3 things startup founders need to know about M&A

When startup founders think of mergers and acquisitions (M&A), we tend to think of “Mad Men”-esque processes, involving dramatic office reshuffling and expensive rebranding. The reality though, is that M&A isn’t limited to flashy corporate businesses nor does it have to bulldoze through company culture.

In fact, since the beginning of 2021, of 530 startup acquisitions, more than half were startups buying other startups. More early-stage businesses are climbing aboard the M&A train to take advantage of fellow startups’ tech, talent and to absorb competitors. They’ve also realized that deals don’t have to have heavy price tags and red tape that larger companies navigate.

I know this firsthand from 15 years buying and selling companies. I previously worked at JP Morgan, facilitating M&A for corporate banks, and I’ve taken what I’ve learned to the startup space. I conducted 12 acquisitions at my retail platform Kiwoko, which helped it grow to over €150 million in revenue, and it was eventually sold five times.

M&A is particularly beneficial for startups that struggle to scale operationally because they essentially buy cash flow, revenue and other companies’ traffic, meaning startups grab a bigger share of their markets. They’re also a good way for startups to find, consolidate and experiment with their value proposition. The problem though, is that most founders don’t know how to get started with M&A and resign themselves to the shadows of bigger players. But mergers are accessible and advantageous to businesses of all sizes.

These are my three insider tips for startup M&A:

Let your in-house team get the ball rolling

M&A naturally comes with some friction and cost, but unlike corporates, startups don’t need to outsource people to smooth out the steps. You don’t need investment banks, advisers, legal teams and consulting firms to ensure all goes well.

Founders can run business and financial checks with the support of in-house resources like the accounting department and lawyers, as well as leverage their network and do due diligence through trusted connections. Granted, you have to spend a lot of time and focus in this vetting stage, but it is possible and effective without bringing new players in.

Beyond the logistics, founders need to actively analyze the value of the targeted company. For example, every one of the acquisitions I have made — even with significantly smaller companies — had better purchasing terms with at least one supplier.

Pinpoint what the deal could bring and why you’re doing it now. Are there opportunities for higher profitability, more users, a better chance of achieving your goals? What’s the company’s value relative to the market? Does it have strong brand recognition or significant disruptive potential? What will make the business more valuable once it’s yours? Does one of you have better marketing or the cash to guarantee the business plan is executed?

As the founder, you have to be able to articulate why the deal matters to the people that are helping you get the ball rolling.

Treat the company you want to acquire as a partner (not a project)

In the corporate space, acquisitions generally involve smaller companies getting bought and dissolving into the bigger structure. The process is very much voiceless and one way for teams. In the startup world, however, the human component is stronger. Founders tend to have a personal connection with their business, and when considering selling it, they want someone who offers a future, not just cash.

The human side of M&A is always the hardest to get right. For the company being acquired, the process is highly emotional and dependent on trust, so you as the founder of the purchasing company can’t underestimate the power of relationship-building. You have to start early and nurture M&A plans. You can’t dive in suddenly with a proposal and expect the other founder to welcome it with open arms.

Begin by speaking to your suppliers who you know are working with other startups. If they have a contact that’s caught your eye, use the supplier as a common connection and get to know them. As the relationship warms up, share information around your KPIs, tools and strategies — essentially treat them like they’re a business partner. When the time is right, say to them, “If you ever think about joining forces, call me.” They may not be interested straight away, but if they do consider an M&A down the line, you’ll be the first name on their mind.

Be conscious of the trail you leave behind

Although being transparent with fellow founders is important, you need to maintain a level of discretion when it comes to making an offer. Not doing so can easily kill the deal. The company you try to acquire or merge with wants to know that you’re sincere and respectful, and premature whisperings of an M&A could leave a bad taste in their mouth.

You need to protect your reputation at all points, too. I’ve had deals fall apart, but a year or so later the founder contacted me to resume because they knew I was delicate and consistent in how I handled the situation. If I’d had even one bad run-in with founders, I could have jeopardized all future M&A opportunities. Founders talk, and if you’re suspected of treating entrepreneurs unfairly, you’ll struggle to convince them that a merger is worthwhile.

That said, you don’t have to be soft with your terms — M&A is, after all, a strategic move for your business. Look at how the targeted startup’s profitability has changed, how much money the company needs to achieve its aims, its metrics, cash flow and existing debt. Remember that startup projections are more uncertain than corporate ones and provide more leeway for fluctuations in your calculations.

M&A is mostly unstructured among startups but it needs ongoing momentum to come to fruition. The above three takeaways can ensure that founders get up to speed on their M&A journey and keep moving forward as the roads merge.