How Startups Get Acquired

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At the early stage, exit considerations for your startup seem like a champagne problem for way down the line. But there is a new current reality at top of mind for every VC these days: “How do I exit my portfolio?”

Not having at least some thoughtfulness here will impact your fundraise success. But more importantly from a founder perspective, a significant percentage of your net worth (not to mention the many years committed to building your baby) will be tied to your startup equity.

Of the 3 major ways to get liquidity, the M&A by strategic acquirer is the most stochastic (See below). Tabular just exited at $2B valuation while allegedly only doing $1M ARR (!)

• Liquid Markets: IPO if equity (Relatively straightforward if you can hit your public investor KPIs); Token listing if token

• M&A by Sponsor: Cash flow based (Straightforward if you backsolve by PE requirements)

• M&A by Strategic: Extremely wide range of outcomes

We’re going to break down below the categories acquirers look for in a startup M&A target, historical examples, and how you can position yourself here.

M&A for Product Expansion

The most popular reasons for acquisition is to expand the product - which can be broken down into two themes:

1. Vertical Expansion

2. Horizontal Expansion

From a business point of view, there is a clear flywheel whether it’s vertical productization or for horizontal expansion of offerings:

For vertical stack M&A, controlling more of the infrastructure both improves the robustness of the business moat as well as removes additional layers of middlemen - in other words, cheaper costs leading to margin expansion or more competitive pricing.

An example here is Amazon’s acquisition of Kiva Systems (2012, $775M cash). As Amazon’s ecomm operations grew increasingly complex, they looked to automated warehouse robotics solutions. They landed on acquiring Kiva which was developing exactly this product. By vertically integrating Kiva (vs just being a customer), Amazon integrated Kiva’s products directly into its workflows, did not need to worry about risk of supplier jacking up fees, and reduced costs for end customers.

For horizontal product M&A, companies can operate creative playbooks for growth. Companies can cross sell the portfolio of products into captive distribution channels of existing audiences - effectively accelerating growth for the cost of adding a new button to the UX.

Back in my banking days, I worked on Morgan Stanley’s acquisition of E-Trade. The logic was simple: MS acquires the brokerage platform which gets boosted volume from wealth management clients having this new product, while wealth management gets new HNW clients who already are on the E-Trade platform.

Zuckerberg in my opinion is one of the most underrated CEOs executing this strategy. Most notably, he identified Instagram & WhatsApp as new trends for messaging & social sharing - and funneled Facebook users towards those apps post M&A to solidify their network effect dominance. While also bundling advertising across all his assets under Meta. Without those two apps, Facebook as a standalone company would have significantly less users and negotiation power amongst advertisers.

Other companies are more explicit about bolt on M&A for financial engineering. Salesforce for example is more akin to private equity through M&A of vertical SaaS solution and creating bundles for their sales teams to push into their B2B distribution networks. Higher EPS growth through acquiring fast growing startups and boosting it with embedded distribution leads to better multiples in the public market. Salesforce even has a whole page dedicated to their long list of acquisitions: Link

M&A for Talent

It goes without saying that as a founder, one of your biggest tasks is to recruit the brightest minds throughout the company.

If your systems and processes are built well, this can be such a huge advantage for you that your pool of talent becomes an edge even in a low moat business.

From a numbers standpoint, employees are the delta between value delivered and salary. This “delta” can come from great systems in place to empower team to become exceptional, or incredible 10x talent that is otherwise rare to recruit for.

Big companies sometimes look to acquire companies just for that talent for several reasons: (1) It takes a long time and recruiting costs to build out a new unit in a company (2) The best talent often is not available for traditional hiring (3) The company can expand this “delta” of value vs salary by increasing the “LTV” of employees through plug and play into larger scaled products.

Great example here is Apple’s acquisition of PA Semis in 2008 when Apple wanted to build out its chip unit. Apple accelerated buildout of this unit through acquisition of PA Semi’s ~150 engineers. After seeing the PA Semi unit shut down, it’s clear Apple wanted primarily the talent rather than the IP or other assets.

M&A for New Geographies

If your product is attacking a specific local market, you know how difficult it is to integrate all the local rails and operational intricacies.

For large companies seeking to enter a new market, M&A (for the right price) could accelerate the GTM. Granted, this only works if your product requires localization - otherwise it is cheaper to just hire out a local BD / Sales team to scale the existing product. Localization can include licensing, connectivity to existing distribution or tech rails, etc. that takes time to build.

Great example of this is with Stripe, where their core business takes very long to integrate with local banking infrastructure. For Stripe, while they do build direct local connections to expand to new geos, they’ve also done M&A to accelerate this process. In 2020, they acquired Paystack for $200m in 2020 to offer similar services in Nigeria.

Sometimes companies also acquire just for the licenses - Mexico and Brazil for instance are notorious for lengthy application processes for financial services licenses. It’s quite often the case that fintechs here get acquired just to fast forward half a year of legal work while the rest of the operating company gets tossed aside.

M&A for Ecosystem Lock-in

Creating an ecosystem of other developers creating apps on a platform is important for scaled tech co’s to keep a fast pace of innovation and new experiences. Having the right developer toolkit both attracts more developers with unique ideas to build in that ecosystem as well as keep them locked in there once they’re successful.

Many examples of developer tools that have been acquired:

• Meta acquired Parse, a mobile backend-as-a-service (MBaaS) platform, in 2013 for approximately $85 million.

• Microsoft acquired GitHub on June 4, 2018, for approximately $7.5 billion in stock.

• Nvidia acquired Brev.dev in 2024, which helps AI developers find cost-effective GPU compute across cloud providers which enhances Nvidia's offerings for AI and machine learning development.

M&A for Threat Elimination

Scaled companies sometimes buy out competitors to eliminate the potential for disruption - though this is becoming less frequent. The regulators have been increasingly aggressive on anti-trust approvals, with any denials subject to hefty breakup fees.

Great example here is Adobe’s M&A of Figma, which was eating Adobe’s lunch. Adobe and Figma mutually agreed to terminate the merger agreement a year after it was announced.

On a smaller scale, many 7-8 figure M&As are snapped up by Google / Facebook / other big tech in order to both eliminate threats and acquire talent. The FTC estimates Microsoft, Apple, Google, Facebook and Amazon together made 616 acquisitions from 2010 to 2019 below their reporting threshold of $92M.

Advice for Founders

Most of the advice below is on par for building a great company anyways - but it serves as a good reminder for the important things:

• You are rewarded for doing a few hard things well, not necessarily many things “ok”

• Hire a great team around you

• Dominate your niche before looking elsewhere

• For B2B, make sure you are an indispensable supplier. And building a strong relationship with the product teams you work with gives you great feedback on what works and what doesn’t - keep in mind the product teams are relied upon too for feedback to C-levels if you are considered for an M&A.

• The best companies are bought, not sold. In the case of Tabular's ~$2B acquisition mentioned above, there is a reason why it got bided up so high - Databricks and Snowflake both felt the FOMO that their product was critical for their AI initiatives.