M&A activity broke records last year, with more than 3,000 M&A deals globally, according to Crunchbase. Now we see the market cooling off with less favorable economic conditions. Halfway through the third quarter of this year, just under 1,600 startups have found an acquirer in the market.

Despite this, startup M&A should see a strong showing in the fourth quarter of 2022, just not quite as strong as its recent historic heights. We are starting to see a promising rebound with Adobe's planned acquisition of Figma. Knowing the ins and outs of an M&A process is more imperative than ever as we enter a less seller-friendly market and see a shift back to more scrutiny and fairly balanced deal terms.

Canvas General Partner Mike Ghaffary spent seven years at Yelp, helping close more than 200 deals across business development, strategic partnerships, and M&A. During those deals, Mike developed deep relationships and integrations with companies such as Apple, Amazon, Stripe, Facebook, and Microsoft. In this Q&A, Mike shares his insights and advice on M&A, a top-of-mind topic for founders. 

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Why is M&A especially relevant right now?

If a company doesn’t have a clear path to an IPO, its founders should consider the M&A process. Even with a plan to IPO, it’s worth knowing your options.

The perception within the fundraising landscape in the past ten years was that the next fundraising opportunity was right around the corner. Founders and investors often assumed that capital markets were always open if the company grew at a certain rate. Founders weren’t thinking about strategic options or what an exit path would look like, but 2022 has been a harsh wake-up call for all of us. Even if you're marching down the path to becoming a public company, you must consider your exit options along the way if you hit a tricky point in raising the next round of cash and you're not yet profitable. Perhaps an alternative exit is the best outcome for everyone involved.

Now there is a correction in valuations across the board, from public companies to venture financings, creating heightened interest in M&A by founders. We haven’t seen a big wave of consolidation, but the conversations are happening now. I predict a wave will come in the next few months, likely during Q1 of 2023. 

In addition, even if you don’t think it’s the right time for M&A for your company, those conversations can lead to a valuable strategic partnership or investment, so the time invested can pay off that way too.

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When should a founder start to think about the M&A process?

Developing strategic exit options should begin much earlier in a company’s journey than most founders realize. 

I advise founders to start thinking about the M&A process in the early business development stages, during strategic conversations. 

More often than not, companies that are planning to acquire you are companies that are also interested in creating multiple partnerships or extensive integrations. 

Years before a pending acquisition, I highly recommend creating a large strategic map of all the large companies and small startups in your industry. Then, map out where you can develop relationships with the CEOs and executives at these companies. Ask your investors and founders to help foster connections by introducing you to people they may know at these companies. If you are targeting public companies, identify their strategic priorities in public filings. It’s a great place to launch the conversations and showcase that you understand their priorities and how your company might fit in. 

If you're speaking with a company that would never consider a strategic partnership with you, it’s not likely they would acquire you either. 

Developing these relationships and having these conversations early in a company's life span will set you up for future success. 

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What are your top 5 tips for founders on the M&A process?

1. Find and establish a relationship with your business champion.

One common mistake founders make is assuming that a corporate development person (corp dev), or the first person to call them from a potential acquirer, is the person that will champion an acquisition later. That assumption is incorrect. The first person to contact you may not even have a relationship with the relevant person who cares about the strategic priorities that make sense for your company. Build your network in the target company and take your time figuring out who at the company has a P&L (profit and loss responsibility) related to your startup. That person is someone who looks after the business or product area and is looking to grow it. They will be the ones to raise their hand one day and say, “If I could acquire this company, this area in the company that I oversee would improve; it will help the bottom line or new product innovation.”

2. Build lifelong relationships, not one transaction.

Don’t look at these meetings as transactional. These strategic conversations are broader opportunities to develop relationships and enjoy the process. As a founder, this is an excellent opportunity to build relationships with the biggest tech companies and most relevant companies in the industry. These relationships can extend from your current company to the next one you create. There are people I met early on in my career during these strategic conversations that have become some of my lifelong friends.

3. Think realistically about your position during the process.

For many companies at the early stages of Seed and Series A, you are most valuable as an acquihire, a way to acquire key talent and a fresh set of minds for the company. Founders often think an acquihire bailout is always available as a fallback option, but it’s not easy, especially in this environment. An acquihire acquisition can be for $0 and nothing more than a new job offer for the founder. Sometimes, if the founder or team of a company is very valuable, the acquisition will be more than that, but it rarely exceeds $5 or $10 million. If an acquihire is your only option, it’s worth considering, but it’s often not the significant, strategic outcome that founders want. A strategic acquisition is about much more than just acquiring talent/employees. The business champion you are working with will call out the strategic offering an acquisition would bring, such as product innovation or huge revenue growth, and how it will directly affect the company’s bottom line. Strategic acquisitions can bring in the more significant price figures founders want. They usually start at $20 or $50 million and can go up depending on the company's value after the acquisition. At Canvas, we helped Gabi through an acquisition by Experian for $320 million and FutureAdvisor through an acquisition by  BlackRock for $150 million. On the other hand, when I was at Yelp, we acquired Eat24 for $134 million and then went on to sell Eat24 to Grubhub for $287 million. As a founder, you want to ensure any interested acquirer has a clear vision of the value your company brings as a whole. 

4. Get smart on the role of investment bankers.

Similar to hiring a talent search firm, hiring an investment banker to help match you with the right companies can be very helpful. You might be able to source and run leads for an acquisition process on your own, but the investment bankers already have the resources and connections. Investment bankers come at a price but are often worth it. Once you’ve hired an investment banker, it can signal that you are pretty serious about selling the company to your investors and employees. Remember what you are signaling during this process and ensure you are ready for that step. 

5. Think broadly about the landscape of acquirers.

There are many tech, and non-tech companies you never imagined would be interested in acquiring your startup, but they might be worth considering. For example, I wouldn’t have guessed that Lululemon would acquire the fitness hardware startup Mirror. A few years ago, people wouldn’t have thought that Amazon would buy One Medical Group. Are there retailers or traditional non-tech companies you should speak with? Are there tech companies you think are unrelated but might be worth understanding better in case they become interested in your area?

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