GSK — a notary popular with the Berlin startup community.

M&A for startups

M&A stands for Mergers and Acquisitions and it most often refers to the process of one company buying another (real mergers of equals are very rare). Buying and selling companies is typically a lengthy and complicated process with a lot of tricky pitfalls on the way. Given that most companies engage in M&A relatively rarely and that stakes involved are typically very high, there is a whole industry of M&A advisors aiming to help out in such situations. I myself worked at one such advisory company for a couple of years before I moved to Berlin to fully focus on startups and VC.

At large corporations, M&A can be very strategic (think Daimler and Chrysler merging to form Daimler-Chrysler — which does not exist anymore), can have massive financial implications that are complex to analyse and understand, and represents a lengthy and complicated process that can be very difficult and time consuming to manage. For startups the situation is somewhat different. Whereas acquisitions can indeed be picture changing strategically, they are more often tactical. Assessing the financial implications of an acquisition in the startup world is rather straightforward and the process itself is also manageable (although certainly time consuming and tricky). This would imply that startup CEOs should always keep in mind the possibility of acquiring other companies/assets when opportunities arise. Unfortunately, in my experience, startup CEOs, especially the younger ones and especially in Europe, frequently reject this thought outright stating that it is certainly too expensive, such things never work out, etc. I think this is a mistake. I myself have seen and was involved many times in M&A situations that were very beneficial to startups, even at the early stages of their existence. Here are some examples, clustered according to the main drivers behind the acquisitions:

1) Entrepreneurs buy a small company / underdeveloped product to further develop it. This helps them jump over the phase of gaining initial traction and product market fit, speeds up time to market. Examples: Niania.pl/Pomocni or Docplanner.

2) A startup buys another startup in a different country to speed up / enable international expansion. Examples: Madvertise in Turkey, Delivery Hero in Sweden, Mister Spex in Sweden, Spreadshirt in Poland.

3) Market consolidation. Competitors go together to create a company with a stronger market position: SponsorPay + GratisPay.

4) Product range expansion: Brainly invests in mailgrupowy.

And there were also many examples of acquisitions that did not even make it to the news.

The question that arises most frequenly when discussing this topic with startups is one of paying for such acquisitions. Many will say that this is a tool only available to well funded startups. This is only partly true. Being creative when it comes to structuring the payment for an acquisition, if no sufficient cash is immediately available, has been one of the success factors in the situations I witnessed. Some options are:

  • payment partly or whole in shares (no/little cash changes hands)
  • payment based on performance
  • payment in instalments
  • payment subject to raising financing (yes, you can agree on a deal and then go fundraise to finance it)

Everything that works for the seller and buyer can be agreed on and structured accordingly. Taken to the extreme, M&A can be a strategy and a skill that lets you win a market and defeat your competitors, just like any other skill an organisation develops.

Overall, my experience with startup M&A has been that it can really work well. But as with more mature companies, also at startups things can go wrong. Finance scholars actually tend to claim that M&A in mature companies tends to destroy rather than create value and cite overpaying and integration challenges as key reasons. I have not yet seen a study on how M&A works at startups and whether it ads or destroys value, but I would say that overpaying and integration are certainly things to look at closely. But there are enough examples showing that it can work very well and I think startup CEOs should not be opposed to M&A, but always carefully consider the merits of potential acquisition opportunities.


Originally published at pawel.ch.