Why Index Ventures warns against mid-sized M&A deals

This article summarizes an episode of TechCrunch’s video series featuring Shardul Shah, a partner at Index Ventures.

Shardul Shah, a partner at Index Ventures / Photo credit: Index Ventures

Index Ventures manages funds that help grow tech startups worldwide. Shardul Shah, a partner at the firm, shares that traditional acquisition plans often fail when they target mid-sized businesses. He notes that maximizing growth today often requires abandoning the middle ground and choosing between massive companies or very small teams.

This approach creates stability by focusing on the extremes of the market. Shah believes, success comes from avoiding the operational complexity that often emerges when mid-sized companies are combined. By using this two-sided plan, buyers can generate higher returns for investors and prevent daily work from stalling.

Rethinking the acquisition scale

Attempts to integrate medium-sized companies frequently run into operational problems. While these deals may initially look attractive, they often hide structural problems that disrupt daily workflows.

Shah notes that buying only the largest or smallest companies tend to produce clearer results and outcomes. “M&A has been a tried and true component of creating shareholder value over time,” Shah says. “The two ends of the spectrum tend to be the most successful.”

Valuing the human element
Whether acquiring a massive enterprise for its market share or a tiny startup for its niche expertise, success depends on more than just the product.

Evaluating a large company solely based on its software ignores its actual market value, as seen in Google‘s reported US$32 billion pursuit of Wiz. Shah recommends focusing on these areas to ensure a successful purchase:

• Scale creates market power when acquiring large, established companies.
• Talent brings in specialized, highly skilled teams through smaller acquisitions.
• Leadership strengthens operational direction illustrated by Assaf Rappaport at Wiz.
• Culture strengthens the internal environment by investing heavily in top executives.

Defining defense boundaries

Beyond financial acquisitions, technology leaders also face difficult decisions when collaborating with government agencies. Developing AI without strict ethical boundaries can risk enabling excessive government control.

Anthropic recently challenged the US Department of Defense in court to defend its internal ethical standards. The lawsuit challenges standard defense agreements, and attempts to set limits on activities such as espionage and self-firing weapons.

Mobilizing industry support
Shah views confronting federal pressure alone is an enormous risk for any single organization. In response, workers from competing technology companies united to provide legal backing through collective support:

• Solidarity unites employees from competitors like OpenAI and Google to defend industry standards.
• Courage requires individuals to risk their own jobs to put their names on legal filings.

The cost of purposeless hardware

While software developers debate ethical applications, the hardware sector faces a more basic challenge: utility. Selling a physical device that fails to solve a clear consumer problem often leads to rapid market rejection.

Overcoming the privacy barrier