Most businesses would kill for 20 percent annual growth. But in the tech world, if this is your reality, you have a 92 percent chance of being dead within a few years.
Growth fixes require major intervention to a product and the way it is sold – requiring years companies do not have to show results. However, a solution that can give near-instant boosts to growth is chronically overlooked: M&A.
Since 2015, startups globally have acquired 2,418 businesses, according to Crunchbase data. US startups account for 58 percent of transactions; Europe for 16 percent. In absolute and relative terms, those figures should be higher. From speaking to founders, it is clear to me that buying other startups can achieve four things.
First, talent acquisition. “Acqui-hire” is when a company buys another for its employees, typically engineering teams often yet to launch a product. Back in 2009, Facebook bought Friendfeed for its engineers. One of them was Bret Taylor, who went on to become Facebook’s CTO.
Second, acquiring a product. This means advancing a product roadmap without having to build yourself. To take one European example familiar to me, Louis Jonckheere, the CTO and Co-founder of Showpad, which lets salespeople source and organise resources, knew the company’s users needed to be well-trained. This led to Showpad buying LearnCore, the leader in sales coaching software, in June 2018.
Third, entering a new market. Moving into a new geography requires setting up an office, hiring locally, building brand awareness and a pipeline of customers. Acquiring a local player bypasses this. French ride-sharing unicorn BlablaCar does exactly that, strategically acquiring local players in order to scale as fast as possible.
And fourth, buying up competitors can land a new customer base, reduce competition and increase revenues overnight. Templafy, a Netherlands-based startup that builds corporate brand management software, found, as it internationalised, that it was up against local competitor iWriter. The former acquired the latter in May 2019, and the combined entity immediately became the domestic market leader. Integral to the move for Templafy’s CEO Jesper Theill Eriksen was the fact that iWriter founder shared the vision of creating a new category.
If we are to see more European tech startups using M&A to scale faster (and more quickly than their competition), those of us with some overview of doing this must speak out.
Crunchbase data from M&A transactions over the past five years show that, once a company has raised more than $25m, activity jumps. These businesses and, crucially, those just below that bracket, should be encouraged to accelerate their growth – because that is how Europe can usher in not just a handful, but legions of $1bn companies. In my experience as an investor, timing and process are everything.
If a company has not found product market fit, an acquisition could scupper progress, distracting the founder, even the entire organisation. Small, first-time acquisitions can be opportunistic, but thereafter companies should have a roadmap, hire corporate development resource to avoid focus dilution, and do in-depth “buy versus build” analysis covering cost, timings and the risk of building in-house versus acquiring in the market.
When it comes to finding potential targets, companies can look to four types of source leads: investors, outbound (the company asks), inbound (potential acquirees contact the company) and channel partners, who, like investors, work with multiple firms and have a wide network.
Once a target has been identified, the due diligence process kicks in – an opportunity to focus on everything from shared vision to customer overlap, to how transferable the target company’s technology stack is.
Next comes the transaction negotiation itself. Key areas are the valuation, whether a cash or equity payment is being made, and the future role of the acquiree founder. Pitfalls are, unexpectedly, numerous. Status and remuneration of a founder are sensitive, purchasing a company using cash raised in a funding round can be financially inefficient, and frequently, targets have no revenue – so a “buy versus build” analysis has to be used to determine price.
Following an acquisition or merger, integration is absolutely vital. Research from the likes of KPMG and Harvard Business School, indicates that anywhere from 50 to 85 percent of mergers fail. The statistics are rosier for small businesses, but that does not alter the fact that much of this can be put down to mis-managed post-merger integration. Companies must focus on culture, product and technology – particularly if the acquisition will move them from single-product to platform company – and showing customers how it adds value.
To become global category winners, Europe’s tech startups need to emulate the best practice of US counterparts. Buying up your competition should be on the radar of any tech company that has found product market fit and knows where it wants to go next.
Part of the answer should be: global, and as fast as possible.
Featured image: Markus Spiske on Unsplash