The Forces Behind a Hungry M&A Market

The M&A and IPO markets for VC-backed companies is hot right now, and there is much attention on the huge wins like Whatsapp, King, Grubhub, and many others.

But there is also a lot of activity at the lower end of the market (exits in $12M – $30M range), and I think there are several prime forces behind these exits that we’ve experienced with some of our seed-stage deals that were sold quickly:

  • Technology companies need less capital than they did five or even two years ago. This has many HUGE implications. One is that less capital means that at lower acquisition prices, every shareholder can get a good return (investors, founders and employees).
  • Lower sales prices = more buyers. With a larger universe of buyers, a sale is more likely as is an improved multiple.
  • Small company discoverability improved. It’s a lot easier for acquirers to find interesting companies without the need of expensive intermediaries or knowing the right people. Social media, Angellist, Crunchbase, and proliferation of media outlets are recent avenues to be discovered that didn’t exist five years ago.
  • Run up in the stock markets give public acquirers a currency and not-yet-public acquirers a believable sales pitch to the target about achieving liquidity.
  • Good software development talent is hard/expensive to hire, so there is a market to acquire it.

While every VC and founder wants an outlier outcome, it comes as no surprise that it doesn’t happen for every company. Having good alternatives in scenarios where a company has not achieved exponential growth can produce really meaningful outcomes for everyone. The reality about VC is that while you swing for the fences, it’s very hard to hit a home run. Getting doubles and triples instead of zeros in other at bats can make a difference. When you are an entrepreneur, an outcome like this means millions in your bank account. Maybe not never-have-to-work-again type of money, but life-changing amounts. Keep this in mind as you are composing your financing plan for your company.

Photo credit: Steve Shinn

Copyright © 2014 Jason Heltzer