By Upal Basu, Managing Director, Nokia Growth Partners, NGP India Advisors, India
Excerpt from discussion on Exit Strategies at 2013 Nasscom Product Conclave, Bangalore

What should entrepreneurs do if a company comes calling? I would take that call, I wouldn’t hang up. If you look at history of technology, the S curve of our industry was 5-10 years long. If you started a company, it peaked at 5-6 years and then you could harvest it for many years. The rapid change that cloud computing has done, and the internet has done is that obsolesce has become very quick.

What you think is hot right now may be obsolete in three years. Reality is what is interesting and acquirable today may not be interesting for the same buyer a year from now. This happens all the time in technology industry. The entrepreneur gets a $100 million dollar option he might say no, I am worth 300, two years later he goes back to the same buyer, by this time the buyer would have moved on to a different project.
The key is to create an auction like environment. Always be mindful of who your natural buyers are. When someone calls you, you need to seek the help of trusted advisors to tell you if this is the time to get out or not.

Often what happens is that VCs and company executives suffer from the same disease but as an entrepreneur, you have been programmed to believe that you are number one, but the reality is that the world outside is a very different place. So, whenever a situation arises, whether it’s a talent acquisition hire or a strategic acquisition opportunity, take a deep breath , take the call, be friendly to the potential buyer and have a discussion with people you trust and ask the question – is this the time to get out or should we stay on?

M&A from an entrepreneur’s perspective

I was an entrepreneur for over 8 years, and in the last 5 years I have been a venture capitalist with Nokia growth partners. Often, entrepreneurs miss that exit opportunity. One of the fundamental difference is people don’t fully appreciate is that standard laws of economics of supply and demand do not apply to buying and selling companies. So if you have something to sell like onions or a house and if you drop the price you could have multiple bidders but if you have the wrong company at the wrong time you could sell it for zero dollars, there will be no buyer. If you have an on premise technology company in CRM, you might as well give up any chance of anyone buying that company. Doesn’t matter if you have 20 million dollars in revenue, the real thing is, you have to be at the right time in the market with the right technology which the buyer wants to buy.

The reason which triggers an M&A is fundamentally the same which drives human behavior, its often greed and fear. Fear that your competitor might get that asset and leapfrog you. You could argue the reason why WAZE was acquired was not because Google really needed WAZE but there was a concern that WAZE would have been acquired by Apple which is struggling to get into the mapping industry. Why did Microsoft acquire Nokia’s handset asset, the reality is Microsoft right now does not have a leading position in handsets. How many other companies in the handset market are there which Microsoft has actually acquired to compete against Google?

If you consider the chance of getting acquired is low, from day one of writing your business plan, you need to try to build a company which is distinctive, its scarce, there is no other company like you and you know where the value is shifting in your industry.

If you consider these two points and using Net Magic, Net Magic was around for 7-8 years, why was Net Magic acquired by NTT, Japan? Net Magic was an Indian company; Sharad Sanghi built his company for 8 years. For an acquirer to replicate that it would have been impossible, it’s a regulated industry, data centers fall into a highly regulated act within the Indian government rules and regulations. So for any company to get into the data center industry, they would not be able to replicate that company. They were the only company which was an operator independent, cloud centric technology company. It triggered a massive auction and this company was acquired at a very high multiple.

Why was Instagram acquired for a billion, why was WAZE acquired for a billion, why is this pricing so irrational? It comes back to the fundamental issue scarcity and value. It’s not about your 12 months revenue, EBITA. It’s really about how important is it for the buyer to own that company? That triggers valuation which is not often apparent to an entrepreneur. So my takeaway is, think about this as part of your core development plan and think about how you are going to create scarcity over a longer term.