Startup founders should consider putting in place a ‘dual-track plan’ for growth amid the economic downturn, according to expert Claire Trachet.
Amid rising inflation and interest rates, investors across the board have seen substantial stock losses and falling valuations, resulting in a highly risk-averse investment environment.
As smaller companies struggle to reach or maintain profitability, they often risk going through an unsuccessful funding round at a time when investors are increasingly turning their gaze towards profitable balance sheets over attractive narratives.
This has become a rule of thumb in the startup arena with a plethora of tech giants seeing sky-high valuations drop by as much as 85%, as seen with Buy Now Pay Later firm Klarna.
“Probably the most important bit of advice I can give is to have a dual-track plan in place,” says the CEO of business advisory Trachet. “This means carrying out a fundraising round while simultaneously looking for M&A opportunities.
“In this way, if one avenue fails, startups will still be in the later stages of their other option and all is not lost. In what can be an unpredictable market currently, the importance of this approach cannot be understated.”
Her company has highlighted the increasing trend of companies turning towards M&As in the current climate as a way to expand their offering and customer base, ultimately increasing their valuations and strengthening their position.
However, data from Harvard Business Review illustrates that a staggering 70-90% of M&A deals fall through, even during the best economic conditions.
So how can startups ensure their particular deal gets over the line?
“I always stress to my clients the importance of being ‘deal-ready’ before heading into any potential transaction,” says Trachet.
“The buyer has shown an interest in your firm at a particular moment in time, but a simple change in external market conditions could lead to them getting cold feet and pulling out. What that means is you need to have done all the necessary preparation before negotiations have started, to ensure the deal gets over the line quickly and smoothly.
“This has never been more important than in the current deals market, where the environment can dramatically change over the course of just a few weeks.
“Another really important thing here is to both sign and close the deal at the same time, as this prevents anything putting the deal in jeopardy in between those two things happening.”
Identifying the right fit in a buyer is essential. The fact that this may take a great deal of time is another reason for the ‘dual track’ approach.
“Another key reason deals fall apart is due to a lack of alignment in terms of culture between the business and prospective acquirer,” explains Trachet. “It’s of vital importance to get a good understanding of how the other party operates prior to getting deep into negotiations, otherwise problems can occur down the line.
“Sharing the same values and vision really helps in fostering a smooth negotiation process – all it can take at times is a bad feeling for a deal to fall through. This is where it is again invaluable having someone that has been through these processes before, and can source the ideal buyer for your company.
“Startups should focus on extending their runway: be diligent with the business’s working capital by optimising cash flow, review the contracts you have with your clients and minimise accounts receivable.
“Applying this mentality to the whole of the organisation is going to be key in the next year, whether you’re entering a fundraising round or considering an exit. Ideally startups should be doing both.”
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She adds: “The majority of deals fall through at the due diligence phase. Most commonly, this is because startups have not enlisted expert advice early enough to help them identify and resolve any issues.
“The simple message here is to prepare early, and bring in the right people to help you conduct ‘pre-due diligence’. Think of this like a dress rehearsal before the real performance.”