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Wow - I can see why Paul Graham at one point talked about how exploring an acquisition can kill a company. Even at the "preliminary diligence" stage, a small co

by rfrey 4y ago

Wow - I can see why Paul Graham at one point talked about how exploring an acquisition can kill a company. Even at the "preliminary diligence" stage, a small company will have invested at least a month of the founder's time AND basically given away the keys to the kingdom - all their schemas, processes, customer lists, and contracts. I know there would be non-disclosures in place, but it's easy to imagine a company less scrupulous than Gitlab basically cratering a potential competitor without the resources to go after them in court.

ignite 4y ago
I don't know if this is still a common thing, but this definitely used to happen.
- iamdamian 4y ago
  It seems that Amazon did something similar under the guise of becoming an investor: https://news.ycombinator.com/item?id=23929044 https://news.ycombinator.com/item?id=23929044
bberenberg 4y ago
Yes there is a risk of this. But, with modern tooling, you don't need to do this to accomplish the same goals. It's not hard to figure out the high level approach of what someone else is doing. It's not hard to figure out a significant number of their customers. There are entire companies that exist to answer these questions for you. Ultimately, if you're looking to sell your company, you will have to trust the acquirer. This isn't a GitLab thing, it's just the name of the game. I wrote a bit about selling my company a year ago [1] and it was similar, except a lot of the diligence happened post LOI / Term Sheet. In hindsight, I kind of wish it had happened earlier. [1] https://www.nothingeasyaboutthis.com/lessons-from-selling-a-bootstrapped-company-to-a-pe-backed-company/ https://www.nothingeasyaboutthis.com/lessons-from-selling-a-...
fatnoah 4y ago
Having gone through an acquisition by a different company, I can say that this process almost exactly matches the process I went through. It was definitely a lot of work that ate up tons of time. It also wasn't something that could be discussed with most of the company, so now you add a few months of "acting funny" to the mix and it's a challenge and a half.
akamia 4y ago
I was a lead at a startup that was acquired and the acquisition process would have probably sunk us if the acquisition had not gone through. We were in the middle of raising our next round when the offer came through. The founders and the board decided to accept the offer but it was still contingent on due diligence. While going through the due diligence process all funding conversations had to stop. Luckily we were small so the due diligence process only took 2 months but we had to tighten our belts. If the acquisition had fallen through, we would’ve been in real trouble because we burned 2 months of cash and would have needed to line up funding quickly.
mbesto 4y ago
100% true. So people are aware, even if you get to an LOI, then there is usually an established close period (right now it's usually 30-90 days). That close period is intense and can absolutely derail the energy of the company.
tptacek 4y ago
It's a lot of time, but it's probably more important that it's psychologically destructive. As soon as you've invested any meaningful time into an acquisition discussion, it becomes very difficult to manage the company as a going concern and to make good long-term decisions about it. You're explicitly contemplating ending the company. You mostly don't need the "don't talk to corpdev" advice once you've found product/market fit, unit profitability, whatever; it's more obvious whether the discussion is a waste of time or not. But early on, it's an especially hazardous thing to do, because you're not anchored to a specific conception of how your business is going to operate.
- rfrey 4y ago
  That's a super interesting point... even if you're fine financially and the acquirer doesn't sabotage you, you've fundamentally damaged the company by exploring acquisition. Like if somebody goes from working hard on a marriage to seriously investigating divorce. Even if they decide divorce was too expensive or whatever, they're never getting back to even the problematic state they were in before they called a lawyer.
  - tptacek 4y ago
    To make matters worse, corp dev people are absolutely aware of the dynamics --- they're more aware of them than you are, because this is their entire job, where you might engage with it once or twice in a whole career --- and are selected for their expertise at manipulating the dynamic. They will, if they're seriously targeting you, deliberately bait a hook and keep you on the line long enough for walking away from a deal to be especially painful. I think Paul Graham pretty much has this topic locked up and can't see how you'd express it better.
  - xwolfi 4y ago
    I investigated divorce months before marrying and we made sure that if it had to happen, like to 55% of mariages around us, we d make it as painless as possible rather than total chaotic surprise. I suppose there must be a corporate equivalent ?
- JumpCrisscross 4y ago
j0hnyl 4y ago
The Billion Dollar Code on Netflix is a dramatized story about this.
sidewndr46 4y ago
Rob Ferretti, who runs a luxury and high performance car rental service has a podcast where he talked about this. He said a major US brand spent several months in talks to acquire the company then just walked away. He said they disclosed pretty much everything, since they had to prove they had revenue and were actually making money. A few months later they launched their own premium service.

