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Don't Talk to Corp Dev
January 2015
Corporate Development, aka corp dev, is the group within
companies that buys other companies. If you're talking to
someone from corp dev, that's why, whether you realize it yet
or not.
It's usually a mistake to talk to corp dev unless (a) you want
to sell your company right now and (b) you're sufficiently
likely to get an offer at an acceptable price. In practice
that means startups should only talk to corp dev when they're
either doing really well or really badly. If you're doing
really badly, meaning the company is about to die, you may as
well talk to them, because you have nothing to lose. And if
you're doing really well, you can safely talk to them, because
you both know the price will have to be high, and if they show
the slightest sign of wasting your time, you'll be confident
enough to tell them to get lost.
The danger is to companies in the middle. Particularly to
young companies that are growing fast, but haven't been doing
it for long enough to have grown big yet. It's usually a
mistake for a promising company less than a year old even to
talk to corp dev.
But it's a mistake founders constantly make. When someone from
corp dev wants to meet, the founders tell themselves they
should at least find out what they want. Besides, they don't
want to offend Big Company by refusing to meet.
Well, I'll tell you what they want. They want to talk about
buying you. That's what the title "corp dev" means. So before
agreeing to meet with someone from corp dev, ask yourselves,
"Do we want to sell the company right now?" And if the answer
is no, tell them "Sorry, but we're focusing on growing the
company." They won't be offended. And certainly the founders
of Big Company won't be offended. If anything they'll think
more highly of you. You'll remind them of themselves. They
didn't sell either; that's why they're in a position now to
buy other companies. [1]
Most founders who get contacted by corp dev already know what
it means. And yet even when they know what corp dev does and
know they don't want to sell, they take the meeting. Why do
they do it? The same mix of denial and wishful thinking that
underlies most mistakes founders make. It's flattering to talk
to someone who wants to buy you. And who knows, maybe their
offer will be surprisingly high. You should at least see what
it is, right?
No. If they were going to send you an offer immediately by
email, sure, you might as well open it. But that is not how
conversations with corp dev work. If you get an offer at all,
it will be at the end of a long and unbelievably distracting
process. And if the offer is surprising, it will be
surprisingly low.
Distractions are the thing you can least afford in a startup.
And conversations with corp dev are the worst sort of
distraction, because as well as consuming your attention they
undermine your morale. One of the tricks to surviving a
grueling process is not to stop and think how tired you are.
Instead you get into a sort of flow. [2] Imagine what it would
do to you if at mile 20 of a marathon, someone ran up beside
you and said "You must feel really tired. Would you like to
stop and take a rest?" Conversations with corp dev are like
that but worse, because the suggestion of stopping gets
combined in your mind with the imaginary high price you think
they'll offer.
And then you're really in trouble. If they can, corp dev
people like to turn the tables on you. They like to get you to
the point where you're trying to convince them to buy instead
of them trying to convince you to sell. And surprisingly often
they succeed.
This is a very slippery slope, greased with some of the most
powerful forces that can work on founders' minds, and attended
by an experienced professional whose full time job is to push
you down it.
Their tactics in pushing you down that slope are usually
fairly brutal. Corp dev people's whole job is to buy
companies, and they don't even get to choose which. The only
way their performance is measured is by how cheaply they can
buy you, and the more ambitious ones will stop at nothing to
achieve that. For example, they'll almost always start with a
lowball offer, just to see if you'll take it. Even if you
don't, a low initial offer will demoralize you and make you
easier to manipulate.
And that is the most innocent of their tactics. Just wait till
you've agreed on a price and think you have a done deal, and
then they come back and say their boss has vetoed the deal and
won't do it for more than half the agreed upon price. Happens
all the time. If you think investors can behave badly, it's
nothing compared to what corp dev people can do. Even corp dev
people at companies that are otherwise benevolent.
I remember once complaining to a friend at Google about some
nasty trick their corp dev people had pulled on a YC startup.
"What happened to Don't be Evil?" I asked.
"I don't think corp dev got the memo," he replied.
The tactics you encounter in M&A conversations can be like
nothing you've experienced in the otherwise comparatively
upstanding world of Silicon Valley. It's as if a chunk of
genetic material from the old-fashioned robber baron business
world got incorporated into the startup world. [3]
The simplest way to protect yourself is to use the trick that
John D. Rockefeller, whose grandfather was an alcoholic, used
to protect himself from becoming one. He once told a Sunday
school class
Boys, do you know why I never became a drunkard? Because I
never took the first drink.
Do you want to sell your company right now? Not eventually,
right now. If not, just don't take the first meeting. They
won't be offended. And you in turn will be guaranteed to be
spared one of the worst experiences that can happen to a
startup.
If you do want to sell, there's another set of techniques for
doing that. But the biggest mistake founders make in dealing
with corp dev is not doing a bad job of talking to them when
they're ready to, but talking to them before they are. So if
you remember only the title of this essay, you already know
most of what you need to know about M&A in the first year.
Notes
[1] I'm not saying you should never sell. I'm saying you
should be clear in your own mind about whether you want to
sell or not, and not be led by manipulation or wishful
thinking into trying to sell earlier than you otherwise would
have.
[2] In a startup, as in most competitive sports, the task at
hand almost does this for you; you're too busy to feel tired.
But when you lose that protection, e.g. at the final whistle,
the fatigue hits you like a wave. To talk to corp dev is to
let yourself feel it mid-game.
[3] To be fair, the apparent misdeeds of corp dev people are
magnified by the fact that they function as the face of a
large organization that often doesn't know its own mind.
Acquirers can be surprisingly indecisive about acquisitions,
and their flakiness is indistinguishable from dishonesty by
the time it filters down to you.
Thanks to Marc Andreessen, Jessica Livingston, Geoff Ralston,
and Qasar Younis for reading drafts of this.
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