Building for the buyer

Should startup CEOs build their companies with specific acquirers in mind? Several VCs say yes.

“We’re just focused on building a great company.” That’s a typical CEO response when a reporter asks about exit possibilities. But VCs, who are looking to pull out of a company within ten years, want something a little more concrete.

Speaking on a panel at the AlwaysOn Venture Summit Tuesday, Prism’s Woody Benson encouraged CEOs to position themselves early for an acquisition. “The greatest thing an enterprise CEO can do is to map out who you think will buy you in 18 months and figure out how you can intersect with them. You have to be wanted. Do biz dev deals with them, go to their conferences—socialize that.” He said. “You have to create a synapse, and synapses don’t just happen.”

Azure’s Mike Kwatinetz agreed. His portfolio company Vapps, which sold for $30 million in November 2008, involved its eventual buyer Citrix in due diligence well before acquisition talks ever surfaced.

At the same time, the speakers agreed that companies need to have several options in order to maximize the valuation. IVP’s Steve Harrick, who was involved in acquisitions of MySQL, Arcsight, comScore, Danger, Business.com and Quigo, said alternatives are key. “I’m hoping for companies to be able to choose between IPO and acquisitions, and then multiples will increase.” Kwatinetz, who helped sell Bill Me Later for $1 billion in one of the worst exit environments in VC history, holds “CEO days” for all Azure's portfolio companies, to which they invite business development officers from 30 or so strategic potential acquirers. “If there’s one seller and multiple buyers that’s a better situation than the reverse,” he said.

But that may reflect a later-stage outlook. Bay Partners’ Neal Dempsey, who targets younger companies and has seen a swath of exits in the last four years, including Celequest, Nuera Communications, IPWireless, WhereNet, Silverstorm, and Exeros, sounded a bit more like the typical CEO: “We invest early, so I take a different approach: you need to create a successful business. We don’t want our CEOs to think about who’s going to buy them.”