Edtech Business

Companies Are Bought, Not Sold: M&A Advice From 3 Edtech CEOs Who Survived the Process

By Tony Wan     Sep 10, 2018

Companies Are Bought, Not Sold: M&A Advice From 3 Edtech CEOs Who Survived the Process
From left: Larry Kane (Orrick), Jinal Jhaveri (Schoolmint), Kim Taylor (Cluster), Jacob Klein (Curriculum Associates)

At the start of this decade, the education industry saw hundreds of flowers bloom. Launched from garages and tech accelerators, startup after startup burst onto the scene with technology tools for the education market.

The industry has since consolidated, due in part to an uptick in mergers and acquisitions by education companies and private equity firms. Data from investment bank, Berkery Noyes suggest these deals have grown at a steady clip since 2013.

Education Industry Mergers and Acquisitions
Source: Berkery Notes data from 2015, 2017 and 2018.

So what is it like—and what does it take—to sell a company?

“You don’t just one day say, ‘I’m going to sell,’ meet someone and they buy you,” says Kim Taylor, CEO of Cluster and former co-founder and CEO of Ranku. “Someone who buys you is going to know who you are already. That’s the thing people often forget.” In 2013 she started Ranku, which helped colleges and universities market their online programs, and sold the company to academic publisher Wiley in 2016.

At the EdSurge SF Edtech Meetup last week, Taylor was joined by fellow education technology entrepreneurs who also built and sold their startups—and survived to tell their tales: Jacob Klein, former CEO of Motion Math and now director of learning games at Curriculum Associates, and SchoolMint/Hero K12 CEO, Jinal Jhaveri. They were joined by Larry Kane, a partner with Orrick who’s advised and facilitated hundreds of education business transactions.

“Turning equity into cash is the hardest thing you will ever do,” Kim adds. She and her fellow panelists all also agreed on another thing: Companies are bought, not sold.

Too Early to Think Exit?

The quick answer: No. But that doesn’t mean founders should be oblivious to these opportunities. At the same time, no one builds a great a company if they’re pursuing a sale from day one.

“Being in love with your product is a really important part for most CEOs,” says Klein. “But to really build a business, you have to also be fascinated—or hire someone who is—with customer acquisition strategies, and the nuts and bolts of growing a sustainable business.”

That’s one of his biggest takeaways from Motion Math, which won early acclaim in 2010 for its math game apps for the iPad. In its early years, the startup’s revenue came largely from selling apps—a model that ultimately proved unsustainable. The company raised an early seed round but could not raise a Series A.

In 2013 Motion Math began to develop a subscription business, and Klein began conversations with possible partners. In 2013, he met executives from Curriculum Associates, who told him it “wasn’t the right fit” at the time. Two years later they told him that a partnership could be “interesting.” Finally, in 2017, Curriculum Associates made Motion Math an offer and acquired the learning games company.

That process went for longer than Klein had planned. But for buyers, timing is everything. Even when it’s not the right time, maintaining relationships with business partners is key. But “keep these conversations as concise as possible,” Klein advises. “Unless you’re really a key part of a company’s strategic plan and a top priority, it’s not going to be worth the hassle to pursue and court an acquisition.”

For Taylor, who sold Ranku, “it’s never too early” in a startup’s journey to explore exit opportunities. That doesn’t mean that a founder should be constantly running a sales process, however. More important, she says, is to understand where you sit in the market and ask: “What do you do that other people can’t do? Who else is playing in your space? Who doesn’t care about what you do?”

Being a student of the industry, she adds, will help entrepreneurs better grasp which opportunities are worth pursuing—and which would be a waste of time.

In some cases companies are founded with the express purpose of getting acquired in six months, according to Orrick’s Kane. That’s a misguided approach. “It is a mistake,” he says, “to build a product just for a sale, no matter how well entrepreneurs think they know a potential buyer.” After all, he added, buyers always have other options.

Just Another Number in Excel?

For education entrepreneurs driven by a mission to improve education, this can be sobering advice: “When you start a company, especially if you’re venture-backed or have outside funding, you need to remind yourself that you are an investment for someone, and they’re looking for some sort of outcome at some point,” say Jhaveri.

“To look at it in a more depressing way,” he adds, “you are part of someone’s spreadsheet.”

Jhaveri co-founded Schoolmint, an online K-12 enrollment platform, in 2013 before selling it last year to Hero K12, a company backed by BV Investment Partners, a private equity firm. (Hero K12 is rebranding itself as Schoolmint, which Jhaveri will run as CEO.)

Investors can sway the sale process, says Kane. “If you’re taking venture capital, you have to understand that investors may have different exit criteria.” Among the questions an entrepreneur should ask: What’s the time period in which investors want to see returns? What are the liquidation preferences (the order in which shareholders get paid after a sale)? There are deals, Kane notes, where investors get their money back but leave founders with nothing.

The ideal investor is aligned with the company’s mission, says Klein: “If you come to them with two deals—one with slightly better economics, but the other one is from a company with an aligned mission that’s actually going to help kids, the investor will understand why [the latter offer] is the better deal.”

Are Bankers Worth It?

