How to Use M&A as a Tool to Accelerate Growth

Hi everyone, my name is Teddy Wardy with Inside Venture Partners. Today I wanted to talk to you about something a little bit unconventional which is around doing M and A as a startup yourself. So basically startups acquiring other startups. And this is not just about like, you know, something you do on a later stage when you raise that, you know, $120 million that PJ from Showpad had done, but something you can do at the series A stage when you're doing small active hires to build out your team. But before that, just wanted to give you quick introductions and backgrounds. I used to be a CTO and operator, co founder of SaaS startup, spent six years building that made all the mistakes you can possibly ever do. But somehow we got acquired by a public tech company and since then, for the last five years I've been investing in European application layer SaaS companies such as Showpad, Collibra, Pipedrive, Automile, BitMovinn and a number of others and something about Insight. So we are a New York based global venture and growth equity investor. We've been around for 20 plus years, raised over $18 billion and counting. And we, our focus is broadly software, which we define mainly as B2B and enterprise software with some B2C thrown in. We invest mainly in the growth stage, so think series B series C, but also do some things earlier as well as some later stage buyouts. And finally, we've been investing in Europe for quite a long time and some of our success stories that have made it all the way to IPO include Mimecast, Delivery Hero, HelloFresh and some others. So on this topic, so how, like, what are the things? Like what would you consider, why would a startup be buying another startup? So the conventional high growth playbook is that, you know, the only good growth is organic growth and you know, acquisitions should happen at the very late stage and be focused on cost cutting and so forth. So we think a little bit differently if you want to get to $100 million ARR, which, which is the goal for a lot of people. Although the journey doesn't really end there, there are many ways to get there. So acquisitions could be for a number of reasons. First one is just kind of building out your team, so acquiring talent. There's so many teams out there who have great, you know, great people, but maybe their business hasn't taken off the ground that well. Having them join you instead of shutting down shop can be a great outcome for both parties. And usually you see these things happening like on the engineering side people are acquiring Machine learning and you know, AI teams, for example. Another one to think about is geographic expansion. Let's say you want to, you know, open that second engineering location. Let's say you want to open that APAC sales location. Acquiring something earlier stage might be a good way of getting there. A third one is product expansion. So let's say you've realized that, you know, you're on a good track, but you know, let's say due to competitive pressure or whatever reasons, you really want to have a broader suite that you go to market with. That's a good reason to buy something early and kind of grow it from there instead of always building yourself. And finally, of course, if you can buy ARR a cheaper multiple than your own multiple, it might actually make sense in certain situations. But be careful not to be too opportunistic. So what do these deals actually look like? So in most cases there's a pretty heavy equity component. So it could be something like, you know, you pay out the existing investors of a business, but you have the founders or the management team of the target role equity to a combined entity and that kind of sets the incentives and kind of you kind of get a new co founder or a team member or multiple of those to your business. And contraindications would include large amounts of venture funding. So those pesky venture investors often feel like they want to get their money back. So you know, if you see an early stage company that's like 10 employees and raised like $30 million, it might be harder to make a deal work, at least in a way that everyone kind of walks away recently happy. And these things are a win for sellers as well. I mean, some of you might be in a situation that you'll be acquired by another startup. And I kind of want to emphasize that these things are win win. So for the seller, it's about taking some cash off the table, actually participating in much more meaningful bigger upside with lower risk. So more upside and lower risk is usually a win for the other party as well. So you might say that you're so focused on core growth, how would you ever manage an acquisition and then, you know, integrating that. So I would recommend to focus on minimizing distraction as the number one thing and then realizing value from day one. So I have a checklist of things that you might want to consider. First one would be office location. So you want to think about something, let's say in your primary location to begin with, or at least if you are, you know, acquiring something that's in a different city or country think about, you know, very simple things like are there direct flights? Because this might affect things. How do you make things work? Second one would be management and cultural fit. Is the management team and the employees like a cultural fit to your business? Is their values fit? Do you think this, you know, they work the same way. You really don't want to distract your business by buying something that might cause chaos and a lot of friction between your teams. Third one would be sales motion. Is your product something that you can plug and play and have their sales rep sell immediately? You know, is their product something that plugs to yours? And that's like extremely important to think because you don't wanna be kind of a dual brand company for a very long time. One