Startups are a tough sell

We knew the IPO market was bad for venture capital-backed startups, but it seems the M&A market isn’t getting any easier for them either. At least that’s what Paul Deninger, an investment banker at Jefferies & Co, said at a technology summit at Stanford University.

“The M&A market is going to get tougher,” Deninger warned. “We’ve got to repopulate the buyer base. You can count on one hand the buyers.” He named the usual suspects – IBM, Cisco, Microsoft, Hewlett-Packard – and other big companies that have tons of cash and are always on the lookout for a good buy. But after all, there are only so many startups these tech giants are interested in or have the ability to buy. “That can’t last forever.”

What’s worse, the competition among those trying to sell companies is only going to get tougher, Deninger said. That’s because venture capitalists are increasingly investing in companies that will be “good M&A opportunities, rather than pursuing big ideas that could become standalone IPO companies,” paving the way for an eventual glut of M&A candidates. That’s not surprising given the current market environment, where not a single venture-backed company went public in the second quarter.

But some of the other speakers at the summit had encouraging words for entrepreneurs who may be fretting that they won’t be able to sell or go public, especially if they have a well-developed line of products or services.

“Are you a feature, a product or a company?,” Lise Buyer, a principal at Class V Group, which advises companies exploring the IPO option, asked startups to ask themselves. “If you’re a feature or a product, maybe you could go public at another time, but not now,” she said. “But if you’re a company, hang in there.”

Morgan Stanley banker Drew Guevara, meanwhile, had some advice for startups on how to play the M&A game. The trick, he said, was to make a potential acquirer feel like it wants you, rather than tacking on a “for sale” sign. “Have somebody say they want you.” After all, “you can’t do a hostile sell-side,” said Guevara, whose firm is involved in two hostile takeover deals this year — Microsoft’s failed takeover offer for Yahoo and Electronic Arts’ ongoing hostile bid for smaller rival Take-Two.

Photo: Summit at Stanford website