My most recent startup, Smarterer, was just acquired by Pluralsight--and I'm genuinely scared to death.
It's not because the acquisition isn't 100 percent the right outcome. Combining the visions of Smarterer and Pluralsight makes our future nothing short of astronomical, and by being acquired we delivered an incredible financial return for Smarterer shareholders.
So, why am I so scared?
Because we are entering the incredibly complex, insanely demanding, highest-likelihood-of-failure, fourth trimester. It's the stage of growing a company no one talks about--because in the startup journey, after an acquisition, many consider the story complete. Reporters focus their energy on the next rocketship, and investors go back to hunting other prey. Yet for the company acquired, the journey continues to unfold, and actually, the most challenging mile lies ahead.
Two weeks after another company I founded was acquired, my president and I trotted off to visit our new owners. There, a key contact from the acquiring company grilled us about why we should expect him to bring us to any clients or support the integration of our business. We walked out stunned--weren't we supposed to be partners? Our president whispered, "We have a major problem." Thirty days later, he quit. Welcome to the fourth trimester.
The truth is, most founders build their businesses planning for the three baby-perfect trimesters:
- The first trimester is startup lore: creating the seed of something out of nothing, building a team, seeking product-market fit, and most likely raising capital with partners who believe in the vision.
- The second trimester is growing a real business: clients are buying, the company is scaling, and money is flowing.
- The third trimester is the delivery: finding a buyer, developing a combined vision for the future, selling the company, and creating value for shareholders. Slap that baby on the butt and hear it gasp its first breath!
But in a startup, there are actually four trimesters. That's right, four. The fourth trimester begins as your company is being acquired (even before the third trimester is complete), and is the act of combining two newly joined businesses together.
There are a number of reasons the fourth trimester is so darn hard:
- Building for birth. Many startups build toward a sale, not toward running efficiently after a sale. Investor dollars and employee options are often structured to deliver the business to an exit, without regard to what happens after it.
- Sandwich dynamics. Let's say your culture is whole wheat bread, your product is ham, and your team is hot sauce. Well, your acquirer happens be Wonder Bread, eggplant, and mayo. OK, now try to cram those two halves together and make it taste good.
- Transaction over strategy. When another company I founded was acquired, on the day of the transaction, I called up the CEO and asked, "Now what?" He replied, "We've been spending so much time on the deal, I thought you were figuring out what to do now." All of the work we'd been doing was to get legal and financial terms in place for the acquisition, and we failed to focus on exactly what we were going to do together.
- Love pecks. Post-acquisition, your workload quadruples as employees, vendors, and contacts seek ways to connect. Each love peck deserves your attention, and while individually they are manageable, all together they up to thousands of distractions from the core task at hand: integrating and creating mutual value with your new parent company.
The news that Smarterer has been acquired by Pluralsight is fresh--and we don't want twins, we want quintuplets. Given that, we've been hard at work for months preparing for the fourth trimester via a playbook that delivers results.
Build transparency and trust from day one
Aaron Skonnard (Pluralsight's CEO) and I first met on April 8, 2014, at a conference, and by June we were talking about putting our businesses together during a private lunch in Boston. One rule we set early was to be completely open and transparent regarding our businesses--show our true colors, warts and all, and what it would take to create value together. No games. As with any relationship, trust is the foundation upon which everything else can flourish.
Develop "working principles"before strategy
Working principles define the "how" for the "what" you're going to build together. When one of my first businesses was acquired, we skipped over defining working principles and our incredibly tight strategy delivered total chaos. In this latest acquisition, the Smarterer and Pluralsight executive teams, before we even had a merger agreement to review, created clarity on our initial working principles.
Smarterer and Pluralsight's completed set of working principles:
- Smarterer embraces Pluralsight's culture and values
- Smarterer will have operational autonomy
- A combined steering committee will work together to learn and define the strategy (monthly collaboration sessions for the first year)
- Smarterer will have full access to Pluralsight's internal and external resources
- Together we will share a common purpose and objectives.
Earnouts lead to misalignment (and are for wussies)
Bankers often quip, "Earnouts--rarely earned, but always paid." This is largely true because the misalignment an earnout leads to often stymies results, and the acquired company fights (or sues) to get paid. An earnout only delays the difficult discussion on value; in one of my previous acquisitions we were back at the negotiating table within a year of acquisition. In our current transaction, Pluralsight and Smarterer agreed on the price after two calls, determined it was the responsibility of all of us to create value post acquisition, and never looked back (both sides could have tried to renegotiate further along, but see point No. 1).
Put employees first
Immediately after the deal was closed, executives from Pluralsight met individually with Smarterer employees to explain compensation, benefits, and any changes to their roles. Smarterer is also providing an accountant to prepare each employee's personal taxes for 2014. And most important, Smarterer focused on ensuring the deal provided every single employee with financial return and the opportunity for major growth. There is nothing more vital than enabling a stress-free transaction for every single member of your team. Comfort leads to clarity, which leads to results.
No pregnancy expects to go into a fourth trimester, and it would certainly be a biological miracle if it did. But in the case of startups, it's best to prepare as if it's inevitable. Developing a playbook is the route to effective integration and long-term success.
And there's nothing scary about that.