by rfrey 4y ago

ignite 4y ago

I don't know if this is still a common thing, but this definitely used to happen.

iamdamian 4y ago
It seems that Amazon did something similar under the guise of becoming an investor: https://news.ycombinator.com/item?id=23929044 https://news.ycombinator.com/item?id=23929044

bberenberg 4y ago

Yes there is a risk of this. But, with modern tooling, you don't need to do this to accomplish the same goals. It's not hard to figure out the high level approach of what someone else is doing. It's not hard to figure out a significant number of their customers. There are entire companies that exist to answer these questions for you. Ultimately, if you're looking to sell your company, you will have to trust the acquirer. This isn't a GitLab thing, it's just the name of the game. I wrote a bit about selling my company a year ago [1] and it was similar, except a lot of the diligence happened post LOI / Term Sheet. In hindsight, I kind of wish it had happened earlier. [1] https://www.nothingeasyaboutthis.com/lessons-from-selling-a-bootstrapped-company-to-a-pe-backed-company/ https://www.nothingeasyaboutthis.com/lessons-from-selling-a-...

fatnoah 4y ago

Having gone through an acquisition by a different company, I can say that this process almost exactly matches the process I went through. It was definitely a lot of work that ate up tons of time. It also wasn't something that could be discussed with most of the company, so now you add a few months of "acting funny" to the mix and it's a challenge and a half.

akamia 4y ago

I was a lead at a startup that was acquired and the acquisition process would have probably sunk us if the acquisition had not gone through. We were in the middle of raising our next round when the offer came through. The founders and the board decided to accept the offer but it was still contingent on due diligence. While going through the due diligence process all funding conversations had to stop. Luckily we were small so the due diligence process only took 2 months but we had to tighten our belts. If the acquisition had fallen through, we would’ve been in real trouble because we burned 2 months of cash and would have needed to line up funding quickly.

mbesto 4y ago

100% true. So people are aware, even if you get to an LOI, then there is usually an established close period (right now it's usually 30-90 days). That close period is intense and can absolutely derail the energy of the company.

tptacek 4y ago

It's a lot of time, but it's probably more important that it's psychologically destructive. As soon as you've invested any meaningful time into an acquisition discussion, it becomes very difficult to manage the company as a going concern and to make good long-term decisions about it. You're explicitly contemplating ending the company. You mostly don't need the "don't talk to corpdev" advice once you've found product/market fit, unit profitability, whatever; it's more obvious whether the discussion is a waste of time or not. But early on, it's an especially hazardous thing to do, because you're not anchored to a specific conception of how your business is going to operate.

rfrey 4y ago
That's a super interesting point... even if you're fine financially and the acquirer doesn't sabotage you, you've fundamentally damaged the company by exploring acquisition. Like if somebody goes from working hard on a marriage to seriously investigating divorce. Even if they decide divorce was too expensive or whatever, they're never getting back to even the problematic state they were in before they called a lawyer.
- tptacek 4y ago
  To make matters worse, corp dev people are absolutely aware of the dynamics --- they're more aware of them than you are, because this is their entire job, where you might engage with it once or twice in a whole career --- and are selected for their expertise at manipulating the dynamic. They will, if they're seriously targeting you, deliberately bait a hook and keep you on the line long enough for walking away from a deal to be especially painful. I think Paul Graham pretty much has this topic locked up and can't see how you'd express it better.
- xwolfi 4y ago
  I investigated divorce months before marrying and we made sure that if it had to happen, like to 55% of mariages around us, we d make it as painless as possible rather than total chaotic surprise. I suppose there must be a corporate equivalent ?
JumpCrisscross 4y ago

j0hnyl 4y ago

The Billion Dollar Code on Netflix is a dramatized story about this.

sidewndr46 4y ago

Rob Ferretti, who runs a luxury and high performance car rental service has a podcast where he talked about this. He said a major US brand spent several months in talks to acquire the company then just walked away. He said they disclosed pretty much everything, since they had to prove they had revenue and were actually making money. A few months later they launched their own premium service.