Hey guys,
As capital gets harder and harder to raise, something is shifting in the conversations I'm having with founders. The ones who had big exit plans, ambitious valuations they were building toward, are starting to look at where things actually sit and ask a different question: is an M&A transaction, getting acquired, the best option on the table?
It's a fair question, and I think more founders should be asking it earlier than they are. The first thing to understand is that what an acquirer values about your business changes everything. Are they buying the technology? The customer base? The business as a whole? Depending on what they're actually looking for, what they're willing to pay can look completely different, and in most cases it's going to be very different to what you raised at your last venture round or what you'd been targeting.
Here's the part that's genuinely hard to sit with if you’ve raised big rounds in the past: the amount you'd get from an acquisition may often struggle to cover the preference stack. Which puts you in a position where you’re needing to weigh up what’s right for the business vs what’s right for you personally as a founder. You may be staring at a number on the table and asking yourself:
"Do I take this now, or do I keep building toward something that might result in a better outcome for me and my investors down the track?"
There's no easy answer to that, but I think founders need to be honest about where things actually sit rather than holding onto a plan that the market has moved past.
If you're in this position, the question worth asking is: what’s the alternative to an acquisition? For startups who have been around for a while where growth has slowed, fresh capital is not as readily available as it was in the past. While an acquisition today may not be at the valuation you were hoping for when you set out, often there are few alternatives to turn things around in the short-medium term.
If you’re exploring this notion, you need to ask who exists out there that would genuinely value my customers, my technology, or my business as a whole? And what does a realistic plan look like to get ready for that kind of transaction? Because readiness is its own challenge. You need to clearly articulate the story around the business, show the value of whatever the acquirer cares about, whether that's revenue, tech, or the customer base, and demonstrate how your business fits into theirs in a way where one plus one doesn’t equal two, but instead three. They need to see how the acquisition benefits them, not just what they're buying.
What people forget is that these opportunities don't come around often. So when the window is there, you want to be ready for it.
For Founders looking at avoiding M&A for now and getting back on a growth path, there are more alternative forms of capital than in the past. Ryan O'Dea from OneVentures to talk through how venture debt fits into that picture.
Over the past 12 months KCV has been involved in a a number of M&A transactions with our clients, and all played out very differently. A few fell over when the buyers expectations were misaligned with the Founders. Of the couple which were successful, the common trait was that it was clear what the value add the startup was delivering for the acquirer. In one case, it was the technology which was built over a number of years. The acquirer cared little about the revenue or customers - for them it was about buying capability. For another it was purely financial and buying future revenue (i.e. ARR). Both those businesses were valued very differently, but the common trait was the Founders being able to articulate how they fit into what the acquirer was looking to achieve.
If you're starting to think about whether getting acquired is the right move, the first step isn't finding a buyer. It's getting honest about what your business is actually worth to someone else based on what an acquirer will value, and whether that number works for everyone around the table. The founders who navigate this well tend to be the ones who started the conversation before they were forced into it.
Luke
PS: If you're working through whether your business is positioned for an acquisition conversation and want to pressure-test the numbers, that's something we work through with founders regularly. Reply to this email.