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A Classic Startup Horror Story

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Re: A Classic Startup Horror Story

#51

Post by pg »

dshah wrote: post #50
pg wrote: post #25

This sort of scenario is unfortunately very common. The antidote is never to allow acquisition talks to be the main thing you're focusing on. We advise startups who get approached by acquirers to treat it as a background process, and not to take things seriously until the very last stage. If acquisition discussions are just a side show, you can easily terminate them if anything goes wrong. Which, interestingly, proba…

Although this scenario is very common, it's not common for the story to get shared. Thanks to the entrepreneur that shared it. One of the reasons that folks don't share their horror stories around M&A is that often, in the back of their minds, they're still hoping that it was all just a big misunderstanding (wishful thinking). They're often also worried about creating a negative impression around the company -- there…

They get shared among YC alumni, and acquirers know that, which seems to mitigate the worst abuses.

Re: A Classic Startup Horror Story

#52

Post by sriramk »

There's a non-zero possibility that the engineering org did report back to the CEO that they could build it.

I've many a large company M&A scuttled due to NIH syndrome from engineering. And almost always they massively underestimated the effort needed to build something (including whether they had the talent or not).

I know of atleast one case where it has resulted in long term serious strategic harm for BigCo when they refused to do a small acquisition (single digit seven figures) because of exactly this scenario.

Re: A Classic Startup Horror Story

#53

Post by kgo »

true_religion wrote: post #8
cienrak wrote: post #3

I don't understand why they didn't try to fight this based on the NDA or no-use. Wouldn't a good lawyer be willing to take this on retainer, if they could prove their tech was being ripped off despite the legal protections they signed going into the deal?

I'm having trouble following... how were they ripped off? There's some confusion about the NDA, but as far as I can see... The Company didn't disclose to anyone. It broke down in due diligence which could just mean that The Company looked at their financials, and found that they were a lot weaker than first presumed and thus not a good acquisition. I'm not sure they admitted that they weren't profitable (who does rea…

Megacorp decides to purchase KFC.

As part of due diligence, they want to know what the secret recipe is. After all, you'd hate to find out one of the special herbs and spices is cocaine or arsenic. This is fine because MegaCorp signed an NDA.

MegaCorp breaks off the deal. Their chefs decide that they can make their own chicken. After all it's not hard to combine these nine herbs and spices.

The chefs only have this knowledge because you revealed your trade secrets under the protection of an NDA. They're not white box reverse engineering the recipe.

Re: A Classic Startup Horror Story

#55

Post by georgemcbay »

sriramk wrote: post #52

There's a non-zero possibility that the engineering org did report back to the CEO that they could build it. I've many a large company M&A scuttled due to NIH syndrome from engineering. And almost always they massively underestimated the effort needed to build something (including whether they had the talent or not). I know of atleast one case where it has resulted in long term serious strategic harm for BigCo when t…

The whole engineering/NIH/underestimate situation certainly rings true.

OTOH, there also tends to be a vast underestimate on how difficult it will be to integrate an existing product (even if it is already built) into a new company.

It is extremely rare that a product the company is acquiring for is exactly the product they need, it is usually 90% of the product they need, and they're still going to have to get the second 90% done while simultaneously working on all the culture issues that pop up when trying to bring two companies together.

Re: A Classic Startup Horror Story

#56

Post by wyclif »

AznHisoka wrote: post #28
brooknam wrote: post #2

Having seen a startup in Austin, TX go through this same kind of thing, I would guess its more common than the author makes it sound here. The best defense is to build a technology that isn't cheap to reproduce. There is no better moat than killer IP.

This is not practical advice. Not many people here are building the cure to cancer. The best defense is to build a self-sustaining business where you don't need to sell it.

This is true. The classic example IMO is Amazon: they didn't have "killer IP." Their "moat" was their mastery of fulfillment and distribution, and owning all the links in that chain.

Re: A Classic Startup Horror Story

#57

Post by larrys »

pg wrote: post #25

This sort of scenario is unfortunately very common. The antidote is never to allow acquisition talks to be the main thing you're focusing on. We advise startups who get approached by acquirers to treat it as a background process, and not to take things seriously until the very last stage. If acquisition discussions are just a side show, you can easily terminate them if anything goes wrong. Which, interestingly, proba…

"M&A guys can smell it when you really want a deal, and that makes them want it less."

That smell thing is really important.

Essentially anytime you are dealing with someone who does more of a particular transaction or negotiation than you do they will be able to sense and pickup things that you would never think of because of the quantity and quality of patterns they've experienced in the past.

We find this happens all the time with domain sales. Buyers say and do all the wrong things which cause a seller to be able to get the most for a particular domain name. I've seen it also happen in real estate as well as other negotiations (buying cars as another example).

It's hard for the less experienced person on one side of a transaction to avoid this since they don't know the signals they are setting off.

Re: A Classic Startup Horror Story

#58

Post by Tossrock »

rokhayakebe wrote: post #12

Dude, seriously, this isn't helping anyone unless you give some clues allowing people to figure out who The Company is.

Well, there are SOME clues. Mention of Silicon Alley means it's probably in New York. The fact that they were having dinner with the CEO means it's probably not Google-scale.

Re: A Classic Startup Horror Story

#59

Post by mkramlich »

gyardley wrote: post #24

This is also a classic bigger-company horror story -- when the developers who said "this isn't so hard, we can do it ourselves" start working on it and run into all the tiny little gotchas that aren't evident in due diligence. Maybe I've just been exposed to a weird sample, but I've heard 'we can do it ourselves' at least a half-dozen times over my career and not once has anyone actually done it themselves.

That suggests what might be a good rule of thumb for distinguishing a rock star programmer from the other kind. The rock star says they can do it, and mean it. Then they do it. Done.

Re: A Classic Startup Horror Story

#60

Post by idiopathic »

pnathan wrote: post #30
roel_v wrote: post #17

Earlier quoted context omitted.

"The best defense is to build a technology that isn't cheap to reproduce." Actually that's the single worst defense. What can possibly be so expensive to produce that it can't be cloned, yet cheap enough to be possible to sell with profit? The fact of the matter is that most software is quite simple, and when it solves a particular problem in an innovative way, there is no way to capitalize on that because there's no…

Conceptually, if very smart people did it, and other very smart people say it can't be done... that's what you're looking for for a deep moat. Usually that's going to be some sort of new mathematical principle in software. It's excruciatingly hard to get funding if you do come up with that sort of idea, because the experts all say its impossible. ;)

"Conceptually, if very smart people did it, and other very smart people say it can't be done"

Don't forget the third part, which is what the author described, i.e. "not very smart people say they can easily do it themselves". They do not have to be able to do it, they just have to be able to convince the CEO to spend $1 million in salary on the internal delivery time to try to do it.

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