We at Blackhawk Partners advise a number of companies in the path to growth.
Some of the most awkward situations we encounter on quite a regular basis is a software or other company about to be bullied by a 800 pound gorilla basically stating: “Sell to us or we will apply all of our resources to replicating your product and crushing you.”
How do one go about fending off such a threat?
In my opinion, the basic question you have to ask is: How credible is the threat?
In general, many early stage companies compete with bigger companies.
At the risk of oversimplifying the competitive dynamic….
• The early stage company’s advantages include: its focus, its product, and/or its team.
• The bigger company’s advantages include: lots of capital / resources / employees, lots of customer relationships, good distribution, pricing power/patience.
So early stage companies often face the threat of a bigger company entering their markets, and they need to have the self-confidence to keep going. Many companies have built great products that have successfully competed with Oracle, Microsoft, Google, and others….And many of such companies have succeeded, even after a big company has made a “sell to us or we’ll crush you” threat.
However….sometimes such threat is credible. This question makes me think of Diapers.com which was acquired by Amazon for ~ $600mm. In that case, the threat of Amazon entering the emerging company’s market and winning seems pretty serious. I mean, how hard is it to imagine Amazon building an awesome diapers e-commerce business? Amazon’s distribution, consumer relationships, and supply-chain capabilities seem perfect for diapers.
In other situations… even if a big company is determined to enter a market (i.e., it will build if it can’t buy), it’s still likely that they will fail because they won’t be able to match the product capabilities of the best startup in the market.
But nothing is certain, and you are taking a number of risks in walking away from the deal…….So you really need to carefully assess your own situation and competitive position.
So what do you do?
First of all, congratulations on your success. If your business is making big players squeamish you’re probably doing something right.
I won’t offer a yes/no answer – you’re the only one who can say for sure. There is going to be a lot of calculated risks moving forward; but here are some things to consider:
1. Don’t Sweat the Language. It’s Not Even True. It’s just Drama. If this big company can crush you, they can crush you. No need to tell you. Not a profound insight then. Just try to determine if they are serious about entering the space if you say No. Will they enter directly? Or buy your #2 competitor? The second scenario probably is one to fret about more if you are post-Initial Scale or even post-Initial Traction. And will they sustain the interest past 6-12 months?
2. Be Aware of the Hidden Agenda. Sometimes the “credible threat” isn’t that the larger company will actually directly replicate what you are doing, but rather buy someone else instead of you. And then the bought company will replicate your business, or close enough that your Greenfield opportunity now looks like already plowed territory. Cisco used to run an M&A game where they found two targets in a field and told Target #1 “it’s you or the other guy, we prefer you, but if not you, then them and them + us = you becoming a footnote.”
3. Bluntly Assess Your Situation . What are your advantages? Can you compete? What do you have that they don’t? What is your strategy to deal with the threat? How will you respond to aggressive competition? How strong is your brand? Will customers be easily usurped for a cheaper alternative? If you can’t clearly define these advantages, you’re probably in trouble.
4. How important is the business to you? If you don’t mind the idea of being bought out, the motivation to persevere through threats like this might not be there. On the other hand if you lie awake at night fuming at the idea, you might have the energy to take this bull by the horns. Competition has a way of strengthening and honing your business. This could be a crucial juncture for your biz if you decide to keep pushing on.
5. Know your Best Alternative to Negotiated Agreement . If it’s a real offer, analyze what happens if you say yes or no. Ignore the drama of the “crush you”. Is passing better than what’s on the table? What if they increased the offer 50%? Or more? Most Big Companies initial offer is only 50-75% of what they’ll ultimately pay. Before you say either Let Me Learn More, or No … know your Best Alternative to Negotiated Agreement and what happens if you let the soft offer lapse. Nothing more or less. Is passing better that selling? Do the probability math as best you can, devoid of emotion.
6. Speak to your competitors . You may wish to speak with the other large players in the space as they may be hungrier to use what you have to compete. Get them bidding on you.
7. Be open to Negotiate an Earn out . You might be able to negotiate an earn out beyond the “respectable” offer, especially if your product can be directly measured post acquisition. For example, you’ll take the deal at 10x the run rate, but “If your product grows by x% over the next 3 years, you’ll also get another 5x, proportional to that growth.” It gives you more skin in the game (you like), more reason to stay (they like), and takes away some of the sense you left too much on the table by selling now.
8. Play It To Your Advantage. The threat may be very real, but just “replicating your product and undercutting your price” is not a guaranteed formula for success. It really depends on your product and industry. But if they come out with a similar product at a lower price point, you could even play this to your advantage. Beef up your product, outperform them in features, and keep your price higher. You don’t always have to be the cheapest; but you need to live up to the reputation. You were the first one there, now everyone else is tagging along, keep that leadership position. They could effectively even be expanding the market for you. But this is just looking at another way the situation could play out.
This isn’t to say, “of course you should sell.” There is much to weigh, including how well equipped you are financially to do battle, how well you are acquiring new talent, how much of a lead you think you have, how badly you want to stay independent, etc.
I leave you with the words of the great American financier Bernard Baruch: “I made my money by selling too soon.”
There is so much else I can say but I’ll leave it at that.
Share your thoughts…
By :Â Ziad K Abdelnour
Ziad is also the author of the best selling book Economic Warfare: Secrets of Wealth Creation in the Age of Welfare Politics (Wiley, 2011),
Mr. Ziad Abdelnour continues to be featured in hundreds of media channels and publications every year and is widely seen as one of the top business leaders by millions around the world.
He was also featured as one of the 500 Most Influential CEOs in the World.
