We’re just a few weeks into 2018 and have already completed three portfolio exits: @Mattermark (by @FullContact), @MemoAIHQ (by @coinbase), and @GoPike13 (by $CSU.ca). This is a good time to share some observations about the current state of the tech M&A market – both specific insights from these transactions as well as broader observations.
More buyers than ever before
The buyer universe has really expanded over the past few years. There are still the usual suspects: Google, Facebook, Amazon, and LinkedIn. But now we’re also seeing acquisition interest from companies that have gone public over the past few years: for example, Shopify has been very active on the M&A front. Then, there are also pre-IPO companies like Slack and Dropbox and “older companies” that are trying to redefine themselves (e.g. payments processors), plus a whole new group of entrants with private equity funds that are looking at acquiring SaaS companies.
The latter has probably been the biggest story of 2017. There’s a lot of money available in private equity looking to acquire SaaS companies for roll-up plays. While it’s interesting to have a new group of buyers, keep in mind that companies that want to exit need to have a) enough scale and b) be close to profitability.
More buyers=more complexity
The increased buyer universe makes the M&A process more complex. This means that using an investment banker to help manage the process makes more sense than ever before. Of course, this route is for those companies where the expected outcome is enticing enough to attract a solid banker; if not, you should navigate the process on your own.
We used a banker in two of the three transactions and they helped work through 50 to 60 M&A leads. This allowed the CEO’s of those businesses to still spend some time on running the business instead of just focusing on M&A.
Focus on track records
The explosion in new entrants brings many new tire-kickers. As such, you need to focus your energy on potential acquirers that have proven to pull off M&A in a reasonable timeframe and have a proven track record.
Interestingly enough, in all three of our transactions, the investors in the selling company had connections to the ultimate buyer. Sometimes they made the initial introduction. Sometimes they helped shepherd along the deal when it ran into problems. While M&A experience may not be the most important criteria when choosing an investor, keep in mind that a solid M&A track record, along with general connections, might help a future outcome for your start-up.
What about aqui-hires?
Lastly, we’ve noticed that interest in pure “acqui-hire’s” has slowed down relative to 3-4 years ago. That said, there’s always very solid interest for strong engineering teams. The general tendency here is to limit payouts to investors and provide most of the outcome for the team.
It has been an exciting way to start 2018. Selling a portfolio company is always bittersweet after working with founders so closely over many years. But I am excited that these three portfolio companies found new platforms to bring their talents to the world. And, we now have additional bandwidth to take on new investments.