Deals involve much more than just a sale price. So to negotiate the best overall transaction, many companies turn to investment bankers. Klein, who hired several bankers over the life of Motion Math, found them helpful in doing a “market test” to see which potential buyers may be interested, and what they are willing to offer.

Key to negotiating the best possible terms is having multiple offers, and bankers can help drum up interest. Buyers “will lowball you unless they think there’s competition,” says Kane, and “a good banker can sometimes help get entrepreneurs to a higher offer quicker.”

Yet not all of them add value to the sale process. Entrepreneurs who have done their homework may find that they know more than bankers. Taylor advises vetting bankers closely; too frequently she felt “underwhelmed” with the ones she interviewed, who seemed to be learning more about the industry from her than she was learning from them. Ultimately, Ranku’s sale to Wiley came as the result of a relationship she had developed and maintained over time.

And Jhaveri did not use a banker at all in Schoolmint’s sale to Hero K12. “I had connections,” he says. “How can a banker know more about my business and my space more than I do?”

These days, Jhaveri is on the other side of the table, seeking out potential acquisitions. Now he recommends that entrepreneurs seek professional help. There are many terms that require negotiations, and the process can be “emotionally draining,” he says. “A lot of times there are tough decisions to be made, and you want to detach yourself and have someone else be the bad cop for you.” (His wife was also the co-founder of Schoolmint, which likely added to the emotional toll. Jhaveri says they’re still together.)

The Term Sheet

There’s more to a sale than just the acquisition price. Most term sheets include details that outline the conditions that have to be fulfilled. Certain performance targets may need to be met and entrepreneurs may be required to stay with the parent company before earning their full cut of the sale. Sometimes there are even non-compete clauses that bar them from joining a rival company afterward.

Sometimes, what seems like a small detail could derail a sale, like drawing up employment contracts and confidentiality agreements. For early startups focused on growth and execution, says Klein, keeping on top of personnel paperwork can seem like a nuisance—but do it anyway, he recommends. (Or find a law firm that can do it for you.)

“Just because you sign the term sheet doesn’t mean you’re going to close the deal,” reminds Kane. Entrepreneurs need to keep their business running during the due diligence process, during which the buyer may uncover details that could change the offer terms, or rescind it altogether. Problems often take the form of pending lawsuits or contested intellectual property rights.

Perhaps most importantly, says Taylor, is that the buyer and seller “feel like everyone’s aligned and incentivized for good things to happen.”

Recommended Reading

Throughout the conversation, the panelists referenced several blog posts they found to be helpful in navigating the mergers and acquisitions process.

Edtech Business

Companies Are Bought, Not Sold: M&A Advice From 3 Edtech CEOs Who Survived the Process

By Tony Wan     Sep 10, 2018

Companies Are Bought, Not Sold: M&A Advice From 3 Edtech CEOs Who Survived the Process
From left: Larry Kane (Orrick), Jinal Jhaveri (Schoolmint), Kim Taylor (Cluster), Jacob Klein (Curriculum Associates)

At the start of this decade, the education industry saw hundreds of flowers bloom. Launched from garages and tech accelerators, startup after startup burst onto the scene with technology tools for the education market.

The industry has since consolidated, due in part to an uptick in mergers and acquisitions by education companies and private equity firms. Data from investment bank, Berkery Noyes suggest these deals have grown at a steady clip since 2013.

Education Industry Mergers and Acquisitions
Source: Berkery Notes data from 2015, 2017 and 2018.

So what is it like—and what does it take—to sell a company?

“You don’t just one day say, ‘I’m going to sell,’ meet someone and they buy you,” says Kim Taylor, CEO of Cluster and former co-founder and CEO of Ranku. “Someone who buys you is going to know who you are already. That’s the thing people often forget.” In 2013 she started Ranku, which helped colleges and universities market their online programs, and sold the company to academic publisher Wiley in 2016.

At the EdSurge SF Edtech Meetup last week, Taylor was joined by fellow education technology entrepreneurs who also built and sold their startups—and survived to tell their tales: Jacob Klein, former CEO of Motion Math and now director of learning games at Curriculum Associates, and SchoolMint/Hero K12 CEO, Jinal Jhaveri. They were joined by Larry Kane, a partner with Orrick who’s advised and facilitated hundreds of education business transactions.

“Turning equity into cash is the hardest thing you will ever do,” Kim adds. She and her fellow panelists all also agreed on another thing: Companies are bought, not sold.

Too Early to Think Exit?

The quick answer: No. But that doesn’t mean founders should be oblivious to these opportunities. At the same time, no one builds a great a company if they’re pursuing a sale from day one.

“Being in love with your product is a really important part for most CEOs,” says Klein. “But to really build a business, you have to also be fascinated—or hire someone who is—with customer acquisition strategies, and the nuts and bolts of growing a sustainable business.”

That’s one of his biggest takeaways from Motion Math, which won early acclaim in 2010 for its math game apps for the iPad. In its early years, the startup’s revenue came largely from selling apps—a model that ultimately proved unsustainable. The company raised an early seed round but could not raise a Series A.

