Dispelling the Myths of Getting Acquired

Event Highlights

[09:45]  How to meaningfully engage with potential acquirers in the early stages

[15:46]  The difference between business development and corporate development and where to start

[18:20]  Advice to founders who are worried about sharing their secrets with acquirers

[22:10]  How to respond to questions from a company about a potential acquisition  

[26:18]  The myth that an investment from a big company reduces or restricts future opportunities

[33:26]  How the events of 2020 have affected the M&A and investing strategy

[43:25]  How important is valuation and how to define a “fair price”

[49:01]  Thinking through synergy, financial return, and the due diligence process

Q&A with Derek Idemoto

The vast majority of successful startups are acquired, but the corporate M&A process is often bewildering to many founders. We hosted Derek Idemoto, SVP of Corporate Development and Investments at Cisco, for a live Q&A to dispel many of the myths of getting acquired. Cisco is one of the largest and most active buyers in the history of the tech industry, having acquired more than 200 companies, and Derek has been personally involved in >$15 billion in acquisitions since joining Cisco in 2007. We asked him to share some of his wisdom for founders who are new to the M&A process:

Every founder dreams of getting acquired, but they don’t always know how to start on that journey. How do founders start conversations with prospective acquirers? Do we call you or do you call us?

This is a good question. The truth is that there are many ways to get a conversation started. We might see a thousand opportunities a year and get a lot of inbound, but warm introductions are always helpful. And as you might imagine in today’s world, with no in-person conferences or other face-to-face ways to meet founders, we value those referrals more than ever. We’re also not doing our jobs if we’re not reaching beyond what’s on our radar screens and canvassing the landscape. We appreciate every connection that’s made, and it’s our job to follow up and engage with each and every startup in our landscape. So, it doesn’t matter who calls first, but when in doubt the call should be made.

Let’s talk about timing. Many founders worry that it’s too early to talk to an acquirer. They’re told to keep their heads down and focus on building. Do you think there’s such a thing as talking to an acquirer too early in the journey?  

It’s never too early. But the reverse is also true: Sometimes it can be too late. I think it’s overall a good idea to get on their radar early, and create a relationship where you can ultimately match up the strategic windows on both sides. Startups have critical milestones, like raising capital, launching a product, hiring executives who can scale up your organization, or expanding internationally. Along that journey, there are windows that are very logical inflection points where a founder can pause and assess whether this is or isn’t the right time to consider a partnership or an acquisition. It does take time to create a meaningful partnership. A long trail of breadcrumbs and a longstanding relationship makes it easier for both sides to know how to find a path forward together.

Many founders worry about sharing their secrets with acquirers. There’s concern that startups are vulnerable, and that a big company will unfairly copy what a startup is doing. What advice would you give to founders about addressing this potential risk?

I know there are numerous media stories that are written about the theft of IP from startups. We’re incredibly cautious about our acquisition processes to protect founders. My first piece of advice is to protect yourself using customary legal agreements – NDAs, for example, are always good hygiene and should be used. Next, both the acquirer and the founders should do what they can to “firewall” information from employees on either side who do not need to have access to sensitive IP. This not only protects the startup but it also protects the acquirers. Finally, the brand and reputation of an acquirer matters. Founders should engage only after doing a little homework on a prospective buyer. At Cisco, we’ve been doing M&A for three decades and our reputation as a trustworthy acquirer is incredibly important to us.

So many founders engage with corporate development, but they don't want to give the impression that their company is “for sale.” Is it best to talk with corporate development before you talk to the business unit? Where do you start?  

There’s no wrong place to start. The corporate development teams at Cisco work very closely with our business units. We know the product teams, the business development groups, and alliances managers and can help explain where there might be strategic gaps or opportunities in our portfolio. Even if you’re not interested in exiting, our team can help you navigate our organization and make sure you’re in the right hands. We have numerous ways to work with startups, ranging from M&A and equity partnerships, to OEM arrangements and co-marketing agreements. It’s our job to be a nexus for all of those things, and we usually end up getting involved as your partnership potential with Cisco becomes more meaningful.

You’re a very active investor in companies with >100 startups in your portfolio. Does your investment potentially dissuade other potential acquirers from buying your portfolio companies, or perhaps restrict options for them down the road?

The best way to answer this is to point to the recent facts, not just for Cisco, but for the tech industry too. Corporate investing has grown to be a much more active part of the startup ecosystem, and throughout the past two decades there were early concerns that this would cause signaling problems for startups down the road. We haven’t seen this play out in our portfolio. We’ve invested in several companies that have ended up being acquired by others, including Cisco’s competitors. And we’ve also ended up acquiring a lot of companies where other strategic investors are in the cap table. The data would suggest that our investments do not restrict optionality at all, and perhaps increase the potential M&A options for a startup.

What’s the number-one piece of advice you have for founders who are thinking about M&A?

My simple advice: focus on culture. When we look to acquire a company, we consider many factors that influence our decision. But one of the most important criteria is our assessment of the people who will be joining our team and their cultural fit with Cisco. Many founders do a good job differentiating their products and market potential, but perhaps not enough attention is given in M&A to the importance of cultural synergies.

We obviously look for teams that share our values. But we're also looking for people to bring a strong and distinct outside culture to our community so that we can learn from them. In all cases, we want to acquire companies that share our vision to power a more inclusive future for all. I don’t think you can underestimate how important this is in any M&A process, and it’s never too early to focus on defining your culture.

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