How to get your Canadian tech start-up acquired

Canadian entrepreneurs looking for a liquidity event can find it tough going. I recently heard about a sure-fire path to getting your Canadian tech start-up acquired. Although it smacks of a get-rich-quick scheme, amazingly enough, it does make some sense.

Here is the though process in seven steps.

1. Recognize that Canada is not where the action is. Take your brilliant idea, and identify the three or four large American technology companies that would be the most likely to acquire it.

2. The window for IT products is usually 3-5 years, so get these companies’ roadmaps. Figure out how your stuff could fit into their stuff in the next 1-2 years.

3. Start developing THAT. Work on it like crazy! The premise of this entire strategy is that when they realize they need what you have, it’s faster and cheaper to acquire your company than to develop it themselves. It usually takes months to put together a top-notch engineering team in Silicon Valley.

4. Do some business development to generate a few sales. American companies don’t really place a lot of weight on Canadian customers, so you only need a few reference customers. Don’t waste all your resources developing sales — you just need to be able to demonstrate that someone thought your product was a good enough idea to buy it, and provides a testimonial saying how great it is.

5. Patents add significant value to your company, so focus on them and obtain as many patents as possible. Set yourself a target like one patent per quarter.

6. Use these testimonial customers and patents to strike partnership deal/s with the companies that you identified as potential acquirers. Structure the deal so that they pay you royalties each quarter to have your product in their catalogue, and sell it with their logo on it. Don’t make a fuss about logos — putting their logo on your product is a step closer to selling your company.

7. If sales are decent, chances are their CFO will get tired of making royalty payments every quarter, and decide that it is better to acquire your company.

A typical acquisition deal might have three parameters, placing $X on each patent, $Y on each engineer who stays post-acquisition, and $Z on sales. A patent can easily be worth as much as an engineer, and the total of both can be comparable to, or even worth more, than the value of your sales (assuming your volume is a few million). All deals are different, but let’s assume some could place a value of $1 to $1.5 million per engineer, and $1 to $2 million per patent. The sales multiplier might be 1X to 1.5X annual revenues.

So, a company with $5 in annual revenues, 5 engineers and 10 patents could be worth somewhere in the $20 to $30 million range.

How do you maximize this value? Simple. A) get as many patents as possible, B) give your engineers attractive bonuses to stay on after a deal is made, and C) generate lots of revenue. But a little time spent crunching the numbers might show that the cost of growing sales (head count, overhead, sales expenses, advertising and promotion, etc.) could make that your lowest priority. So instead of growing your sales by a million, you might just hire another engineer or get another patent or two.

Of course, the whole process will take a couple of years, and we think your biggest challenges will be to finance it during this time and making a distribution deal. You’ll also need to equip yourself with a business plan, presentation and prototype to market your company to the potential acquirers.

Comments

2 Responses to “How to get your Canadian tech start-up acquired”
  1. Brendan Callaghan says:

    Interesting take I’m not 100% in agreement. It is possible that a strategic would be interested regardless of whether we are the market leader, but if they aren’t interested after you’ve just grown your engineers and spent loads of money on patents and nothing on Sales and Marketing, you are up a river without a paddle.

    I think this maybe makes sense for stagnant non-SaaS software companies that have been around for 20 years but not a rapid growth SaaS business. Strategics would be an interesting acquirer but there are numerous other, potentially more lucrative options for liquidity as well and I certainly wouldn’t want to put all my eggs into one basket.

    Basic line…. whats a house worth>? – Answer whatever someone else is willing to pay for it – Be that for the family home or a building lot. The decision to sell that and at what price that’s something else.

  2. Greg Graham says:

    Hi Brendan;

    Thanks for your comment.

    I agree — you have identified the flaw with building a company for the express purpose of being acquired. Many so-called “burger companies” (because they’re going to get flipped) aren’t really sustainable in the long-term. They lack internal functions — sales, marketing, distribution — and focus on short-term acquisition opportunities. What they do have is assets (a product, IP, and people with expertise).

    I don’t recommend this approach. But, if you are going to try to flip a tech start-up, this is a structured approach to doing it, and at least starts with target acquirers in mind versus a new idea that maybe nobody will ever care about.

    Thanks again for your comment, Greg.

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    photo of Greg Graham, Certified Management Consultant - Strategic Marketing - Ottawa, Ontario

    Market Metrics Inc. helps knowledge-based businesses with strategy, planning and innovation and was founded in 2003 by Greg Graham, a seasoned marketing professional. Greg is a Certified Management Consultant (CMC), an Accredited Small Business Consultant (ASMEC), a member of the American Marketing Association, and holds MBA/BEE degrees as well as a Certificate in Strategic Management. He frequently performs consulting engagements on behalf of the Government of Canada's Industrial Research Assistance Program (IRAP). Prior to Market Metrics, Greg's 21 years of corporate experience encompassed tech start-ups through Fortune 500 companies.

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