Startup M&A - Unintended Consequences
As M&A within the startup community is reaching record levels, we’d like to shed some light on potential unintended consequences of an acquisition, in particular future funding rounds.
Acquisitions are a vital tool for startups. You might close a product gap or enter a new region by acquiring a local player. And of course there is the opportunity to grow faster. To grow by acquisition is something you want to be very intentional about.
Assume you’re a $35m ARR business and you’ve just closed a nice funding round based on your stellar 50% growth rate. Your direct competitor is struggling and you’re using some of that new cash to acquire their $15m business for a very reasonable multiple. That deal is allowing you to post a 100%+ growth on the combined business. Life is awesome.
A little less than two years later you’re going for the next round of funding. Your core business has continued to grow with an exceptional 50% and you’ve managed to keep churn on the acquired business at a net 20%. A great job given that it was a direct competitor. As you approach new investors, you now find yourself in the position to explain your growth has been “only” 29%. Life is now very complicated.
Note: Simplified illustration of the impact of an acquisition (here as a Google Sheet).
What the example illustrates, is that acquisitions are impacting your business far beyond the announcement date. Especially acquiring cheap, e.g. a struggling competitor, comes with unintended consequences. A single acquisition that is not growing or adding cross selling is a short lived pleasure and your year 2 results might be painful. I emphasise single acquisition as a rollup of multiple companies might eliminate these issues, especially when timed right.
Planning to grow by M&A or like to learn more about how acquisitions shape startups? Ping me and we’ll connect you to a startup CEO that has been there before.