Corporate Development vs. Exit Validation

If the first time you are speaking with a corp dev exec from a large potential acquirer is at the start of or during a sale process, it’s already too late. Hours of relationship building with the potential acquirers (corp dev AND relevant business unit execs) should already have been invested into prior to any formal sale process. This begs a few questions: 1) should you speak with corp dev teams? 2) when? 3) how much should you share with them? and ultimately 4) what is the difference in corporate development vs. exit validation?

Several of my portfolio co’s have received the unsolicited inbound email from a corporate development exec from a large potential acquirer. They forward it on with a “shall we meet – do you think they’re going to try to acquire us?”. As a first time founder, it is hard to know how to treat this email as it’s hard to gauge what the intention is. Do they want to explore a potential partnership? Do they want to learn about your technology as part of their landscape mapping? Or are they actively looking to acquire someone in your space? It’s understandable to be paranoid, but let me explain how to change this mindset if you operate in an industry where your most likely exit is going to be a trade sale.

A lot of people will give you the advice to steer clear of any large potential corporates that you may be competing with or may one day be in competition with. If you are truly disrupting an incumbent, then your advisors are probably telling you that it is a lose/lose scenario as your startup has nothing to gain. I don’t agree with this sentiment as I believe you need to have strong relationships with the major players in your space. Not so you can pick up the phone 3 months from running out of cash to see if they’d like to acquire you, but for your own landscaping purposes and relationship building. You should try to get to know some of the senior product managers and understand how they view the market that you are both playing in, understand their roadmap and also see where they are having issues (they will usually tell you straight up what they are not building or focusing on internally and in other cases will even tell you what their roadmap looks like for the next 6-12 months). This may or may not inform you on where you should be taking your own product strategically, but more than anything, it allows you to build deep and meaningful relationships with people that will ultimately be giving senior execs and the board the green light to partner with you or acquire your company down the line.

As an example, a major software co reached out to one of my very early stage startups six months after we had invested to learn more about their product and get to know the team. The CEO was incredibly wary of setting up a call but did so as he knew he didn’t need to share any numbers that were not disclosed publicly.  As it turned out, it was a typical landscaping call where the exec wanted to learn about their product, their market focus and get a general sense of how big they were in terms of customers and average deal size. I not only think that you should share all of this information with the corp dev exec but that you should try to meet f2f at least twice a year and have calls in between twice a year to start forging a strong mutual relationship. Your main objective is to create the structure for how the large company should think about your startup over the coming period of time. You want to build credibility with them and also show them you can hit certain milestones so that they take comfort in your ability to innovate and execute on a plan.

So what is the difference between corporate development and exit validation?

Corporate development has many guises, but the main ones are business development and partnerships (mostly top of the funnel as most of the implementation and decision making will be made by senior PM’s or business unit heads) and of course M&A. If you have clear strategic objectives of partnering with large co’s then you should be engaging across many levels of the org – including corp dev, PM’s, senior execs etc.

Exit validation is something completely different. Remember when you were conducting market validation for your idea when you were first starting out? You probably built v1.0 and found some users to test the product to give you direct feedback which in turn enabled you to start building a framework by which to build your product. Exit validation is something similar that allows you to dip your toes in the water with potential acquirers to see if you were to start an M&A process, who the most likely acquirers would be, why your company would be strategic to them, and roughly what kind of price they would be looking to pay.

Going back to the very beginning of this post, if you’re having this kind of conversation as the very first conversation with a corp dev team, it is already too late! As the CEO, you will come off as looking amateurish and desperate. The only way to have this conversation is from a position of strength; one in which you have likely known each other for a period of months or years and they have seen your product/company go from strength to strength; one in which you, as the CEO, know that the large-co has a huge hole to fill and that your company can do that for them; one in which you know the value of your company will be worth a multiple more once combined with the strength of the large-co due to their product line and reach.

Ultimately, the brilliant thing about exit validation is it doesn’t mean you have to start an M&A process then and there. More often than not, you will come away from this exercise with some clear objectives you need to hit before deciding to run a full M&A process (or even better, getting an unsolicited offer and then running a process to get the price up). It may be a revenue number you need to hit, a strategic partnership that you need to close, a new release – it could be anything. The point is, you are in dialogue with the right team at the right time and they have seen you hit plans and understand how you work and can act as an internal champion when the time is right.

  • Right on the money, you are always aiming for the exit from day one. So think strategically about the partners/channels/joint ventures globally that you want to cultivate and build relationships with …after all it is only going to take one in the end … but always good to have an auction/choice.