M&A-led Growth Strategies: How startups are employing acquisitions to augment their growth

Tami Bronner
Jul 5 · 9 min read

When looking at the new characteristics of the Israeli tech scene: the enormous amounts of money invested in early-stage startups, the competition over talent and the expectations for hyper-growth, it’s obvious why acquisitions are no longer confined to public or soon-to-be-public companies. Instead, they have become a major growth accelerator for Israeli private tech companies in early to mid stages.

In the past year, four of our portfolio companies have announced acquisitions of other companies: Verbit acquired two companies for tens of millions of dollars, Guesty acquired two companies, OwnBackup acquired two and Zencity just recently announced an acquisition. Yotpo also acquired two companies in the past couple of years.

CEO Spotlight Tomer Targin, Yotpo, Acquired 2 Companies

“We discussed many different ideas on how to make Yotpo’s TAM (Total Available Market) even bigger, which resulted in a major strategic change. We knew we couldn’t achieve our goals by building everything ourselves, because we lacked the required talent or expertise. It was clear we needed to take immediate action in order to sustain growth for the next two years. Two product acquisitions helped us achieve these strategic goals. As a result of the M&A, we set up a new development center, allowing us to scale up the team.”

When looking at the data, we can clearly see the growing trend of M&As led by Israeli (founded by Israelis and headquartered in Israel) private tech companies.

Considering current trends and the number of acquisitions so far, 2021 is expected to have almost twice as many acquisitions as 2020, which was the year with the largest number of acquisitions until then. While there is no available data about the size of the acquisitions, we can presume these are fairly small ones, given that these companies don’t have endless piles of cash on their balance sheets. Despite their size, the growing number of acquisitions is reshaping the local and global tech scene.

CEO Spotlight: Amiad Soto, Guesty, Acquired 2 Companies

“The trigger for the acquisition was strategic. We created a checklist of what we were looking for and based on that we created a funnel of potential companies for acquisition. M&A processes require a lot of planning and attention, synchronizing the goals of multiple stakeholders, and aligning with company strategy. Therefore, we created a dedicated department in charge of corporate development and strategy, which manages the whole process.”

Why M&As?

For many companies, non-organic growth is a fast and efficient answer to the need to quickly increase their revenues, customer base, product usage, and headcount. This is often the leap they need to take to gain a competitive advantage in the market.

The 4 Types of Acquisitions

There are four main reasons for companies to acquire other companies. Each has its own unique challenges and opportunities.

M&A Reason #1: Audience Expansion

If a company has an operating product and an established product-market fit, it can induce its growth by purchasing a company with a similar service or customer base.

The Value

By transferring the customer base, the acquiring company can accelerate multiple growth processes in the organization and the product. First, the ability to provide a solution for new and varied audiences enhances the maturity level of processes, services and the product itself. This advantage is augmented even more if this audience represents new use cases and needs, and comes from new geographies. Second, the acquirer can optimize its own value proposition by analyzing the new customer data to produce new valid insights. Third, the company can improve its negotiation power with various services and providers based on the larger number of customers. Fourth, from a financial perspective, the acquirer can improve the new business’s gross margins and net retention by leveraging its existing assets, capabilities and know-how.

Pre-M&A Thoughts & Considerations

The basic KPI that determines success in such an acquisition is the ability to preserve new customers and make sure they don’t churn after the transition. Companies must deeply understand what their new customers are already getting today. Then, they need to identify any gaps and, if necessary, scale up their product infrastructure and adapt it to meet the needs of the new customers. In addition, they need to ensure that the unit economics of the acquired companies are improved, or at least aren’t decreasing following the acquisition.

CEO Spotlight: Tom Livne, Verbit, Acquired 2 Companies

“The purpose of our first M&A was customer acquisition. Due to our AI-based technology, our new customers could increase the amount of transcription services they were purchasing, enabling us to earn more from each customer. Our cost of providing services was also lower than the service provision cost of the company we purchased, which was providing manual services. Thus, we were able to increase the gross margin, increase sales volume and keep our customers happy. This created a financial arbitrage — we created growth, we improved and upgraded our assets and we created more free cash flow.”

M&A Reason #2: Filling Product Gaps

Any gaps in a company’s product offering can create churn and disturb the ability to acquire new customers. Purchasing a company with a product or service that completes or supplements the acquiring company’s product can solve this problem.

The Value

On the one hand, this type of M&A is complicated, requiring the highest technical and operational level of product integration. On the other hand, it’s a big win if it works. Integrating both products successfully can significantly shorten timelines and quickly bring value to customers. This creates a competitive advantage, without having to develop the product in-house.

Pre-M&A Thoughts & Considerations

To succeed in this type of acquisition, it’s important to involve all relevant stakeholders in the organization: development, product, operations, sales, support, marketing and more. This will help create integrations on all levels and find gaps that might fail the process.

CEO Spotlight: Eyal Feder-Levy, Zencity, Acquired 1 Company

“We recently acquired a company with a product that complemented a missing part of our offering. The need came from our customers, so we knew they would be receptive to our new offering. We also integrated the acquired company’s existing customers into our product, enabling us to grow our ARR. We consider the acquisition very successful. We had been growing organically very well, but we challenged ourselves to grow faster and more aggressively. We invested a lot of time and effort in finding the right company that would answer our needs and expectations.”

