Startups are increasingly looking at M&As to scale. Here are a few pointers

One of the best ways to scale a startup is through mergers and acquisitions (M&As). As the CEO of Everise, I’ve been involved with more than 20 M&As myself, so allow me to share some of my observations and experiences on this front.

M&A as a growth strategy

Not a week goes by these days without some sort of M&A news making it into headlines. In the US, the first half of 2018 alone saw US$2.5 trillion in mergers, making that year the biggest in terms of major corporate deals ever.

A similar phenomenon is happening in Southeast Asia as well. A recent report by Baker McKenzie touted the region as a top destination for mergers, acquisitions, and investments in the next two years. In Singapore, for example, 40% of corporate executives plan to acquire investments amid rising competition for assets and geopolitical disruption, according to the 2018 Southeast Asia edition of the 19th Ernst & Young Global Capital Confidence Barometer report.

There are good reasons why so many companies, including startups, are looking to M&As as a growth strategy.

The first is geographical expansion. A firm might be a leader in one specific market, but it often takes years to build a solid distribution network or gain a foothold in a new market with existing players. An M&A, on the other hand, can accomplish both in relatively short order and gain founders access to new clients, markets, and talent.

The second is acquiring capabilities. Many tech-based firms buy other entities to enhance their own products and services. For Everise, we purchased a company in 2018 because it built a multilingual conversational AI platform that allows organizations to automate customer and employee experiences. That was a capability that we didn’t have at the time.

The third is the people. More than just the tech, you also want to look at the brains behind it. For us, the founders of the firms we acquired are part of our executive leadership team and continue to lend us their unique perspectives.

Finally, M&As are also a viable exit strategy for startups, which often have very slim chances of success to grow beyond the initial stages. As such, merging or being acquired by someone else puts a company in a very secure place.

Growing via M&A is by no means the only option out there, but I argue that it is certainly one that makes a whole lot of sense, especially for tech firms. Think about it: many startups possess precious intellectual properties. However, monetizing these assets is a challenge to say the least. That’s part of the reason why, when it comes to initial public offerings, we tend to see business-to-business or business-to-consumer brands and not deep tech companies, which is just a harder sell.

On top of this, M&As allow startups to command a higher valuation. The buyer or buyers involved in the negotiations usually have an immediate need for its product and/or service, and a bidding war will no doubt boost its worth even further.

Beware of pitfalls

With that said, there are plenty of potential problems.

The first is the fact that the acquisition price is likely to be below the ideal price tag. While I constantly encounter startups that want to be the next unicorn, it’s not that easy to become one. On a related note, buyers tend to offer some – if not most – of the acquisition in a share swap, which means that founders are unlikely to get the whole acquisition price in cash after they sign on the dotted line.

A typical M&A transaction also involves complicated legal processes and multifaceted agreements and deal structures. So, it’s important to hire outside counsel that specializes in M&As, specifically in areas such as tax, compensation and benefits, employee matters, intellectual property, cybersecurity, and data privacy.

Another drawback is a loss of autonomy. Once a startup is acquired, the owners are handing over part – if not all – of the control to someone else. I sometimes come across startup founders who get overly attached to their business – and I totally understand. However, every company has a right price and the right buyer. At the end of the day, the business is only as good as the day it is monetized.

My advice to founders is to have an open and candid conversation with the company that it’s merging with. If there is a role for everybody, great. If there isn’t, that’s fine too. Put all these things on the table and have an honest discussion.

The right time at the right price