The Startup Velocity Question: Joining Forces Through M&A

Let’s look further at the issue of solid companies that have achieved $10M, $20M, $50M in revenue, close to breakeven, but not necessarily growing at an exponential pace. 

One commonly used strategy is to combine two companies in a related space to achieve growth and rationalize expenses.

Building a sales force is very expensive. For a $10M, $20M, $50M company to keep investing in growing a sales force is often not very profitable. However, if two or three companies come together and sell their products through a joint sales force, the profitability equation can be much more attractive.

In these cases, product lines need to be rationalized.

Positioning needs to be rationalized.

What is the umbrella positioning that can capture the strengths of the combined entities?

Often, two entities may have competed against each other for the same customer.

Now, they are together. 

How should they partner?

What segment should they go after?

What is the defensible bottom up TAM for that segment?

And finally, what is the exit strategy that drives the combined entity to a logical conclusion, offering returns to all investors?

Is a strategic exit possible? Does the combined entity have something unique to trigger a strategic acquisition by a larger player?

Or, is a financial exit the more likely outcome? 

Can the Positioning and the TAM support adequate growth (doesn’t have to be exponential, but has to be respectable) to lure a PE acquirer?

What about profitability? PE acquirers seek profitability. Can you achieve attractive profitability within a reasonable timeframe to attract Private Equity buyers?

These are the challenges to work through in combining venture funded startups facing the velocity question.

Key Takeaways:

• M&A can be a strategy for companies with $10M-$50M revenue to achieve growth and rationalize expenses.
• Combining sales forces can improve profitability for smaller companies.
• Product lines and positioning need to be rationalized in M&A scenarios.
• The combined entity needs a strong umbrella positioning that captures the strengths of all parties.
• Segmentation and TAM analysis are crucial for the newly formed entity.
• Exit strategies (strategic or financial) need to be reevaluated for the combined company.
• Profitability becomes more important, especially for attracting Private Equity buyers.

My Question to You:

Are you considering M&A as a growth strategy?

If you think you need help, consider 1-on-1 Private Consulting with me. I will diagnose and create a path forward in an hour.

Photo by iSAW Company on Unsplash

This segment is a part in the series : The Startup Velocity Question