Startup M&A and accruals are expected to pile up in the fintech sector and this already appears to be showing. However, recent events, such as Thrasio’s impending bankruptcy, provide a warning.
The opportunities, pitfalls and risks of technology M&A are real. When does it make sense to execute M&A as a technology startup? And how can you avoid the most common pitfalls? We dive into both.
As Simon from Marqeta told me: “I always say that M&A is a tactic and not a strategy. For Marqeta we have a north star we’re building towards and if acquiring a company can get us there faster we would look at it. Smart, well-built and well-run modern technology that can be additive to a greater mission will always be in demand.”
This is critical.
Startups must ask themselves the hard questions around the rationale for M&A.
In other words, do mergers and acquisitions allow the development of cross-selling of new products to expand the encounter with the visitor? In unit economics, this means consistent average order price per visitor (AOV) or lifetime price (LTV) is increasing, with strong CAC.
As Ross Buhrdorf, CEO of Zenbusiness and founding homeway: “In homeaway and now in Zenbusiness, we see the roll-ups as an opportunity to boost expansion through greater distribution, whether known brands known in a market or a biological product “. search engine optimization position. » (Disclosure: I was a past investor in ZenBusiness at my previous company. )
Some acquisitions allow companies to better serve existing or new consumers with the existing product line in a more sustainable way. This affects the visitor acquisition rate (which could reduce it) or the length of the market (which could expand the reach of visitors). Square’s acquisition of Afterpay is an example.
For example, getting a deal in another geography or visitor segment.
M&A can help increase a company’s moat or defensive positions.
Certain deals must be owned for fear of others owning it. Arguably one of the reasons Visa had offered so much for Plaid was because it would be too painful for a competitor to own it.
Many M&A deals build internal features (for example, today’s topic: synthetic intelligence and pending acquisitions) to better serve consumers and make it harder for others to borrow from them.
Price determines the price created as opposed to the price paid.
Some roll-ups are based on an expansion thesis (by extending the duration of the company, the roll-up will be valued at a premium). Getting the access value right is essential.
Mergers and acquisitions are built on the promise of “synergies” – operational efficiencies derived from a combination.
But don’t forget that either can be uncertain: multiples replace each other and synergies take longer to materialize, if at all. The value of the transaction deserves to reflect this uncertainty.
The deal has to paintings for everyone. For dealers, money is what they are hunting out for. But buyers would possibly need to stay dealers. They would possibly also need to mitigate adverse variety (is the asset as smart as the dealers claim).
That’s why incentives are important. One solution is to design a portion of the purchase as fair to keep distributors engaged.
Profits can also be difficult tools to meet valuation expectations among traders who think the company is worth more than buyers. For example, if traders believe that some long-term transactions will go through and deserve to be settled, a profit can this gap?
Price and deal structure are drivers of success. But risk is real and should be recognized. For example, one of Thrasio’s pain points was its floating rate debt, whose cost exploded in a rising interest rate environment.
Allow a margin of protection so that even if everything doesn’t turn out perfect, everyone wins.
Buying a sole proprietorship can be difficult, especially if it is large. If you want to summarize, you want to create a playbook.
This means a structured way to map the ecosystem, prioritize goals, perform due diligence, and execute deals. As Ross emphasized to me: “It is imperative to have a well-established playbook at each and every level of an acquisition, from studies to the final levels of logo generation and integration. »
This is the easiest part. The most complicated thing is to set the price of what has been built. Some have argued that Thrasio is strong on the former, but that the latter is a challenge on an Amazon-dominated platform. Ensuring that stock is stored at scale while forecasting demands in a dynamic environment is not straightforward.
Roll-ups can be huge opportunities. But they also pose risks. Go ahead and roll!
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