Ultimately, it's not about the ideas, the venture capital, or the funds raised; it's about execution. Effective execution is rooted in team dynamics and the bonds formed within the team. Emphasizing these relationships is the key to success.

For the advice, create a checklist, set clear milestones, and ensure both you and the acquirer are aligned. Approach the acquisition with the same urgency as a crucial product release. By maintaining this mindset, the acquisition process can be expedited. 

When you consistently prioritize and review progress, even the legal team will match your pace. I recall our legal team working at odd hours, like 4am or 5am. When they see you moving rapidly, they'll also pick up the pace, leading to faster results.

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