If Financing is Marriage, is M&A Death?

written by Franciscus on April 21, 2012 in Tech with no comments

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Editor’s note: Contributor Ashkan Karbasfrooshan is the founder and CEO of WatchMojo, he hosts a show on business and has published books on success (he was also, from 2000-05 one of the most popular relationship columnists, under a pen name, for a well-known lifestyle mag).  Follow him @ashkan.

Not a week goes by where I don’t get an email that goes like this: “I wanted to reconnect, as I’ve recently left [the company that bought my startup].  Long story, but suffice it to say their executives and I did not share the same vision for the future.”

Let’s face it, although there have been some smashing successes, more often than not, Mergers & Acquisitions fail.  If you didn’t know any better, you’d think that selling your company amounted to a kiss of death, when it ought to be closer to a rebirth and the start of something… better.  Indeed, while raising money from investors feels like marriage, M&A sure feels like death.

How so?  Let’s count the ways.

Why Bringing on Investors is Like Marriage

The financing process – prospecting, discussing, negotiating, and closing – is awfully akin to marriage.  Like any relationship that “culminates” with a wedding, the real, hard work starts once the honeymoon is over, and the partying that comes with celebrating the closing of a financing round is eerily similar to a honeymoon.

In fact, when you go from being your own boss in a bootstrapped company to having a fiduciary duty to investors, the honeymoon is over pretty quick: you can’t act selfish and do what feels right; you have to take into consideration how your words and actions will affect your significant other.  Sure, it might get a bit dysfunctional if you have more than one investor, but we’ll that for a separate article.

Why Entrepreneurs Fail At “Marriage” (Financing)

We’ve all seen the stats: half of marriages end in divorce and 99% of VC-backed startups fail, with VCs earning a measly 1% per annum.

Why the poor record?  It’s perfectly fine to celebrate your financing – something that takes a lot of time and energy to do. But if you treat that as the end result or the outcome that matters, then you’re bound to fail.  In fact, it says a lot about an entrepreneur when all he brags about is how much money he’s raised.  After all, some would argue that if you’ve been divorced three times, you’ve actually failed six times, because you’ve connected with the wrong partner thrice and called it quits three more times.

Why Stop There with the Analogy?  Products Are Like Children

The similarities don’t end there.  Regardless of one’s thoughts on how much a man and woman each contribute to pregnancy and child-rearing, the bottom line is you need both to have children in the first place.  Similarly, to some extent, an investor and entrepreneur will come together and create products, but despite their best intentions, it’s impossible to envision how their offspring will grow and develop.

It Takes a Community To Raise a Child

In business, unlike in unique scenarios, the entrepreneur is usually acting like a single-parent, relying on his employees, advisors, users and clients to ensure the well-being and development of his “child”, but the best investors have operational and/or strategic experience and will help you shape your product.  Fred Wilson rolls up his sleeves and gets his hands dirty with a product or service before, during and after he backs it; I recall him talking about Twitter before investing, for example.

It’s all about Compromise and the Greater Good

Ultimately, though, for an investment to be successful and prosper, the entrepreneur and investor have to compromise and sacrifice for the greater good – and that means setting aside one’s short-term self-interests for the children to go on to greater heights.

To be perfectly fair, selling one’s company to a larger entity, or merging your business with another ought to be like a marriage, too, but for various reasons, it seldom is.  More often than not, it’s actually destructive.  Why is that?

Liquidity: My Water Broke!

Well, for one, an investment is usually a means to an end.  Like a marriage, it is (or was, at least traditionally) a step towards starting a family.  An investment’s objective is to take an idea from concept to reality.  Only when it grows and successfully exits – thereby providing liquidity to all shareholders – does the marriage seem like a true success.  In other words, if you get married for the status, your marriage will likely fail.  The same applies to fundraising.

Why Entrepreneurs Fail At M&A

Ironically, M&A is usually seen like a cause of celebration (birth, or marriage) because it provides with some form of instant gratification but it rarely is one with hindsight.

There’s a reason why we have a cliché that says: “the grass is greener on the other side”.  In fact, it’s one of the common mistakes entrepreneurs make when they sell their companies.  If you want a good overview of why so many M&A deals fail, take a look at this article.  Ultimately, like a failed marriage, it boils down to the two parties not coming together to make it work.  But does that mean M&A is equal to death?  That sounds harsh.  But it’s usually true because the seller tends to either lose motivation or overpromise the potential of the combined entity.  Alternatively, the buyer is usually going to fail to do a better job of running the acquired entity than the team that ran it as a scrappy startup.

Do You Want the Crown or the Cash?

However, because you have exited and experienced financial success, you may not care.  Your passion morphs into frustration and disillusionment; with your bank account full, no amount of money can bring back the thrill of sitting on the throne.  In that context, the entrepreneur is just as guilty as the buyer for killing his “baby”.

Mind, Body and Soul

How M&A differs from death, ironically, is that while we’re taught to believe that upon death the mind and body perish but the soul goes on, in M&A, the opposite happens.  A product, unit, or company can continue in form and fashion, but the soul is usually the first thing that is stripped, because of a lack of vision or effort, or an excess of greed, fear and hubris.

But mainly, entrepreneurs want their cake and eat it, too.  Once you accept an offer, you have to realize that it’s no longer your business and if you can’t see the forest through the trees then you are bound to fail.  If you can’t let go and become part of the new solution, you will be just as responsible in the death of your company.

Financing, like M&A, requires a collaboration to succeed.  Failure in either, like a child, is a product of two parties.  With a better perspective, hopefully buyers and sellers can make M&A turn out to be more birth, than death.

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