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Successful Acquisitions:
To Buy … and to be Bought
Tips, Tricks, and Techniques
Randy Smerik
Founder/CEO, Osunatech, Inc.
randy@smerik.com @randysmerik
January 26, 2017
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90+% of
Successful Companies
need to be acquired.

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Context: 4 Business Outcomes
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Failure
Company shuts down or asset sale where there is a
loss for all involved
Lifestyle
Business reaches critical mass and profitability and
provides an income for its exec team and employees
M&A
Business is bought and incorporated into a larger
entity at some profit to investors
IPO Initial Public Offering
Our focus
is here

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Context: IPO versus M&A Venture Exits
VC backed liquidity events
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Since 2000,
median is 90% of
exits are M&A

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IPO versus M&A Exits – Current
VC backed liquidity events
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November 2016 - CBinsights
3%
1H2016
IPOs: 27
M&A: 1564
98.3% = M&A

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Context: M&A Transactions - Deal Size
Private Targets - Internet, Communications & IT
Infrastructure Software & Services M&A – Q1’2011
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source: SagePoint Advisors
Median M&A
transaction is
$10M

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M&A Transaction - Deal Size
Private Targets - 2013 to 1Q2016
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$16.8M $33.2M $24.8M
Median M&A
transaction is
$23.7M
March 2016

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Let’s see what Google Says
• I care about Google because recently Google has been
the most active M&A buyer
– Next on the list would be Microsoft, Amazon, and Apple
for 2015
• Charles Rim (former top Google M&A guy) stated:
– “90% plus of our transactions are small transactions. Less
than 20 people, less than $20M and that is truly the sweet
spot”
– “We do prefer companies that are pre-revenue”
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There are things
that can destroy an
M&A path.

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Destruction Trap #1:
Raising “Serious” Money
Let’s Look at VC Fund Raising …

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Impacts of Raising Money
$$$
Desire for Control/Information
Friends/Family &
Bootstrap
Angels
Seed &
Incubator
Convertible
Debt
Super
Angels
Traditional
VC’s
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Social Graph
and Viral
Note: there is lots of overlap between
these categories in the real world
You are Here

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Issue: VC’s need 10x Returns
• Why?
– Limited Partners in a VC fund expect ~20% return per year
– Typically, returns come from 20% of the investments, i.e.
out of 10 companies funded 2 will provide returns
– Due to the length of time the money is typically tied up in
companies and how long the funds are for, the capital only
gets to be invested once
– When you do the math, the average return of those two
winning companies needs to be around 20x
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Yikes. This is a Problem.
• Simple scenario:
– A VC invests $2M on an $8M pre-money valuation
company
– This gives the VC 20% of the $10M post-money company
– To get 10x (forget about 30x) the VC will need a $20M
return
– At 20% ownership, that means that the company must sell
for $100M
– But … the average M&A deal is more like $20M!
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VC’s
Entrepreneur10 Entrepreneur1 Entrepreneur2
Entrepreneur3
Entrepreneur4
Entrepreneur9
Entrepreneur8
Entrepreneur7 Entrepreneur6 Entrepreneur5
$$ $$
$$$$
VC Perspective
Different Perspectives, but:
VC’s will Protect their Model
• VC’s may fight to keep a company going longer even if the entire
management team and angels feel it’s better to sell
• Techniques: create separate voting classes (preferred) where each class
must approve exits; “protective provisions” with veto rights; control of
the Board; and more
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20X
10X
Entrepreneur
Vision
Hopes/Dreams
Angels VC’s
$$
Entrepreneur/Company Perspective

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Pre $2,000,000
Investment $500,000
CEO 40%
Staff 40%
Angels 20%
VC 0%
Post $2,500,000
Angel Round
Angel Round of $500K at $2.5M post
Let’s See What Could Happen in a
Real-world Scenario
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VC Round
$10,000,000
$3,000,000
31%
31%
15%
23%
$13,000,000
VC adds $3M
at $10M pre
M&A Offer
$40,000,000
$12,307,692
$12,307,692
$6,153,846
$9,230,769
M&A offer at $40M
x Return
12.3
3.1
Multiples
• Great exit for CEO/Founders/Staff - $24 million for them
• Angels see a 12x return
• VC sees a (mere) 3x return and will likely veto the transaction
This example assumes all shares are Common; if 1X PP, then the VC return is 3.8x

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Destruction Trap #2: “Nothing to Lose”
• Pay special attention to a co-Founder who is someone
who has “made it big” at a previous company/deal
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• A high-likelihood danger is that they don’t share
the same view of a successful outcome

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Destruction Trap #3:
Exclusive & “Strategic” Partners
• To move quickly on an idea within a company, it is it is all too
common to agree to exclusive terms with major players
• It is also common to form strategic partnerships with other
companies for sales, manufacturing, and more
• This can have a big negative impact on a company if they are
not managed carefully
• Ensure there is a full management review and transparency
of all Exclusive Agreements
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Destruction Trap #4: IP Licensing
• Owning core IP can be essential for both funding
and M&A
• It is easy for 3rd party IP to “creep” into critical
portions of the code to speed time-to-market
• Know that once it’s there, it’s very challenging to
remove
• Ensure there is a full management review and
transparency of all 3rd party IP
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Destruction Trap #5: Sales
• It’s common to apply pressure to race to sales and drive revenue as
quickly as possible
– Brings (much needed) cash in, can prove/show real customer
engagement, and more
• But if done too early, it can create a focus on short term and
specific customer requirements and not the core product/business
• Engage in sales when you have the right support in place and the
revenue is “significant”
• Sales are the easiest thing to track … and that can be a blessing
………… or a curse
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It’s not Sexy, but
“Be the Gauge - Know the Gauge”.

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Perspective
• It is very easy for entrepreneurs to lose
perspective on where their business is going
• There is so much data and analytics … it is easy
to get lost on the “forest”
• And, people forget that there are typically no
clear black & white win/lose scenarios
• You can play a hugely valuable role as “guide post”
and “time capsule”
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“Macro Reflective Mentoring”
• Frequency: every 1 to 3 months
• The Right Data: identify the top areas for the
business at any point in time
• Micro Data: avoid the temptation to take an
active role in analyzing and tracking low level
metrics
• Reflective: let the team set the goals and time
lines … not you
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28.
Buy and Read this Book!
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Buy on:
Amazon.com
http://leananalyticsbook.com
@leananalytics

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Do These 3 Things
• Know … and manage the importance of a high quality
M&A exit and exit planning
• Know … and manage the forces that can destroy the
M&A potential
• Know … and help your company understand and be
realistic about objectives
• All 3 of these points … are actually very easy to do.
They are.
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Good Luck!
Bon Chance!
Thank You!
Merci Beaucoup!

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Successful Acquisitions:
To Buy … and to be Bought
Tips, Tricks, and Techniques
Randy Smerik
Founder/CEO, Osunatech, Inc.
randy@smerik.com @randysmerik
January 26, 2017
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Randy Smerik