Startups need exits, otherwise known as the explanation to investors about how they are going to get a return on their investment. If there isn't a plan for an exit, then the matter under discussion isn't a business, but a hobby.

The IPO market is opening, but the majority of exits are made as a result of an acquisition. Startups can acquire other startups, but this note and at least one more is about why and how acquisitions are made by large corporations. Long established VC firms know this, have ongoing relationships with their counterparts at the corporations, which are part of the value they bring to a deal - this note is for angel investors and startup founders, who want to understand how to position their company for a corporate acquisition.

Earlier this week 2 partners from Sonnenschein hosted a discussion with Mark Gorman (Cisco), Russ Hartz (SAP),and Don Hanson (Google).

Where they find deals

SAP : in the US, (although not in Europe), there's been a recent increase in suggestions from buy side investment bankers. The majority of their deals come from the product groups as a result of their annual reviews - the target may be a specific company, or a technology request. Partners who have integrated their product with SAP improve their visibility; building relationships with the product teams improves the chances of being acquired.SAP works with the middle tier, not the top tier, banking firms. Their industry executives speak at conferences, and lay out what they are looking for - usually, things which are complementary to SAP's existing business. SAP is unlikely to acquire a company which implements things which it regards as its core competence (like ERP). Right now they are looking for cloud computing infrastructure.

Google: looking for companies who have built a great technology with a great team, especially in the mobile and social spaces. Startup CEOs should contact Google engineering leaders, who talk at conferences. Google runs competitive Challenges, which are another way of getting visibility. Plink was just acquired as a result of participating in the 2009 Android Developer Challenge. Google is not usually interested in talking to bankers.

Cisco: Looking at deals which 'move the needle' (ie, have a noticeable effect on Cisco's revenue, market share and/or annual profit numbers). Hence the Tandberg deal which just closed. Historically, Cisco's ideal target has been a company with around 100 employees, sales for revenue, around which a model can be constructed showing how the technology, if sold by Cisco, will return some multiplier to the cost to Cisco of the acquisition (deals like these can be very much smaller). The Corporate Development group is a team of people who have been investment bankers who survey the market for possible targets. They also work with the business units who are aware of gaps in Cisco's product and service offerings, and of companies which might fill those gaps. Often the relationship starts with Cisco licensing technology. Cisco also makes investments to get visibility into potential targets, putting an observer on the board. (Netsys Technologies, acquired 1996, where I was a VP, was an early example of this strategy).

References

Sonnenschein Nath, Rosenthal LLP
Cisco list of acquisitions
Google list of acquisitions
SAP list of acquisitions

Cunning Systems evaluates product and service ideas in computing and communications. If you would like to discuss whether an idea is likely to be of interest to a large corporation, contact us at info@cunningsystems.com Follow me on twitter at @annejohn and @vcwatch