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.