Late this summer, Massachusetts-based biotech company Corvidia was acquired for $725 million upfront and $2.1 billion after earn-out.
I had the honor of serving on the Corvidia board and have gotten to thinking about the common themes that have emerged in the M&A journeys that I have witnessed over my 20 years as a VC — the last five of which I’ve served as a partner at Venrock.
Turns out there are a handful of generalizable M&A lessons and company builders might learn from them.
1. It’s far better to be bought than sold
Frequently, entrepreneurs build their company for an acquisition — i.e., “our plan is to be acquired post human proof-of-concept” (biotech) or “after $X M in revenue” (tech).
Don’t! Ironically, if you build your company for M&A, you’ll get far worse deal terms.
Acquirers can sense that you built to flip. They’ll smell your reduced alternatives, and they’ll underbid. Part of the reason that Novartis paid $8.7 billion for AveXis was the substantial AAV manufacturing capability that AveXis had created — a capability AveXis would not have built had the plan been to flip.
2. Great M&A is “cooked” over time
You can’t force the process.
Relationships matter in business deals. No matter how rational the deal is, there is humanity and subjectivity to every company and to every decision to form a combination.
Cultivate those relationships organically over time. M&A usually takes multiple years — even when it takes 30 days.
The two companies meet many times over months and years. Conversation and connection occur at multiple levels in both organizations like when CEOs chat, the scientists or engineers chat, or the BD people chat.
Enthusiasm builds at the acquiror over time and you can’t force it.
Keith Leonard (x-CEO of Kythera) met multiple times with Brent Saunders (c-CEO of Allergan) over multiple years before Allergan’s $2.1 billion bid for Kythera.
3. Understand who the decision makers are
BD and Corporate Development are almost never the ultimate decision maker for M&A.
Usually, the CEO is the decider if the deal is big enough. Other times, the Chief Scientific Officer or someone at the top of commercial decides, depending on the stage of the technology.
You have to woo the decision maker and refrain from alienating the deal team.
4. Empathy matters
Understand the buyer’s needs and address their objections.
Do they need a product to fill a hole in their commercial pipeline? Are they looking to build out a capability? Are they worried about getting egg on their face (i.e., FOMO)? Did their last deal work out, or are they gun shy now? Are they motivated by fear or greed?
5. Communicate using the Goldilocks principle
Hyperbole and over-selling will spook your potential buyer. Use the art of the subtle sale instead.
Be open and honest about your company or product’s limitations — every deal has warts. This builds trust and goes a long way in building relationships as I wrote above.
6. Unbiased thought leaders matter
Cultivate objective and respected advocates who have no financial “skin in the game.”
For instance, at Corvidia, there were KOL clinicians who loved our program, and Novo called them to ask their opinion about our drug. That’s “free” BD!
Similarly, thought leader detractors can turn off potential acquirers.
7. Competition drives price
It goes without saying that you usually need more than two bidders to get a decent price.
Many of my companies have tried to use a pending IPO or even a JV to drive price. They don’t.
Those things can create more bidder urgency (which can have value), but they are not a stalking horse on valuation.
8. A robust M&A ecosystem requires proactive buyers
Most buyers are reactive: they window shop until FOMO or some other impetus gets them to act.
But every healthy M&A market has proactive buyers in it — companies that are aggressive and strategic about M&A. Those proactive acquirers get the reactive buyers to move.
In biopharma, Celgene, Allergan, and Gilead have been recent assertive buyers. Back when Novacardia was acquired, there was a proactive buyer who bid, but Merck ultimately “won” the deal after they were galvanized to action by the other party.
One hint: new CSOs and CEOs in pharma companies usually want to leave their imprimatur on their company by being “bold.” Look to them as potential first movers.
9. Don’t hire a banker until you have a term sheet
Hiring a banker too early means that you are being sold vs. being bought.
Bankers will tell you how good your single lowball valuation is, until you have another bid. Once you do, let your bankers be “bad cop” on driving up price. They’re good at it!
Also, I have not seen a banker bring a totally new bidder to the table. Generally bankers just help galvanize a company that the team has already cultivated.
10. Management almost always wants to sell before the VCs
The stereotype of the VC selling the company out from under the founders and execs is not consistent with my experience. Maybe I’ve just had good co-investors.
Often the teams that had always planned to personally bring a product to market — and to lead the public company for many decades — get their head turned by the offer once its real. Five or 8% of $X billion or even $YYY million can be very distracting.
While I often would prefer to keep going, its not my choice once my leadership team has mentally moved on … game over.
Being a healthcare VC feels purposeful. It’s an honor to contribute behind the scenes to iconic companies that bring multiple therapies to sick patients. But let’s be realistic too: M&A is also a vital part of the start-up ecosystem and start-ups exits, and, given that, let’s learn from past mistakes — and perhaps a few successes.
Camille Samuels is an investor at Venrock where she invests in biotech, medical devices and consumer health.