other thing would be talent pickup. So if you think about your own hiring plan, let's say you're, you know, you wanna, you need to hire your CMO in the next six months, but an acquisition might actually get you a great cmo. That might be a good reason to move forward. On the other hand, if you're doubling up on a lot of talent and management team members, it might be a challenge to make things work and have a bit of a different approach. Final, one of the most important things is product integration. So can you integrate the products to make the offering into a single solution that makes coherent sense? And if you can't, is it still okay? Actually many situations it's okay to have a suite of products and you know, you can do value capture at the account level. So you know, you might be selling two completely separate products to the same buyer and that might actually still work quite well. So the perfect world you want to integrate, but it's not always a necessary thing. So let's take an example case. Some of you might have seen pj, the CEO of Chopad on stage a bit earlier today. So they bought a company called LearnCore and the way they thought about it was that Showbot is a sales imbalance platform focusing on content. And they got some pressure on consultation industry, some comments about analysts and kind of questions from the customers that it would make great if the product had a training and coaching component. So Chopad went out and found this target, Learn Core and managed to do acquisition. And the motivation there was around of course the product combination. The two products are much more valuable as a combination than they were separately. Situation wise. They were both in Chicago, good cultural fit. The management team didn't have a lot of overlap, so it was a no brainer on that front as well. And finally the talent pickup was really helpful on tech side. So Chopad had struggled hiring certain types of engineering talent, which LearnCore had. So that worked out very well for both companies. And you know, after some lengthy negotiations, both businesses came out with a, you know, great experience and then are very excited about building the company forward. So, you know, the session is called VC's pitch founder. So I of course have to tell you about how Insight can help here. So at Insight, we did 50 acquisitions for our portfolio companies just during last year and we are probably on a run rate of doing the same thing this year. So we've seen a lot of things of different sizes. So what we can do starts from planning, so building a strategic plan for the M and A. What are you looking to buy? Like what directions are you, are you looking for? And then our pretty broad analyst pool can help source those opportunities, look for everywhere in the world and kind of feed you with a pipeline of M and A opportunities. You can think about this as like an outsourced corp dev team. And then in terms of engaging those opportunities, it's sometimes much easier if it's an somebody from Insight who's reaching out to the target, you know, trying to see if there's a deal to be made or if they're even interested in discussions, then you know, you as the acquirer going directly. So when you get ahead in a process and you find a target that you want to do a deal with, then of course supporting on deal structure and negotiation is very important. We have so many benchmark of deals so we can, you know, help you pay the right amount and structure things in a way that makes sense. And on the execution side, helping with planning, diligence, making sure that you, you know, tick all the boxes and you know, as you're doing probably the very first time that you don't make any, any rookie mistakes and end up buying something that you didn't intend to. Financing is a big component. So for example, when Chopad wanted to buy LearnCore, you know, there was a big cash component to the deal. So we very flexibly offered additional equity financing to showpad at the kind of market terms without them having to go out and raise yet another round. So having the equity financing on tap is a big value add for businesses that go about buying a lot of companies. And finally, integration is the most important thing. So we've done a lot of integration work, we created handbooks, we've kind of like gone through all the processes you must think about when you, when you put companies together because that's like really where the rubber hits the road of. Thus the, you know, do you realize the synergies and do you make those visions work? So a few closing notes. So M and A is an acquired skill. So it's good to start early and it's good to start small. So you know, starting early means that you might want to do that small acquire of like that two person startup which is like some small piece of technology and just get it done and you get the feel of how to run through the process, how to integrate things. Because at some point as you're a larger company, you might be wanting to buy a company for let's say $50 million. So it's good to practice this muscle and cultural fit, I would say is the most important thing of all of these elements and it should never be overlooked. It's almost like, you know, I think series A startups most mostly die for two reasons. One is they run out of cash and the second one that there's founder drama and things fall apart. So if you just like gotten through the founder drama bit and crossed the chasm when you're adding a new management team or a new co founder business, you, you don't want to like trigger that drama for yourself again. So just be very careful that you have great kind of fit with the people you'll be working with for the next five plus years. And final one would be of course recommend working with an investor partner who has done it before and has your back, both in terms of financing but also in terms of just backing a coherent M and a strategy. Thank you.