As Venture-Backed IPOs Remain Closed, Qualcomm and Google Execs Offer Some M&A Advice to Startup CEOs

9/17/09Follow @bvbigelow

The keynote speech that former SEC chairman Christopher Cox delivered yesterday at San Diego’s Seventh Annual Venture Summit was billed as a look at the conditions necessary for the IPO window to reopen, a topic of keen interest to scores of VC partners in the audience.

But Cox’s main theme was really focused on the unprecedented scale of the government’s $14 trillion Wall Street bailout and how it has imperiled the U.S. economy. He left the impression the IPO market won’t be warming up anytime soon. So, after the luncheon, it was only natural for attendees to show high interest in two panel discussions that focused on mergers and acquisitions (one for the life sciences sector and one for technology).

The consensus? Cautious optimism—at least in the session I attended on technology M&As. Executives from Qualcomm and Google agreed that the overall economy seems to be stabilizing, and the climate for corporate buyouts of technology startups has been improving.

“From Google’s perspective, it appears that the worst is over,” said Karim Faris, who joined Google’s corporate development team in 2008.

The half-day summit was organized by the San Diego Venture Group, a non-profit networking group for the venture community and service providers. More than 550 people registered for the event, according to Peter Shaw, who is president of the group’s board (and a freshly recruited Xconomist). Shaw told me this year’s summit was the venture group’s “most ambitious ever” because they never before hosted a high-profile speaker like Cox, or dual-track panel discussions.

If anything, however, the former SEC chairman’s talk only underscored how crucial buyouts have become for venture firms to realize some return on their investments. “A real imbalance in the supply and demand for cash has required all of us to become a lot more disciplined in what we do,” said Tom Baruch of CMEA, the San Francisco VC firm. Baruch served as the moderator in the session on technology M&As with Google’s Faris and Duane Nelles, a Qualcomm vice president for business development. Among the highlights:

—It’s becoming more important for startups to secure a corporate partner with a vested interest in developing new technology early on. Such interest often evolves into a buyout offer. But Qualcomm’s Nelles warned startup CEOs to choose their first business partners carefully. “If a company comes to Qualcomm after working with some of our competitors, there certainly are some concerns,” Nelles said. “We’re cautious about whether we can trust them completely.. And in buyout talks, Faris said, “the momentum can shift very quickly from a one to a zero—and then the interest [in acquiring your company] is gone. So focus on keeping the momentum going, and get the deal done.”

—When asked how a startup CEO should solicit a prospective corporate partner, Baruch said, “You’re going to know right from the beginning if you’re going to need a partner. So look for investors with connections to that sector, look for accountants with connections to that sector, look for law firms with connections to that sector.” Qualcomm’s Nelles added, “With six degrees of separation, usually you can find someone.”

—Like many technology giants, Google and Qualcomm were previously focused primarily on acquiring young startups with key technology and talent. But that’s changing. “We’ve been very focused on technology in pre-revenue types of situations,” said Qualcomm’s Nelles. “Now we’re starting to move more toward business-model type acquisitions, with more attention on EBITDA [Earnings before the deduction of interest, taxes and amortization]” Karim added that while his team continues to look primarily for acquisitions with “talent, technology, and market,” Google also is now also looking for “late-stage companies with real cash flow.”

—When asked about the process of absorbing a startup after an acquisition, Qualcomm’s Nelles said, “The most important thing from my perspective is always on integration, because if you don’t do a good job, you’ve blown the value of your acquisition. So focusing on the team, and how you’re going to integrate the team, is really important.”

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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