M&A reason #3: Expanding to New Markets

If part of the company’s strategy is to expand its services to adjacent markets, then purchasing a mature company can answer that need.

The Value

A product addressing a complementing market provides multiple advantages: shortening time to market, acquiring expert knowledge in domains that don’t exist internally, gaining a competitive advantage over competitors, and gaining a consolidated team that has experience working together and cares about the product’s success.

Pre-M&A Thoughts & Considerations

In these types of acquisition, the acquired companies usually continue to operate alongside the existing teams after an M&A. Therefore, to succeed in this type of acquisition, it’s important to ensure the acquired company is a cultural fit to the acquiring company (even if they will be working as an autonomous unit). In addition, it’s important to validate that the product’s quality is up to standard, that there is a technological fit (for future optimization) and most importantly that there is a synergy between both companies to enable new market capture at low costs.

CEO Spotlight: Amiad Soto, Guesty, Acquired 2 Companies

“Our second acquisition was a new product, targeting a new audience with different requirements. The acquired company had a Guesty-like product but for small customers, and was entirely self-service. The fact that the new company is located somewhere else is an advantage and an opportunity to expand to new geographies.”

M&A reason #4: Acqui-Hire

When a company needs skilled talent, it can purchase a company for its human resources. In such acquisitions, the product of the purchased company usually ceases to exist.

The Value

Hiring quality talent is a huge challenge, nowadays more than ever. As a result, salaries are inflated, companies are trying to out-source off-shore and even out-sourced talent is scarce. By purchasing another company, the acquiring company gains the people and the skillset. In many companies, dedicated teams have been built solely for finding such companies to acquire.

Pre-M&A Thoughts & Considerations

In such an acquisition it’s important to clearly understand the skill set that’s being integrated into the company. In addition, it’s important to ensure there’s a cultural fit and to examine and plan how the different sites will work together.

CEO Spotlight: Sam Gottman, OwnBackup, Acquired 2 Companies

“ We needed a way to fast track the hiring of developers to keep up with our agressive new product development goals . So we acquired an Israeli company with talented people. They brought their skillset as well as their networks for hiring more employees from new audiences. Hiring is a challenge that we think will only get worse and worse. We’re trying to find creative solutions for this problem. We have two people in corporate development whose main role is to find such deals, negotiate them, and lead the integration process after the acquisition.”

Lessons Learned and Future Thoughts

M&As are processes that require attention, planning and resources, including a dedicated team that can connect the acquisition to the company’s strategy and culture. The more accurate the planning is, the easier the next phases will be.

“During the process, we learned there were many M&A associated costs that we weren’t aware of beforehand. If we’d known, we would have determined who was responsible of them beforehand, to remove friction. It’s important to understand that these processes take more time, money and attention than you think.” “The acquisition process takes a lot of preparation. You need someone in charge who knows what to ask, what to look for and to coordinate the process. It’s also important to provide the new company with an incentive for the acquisition, in addition to money. They need to be part of the vision and the company after the acquisition.” Eyal Feder-Levy, Zencity

“It’s important to remain humble throughout the acquisition process, so take the time to understand the advantages of the company you’re acquiring and how they are better than you. Remember, you’re not an investor, you’re an acquirer and you need to make a logical decision. Do not fall in love with the company, the idea or the other founders. Finally, M&A is a muscle that you need to keep developing. Learn how to manage the founders of the acquired company ( they initially reported to me or to my co-founder Omri), how your culture is impacted, etc.” Tomer Targin, Yotpo Sam Gottman, OwnBackup

“It’s important to manage communication throughout the entire process to make sure messages are conveyed correctly. The PMI (post-merger integration) kickoff has to be structured, to make the acquired company feel they’re a part of the new company. After all, we know everything about them, they know almost nothing about us. To that effect and since we plan quite a few acquisitions down the road, we hired an experienced VP PMI.” Tom Livne, Verbit

These five Vertex Ventures’ portfolio companies, which have successfully acquired companies in the past, plan to keep using M&A as a growth engine. They feel they’ve learned from each acquisition and will be bolder in the next one. At Vertex Ventures, we are excited by this trend and plan to promote it when relevant to many of our portfolio companies, while helping them find out how to make it right. We’re certain this trend will continue and trickle into younger companies in Israel, redefining and reshaping the future of the tech scene.

Originally published at https://www.linkedin.com.

Vertex Ventures IL

We partner early with global-minded entrepreneurs who seek to disrupt large markets

Vertex Ventures IL

Vertex Ventures Israel is a leading Venture Capital firm. In the last 20 years, with over $1B assets under management across the Vertex funds, we have been privileged to partner with some of Israel’s best entrepreneurs, and joined their journey to success.

Tami Bronner

Written by

Partner at Vertex Ventures

Vertex Ventures IL

Vertex Ventures Israel is a leading Venture Capital firm. In the last 20 years, with over $1B assets under management across the Vertex funds, we have been privileged to partner with some of Israel’s best entrepreneurs, and joined their journey to success.