In 2013 Motion Math began to develop a subscription business, and Klein began conversations with possible partners. In 2013, he met executives from Curriculum Associates, who told him it “wasn’t the right fit” at the time. Two years later they told him that a partnership could be “interesting.” Finally, in 2017, Curriculum Associates made Motion Math an offer and acquired the learning games company.

That process went for longer than Klein had planned. But for buyers, timing is everything. Even when it’s not the right time, maintaining relationships with business partners is key. But “keep these conversations as concise as possible,” Klein advises. “Unless you’re really a key part of a company’s strategic plan and a top priority, it’s not going to be worth the hassle to pursue and court an acquisition.”

For Taylor, who sold Ranku, “it’s never too early” in a startup’s journey to explore exit opportunities. That doesn’t mean that a founder should be constantly running a sales process, however. More important, she says, is to understand where you sit in the market and ask: “What do you do that other people can’t do? Who else is playing in your space? Who doesn’t care about what you do?”

Being a student of the industry, she adds, will help entrepreneurs better grasp which opportunities are worth pursuing—and which would be a waste of time.

In some cases companies are founded with the express purpose of getting acquired in six months, according to Orrick’s Kane. That’s a misguided approach. “It is a mistake,” he says, “to build a product just for a sale, no matter how well entrepreneurs think they know a potential buyer.” After all, he added, buyers always have other options.

Just Another Number in Excel?

For education entrepreneurs driven by a mission to improve education, this can be sobering advice: “When you start a company, especially if you’re venture-backed or have outside funding, you need to remind yourself that you are an investment for someone, and they’re looking for some sort of outcome at some point,” say Jhaveri.

“To look at it in a more depressing way,” he adds, “you are part of someone’s spreadsheet.”

Jhaveri co-founded Schoolmint, an online K-12 enrollment platform, in 2013 before selling it last year to Hero K12, a company backed by BV Investment Partners, a private equity firm. (Hero K12 is rebranding itself as Schoolmint, which Jhaveri will run as CEO.)

Investors can sway the sale process, says Kane. “If you’re taking venture capital, you have to understand that investors may have different exit criteria.” Among the questions an entrepreneur should ask: What’s the time period in which investors want to see returns? What are the liquidation preferences (the order in which shareholders get paid after a sale)? There are deals, Kane notes, where investors get their money back but leave founders with nothing.

The ideal investor is aligned with the company’s mission, says Klein: “If you come to them with two deals—one with slightly better economics, but the other one is from a company with an aligned mission that’s actually going to help kids, the investor will understand why [the latter offer] is the better deal.”

Are Bankers Worth It?

Deals involve much more than just a sale price. So to negotiate the best overall transaction, many companies turn to investment bankers. Klein, who hired several bankers over the life of Motion Math, found them helpful in doing a “market test” to see which potential buyers may be interested, and what they are willing to offer.

Key to negotiating the best possible terms is having multiple offers, and bankers can help drum up interest. Buyers “will lowball you unless they think there’s competition,” says Kane, and “a good banker can sometimes help get entrepreneurs to a higher offer quicker.”

Yet not all of them add value to the sale process. Entrepreneurs who have done their homework may find that they know more than bankers. Taylor advises vetting bankers closely; too frequently she felt “underwhelmed” with the ones she interviewed, who seemed to be learning more about the industry from her than she was learning from them. Ultimately, Ranku’s sale to Wiley came as the result of a relationship she had developed and maintained over time.

And Jhaveri did not use a banker at all in Schoolmint’s sale to Hero K12. “I had connections,” he says. “How can a banker know more about my business and my space more than I do?”

These days, Jhaveri is on the other side of the table, seeking out potential acquisitions. Now he recommends that entrepreneurs seek professional help. There are many terms that require negotiations, and the process can be “emotionally draining,” he says. “A lot of times there are tough decisions to be made, and you want to detach yourself and have someone else be the bad cop for you.” (His wife was also the co-founder of Schoolmint, which likely added to the emotional toll. Jhaveri says they’re still together.)

The Term Sheet

There’s more to a sale than just the acquisition price. Most term sheets include details that outline the conditions that have to be fulfilled. Certain performance targets may need to be met and entrepreneurs may be required to stay with the parent company before earning their full cut of the sale. Sometimes there are even non-compete clauses that bar them from joining a rival company afterward.

Sometimes, what seems like a small detail could derail a sale, like drawing up employment contracts and confidentiality agreements. For early startups focused on growth and execution, says Klein, keeping on top of personnel paperwork can seem like a nuisance—but do it anyway, he recommends. (Or find a law firm that can do it for you.)

“Just because you sign the term sheet doesn’t mean you’re going to close the deal,” reminds Kane. Entrepreneurs need to keep their business running during the due diligence process, during which the buyer may uncover details that could change the offer terms, or rescind it altogether. Problems often take the form of pending lawsuits or contested intellectual property rights.

Perhaps most importantly, says Taylor, is that the buyer and seller “feel like everyone’s aligned and incentivized for good things to happen.”

Recommended Reading

Throughout the conversation, the panelists referenced several blog posts they found to be helpful in navigating the mergers and acquisitions process.

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