How to Use M&A as a Tool to Accelerate Growth Feat. Insight Venture Partners (Video + Transcript)

Teddie Wardi’s, Principal at Insight Venture Partners, session at SaaStr Europa talked all things M&A. While most of us assume M&A happens late stage, Teddie gives a list of reasons why you should use M&A in your growth strategy. Key takeaways:

  • M&A allows you to acquire talent you didn’t have before
  • M&A helps you expand geographically at a lower cost
  • M&A will help you expand your product line

We’re doing it SaaStr Europa bigger and better in June 2019.  Grab your tickets! 🙂

Transcript

Teddie Wardi | Principal at Insight Venture Partners

Hi everyone. My name is Teddie Wardi. I’m with Insight Venture Partners. Today I wanted to talk to you about something a little bit unconventional, which is around doing M&A, as a startup yourself. So basically start ups, acquiring other start ups. And this is not just about something you do in a later stage, when you raise that $120,000,000 that PJ from Sherpa had done, but something you can do at the series A stage when you’re doing small hires to build out your team. But before that I just wanted to give you quick instructions, backgrounds. I used to be a CTO and operator, co-founder of a SaaS start up. 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, Calibra, Pipedrive, Automile and a number of others.

And something of insight so we are New York based, global venture and equity investor. We’ve been around for 20 plus years, raised over 18 billion dollars and counting and 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 somethings earlier as well as some later stage buyouts.

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, Hello Fresh, and some others. So on this topic, so how like what are the things, what would you consider, why would I start up, be buying another startup? So the conventional high growth playbook is said you know, the only good growth is organic growth and 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 a hundred million dollars ARR, which is the goal for a lot of people, although that 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 teams. So acquiring talent. There’s so many teams out there who are 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. Usually you see those things happening on the engineering side, people are acquiring machine learning and AIT for example. Another one to think about is geographic expansion. Let’s say you want to 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 realized that you know you’re on a good track but let’s say through 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 you know if you can buy ARR cheaper, a cheaper multiple than your own multiple it might actually make sense in certain situations, but be careful not to be too optimistic.

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 or business, but you have the founders or the management team of the target roll equity to combine entity. And that kind of sets the incentives and kind of you can’t get a new co-founder or a team member 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 a company that’s like ten employees and raised like 30 million dollars it might be harder to make a deal work at least in a way that everyone kind of walks away reasonably happy.

These things are a win for sellers as well. I mean some of you might be in a situation that you will be acquired by another startup and I kind of want to emphasis that these things are a 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 low risk is usually a win for the other party as well.

So you might say that you are so focused on core growth, how would you ever manage an acquisition and then 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 acquiring something that’s in a different city or country think about very simple things like are there direct flights because these might affect how do you make things work.

The second one would be management and cultural fit. Is the management team and the employees a cultural fit to your business? Is their values fit? Do you think 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.

The third one would be sales motion. Is your product something that you can plug and play and have their sales rep sell immediately? Is there product something that plugs to yours? That’s like an extremely important thing because you don’t want to be a dual brain company for a real long time.

One other thing would be talent pickup. So if you think about your own hiring plan, let’s say you need to hire the CMO in the next six months, but 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 bot 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 like makes coherent sense? You know if you can’t, is it still okay? Actually in 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 to complex products with the same buyer and it might actually still work quite well.

So in the perfect world you want to integrate, but it’s not always necessary or anything. So let’s take an example case. Some of you might have seen PJ, CEO of Showpad, on stage a bit earlier today. So they bought a company called Learncore. And the way they thought about it was that ShowPad sales platform focusing on content and they got some pressure on consultation industry, some comments about analyst and kind of questions from the customers that it would make great if the product had a training and coaching component. So Showpad went out and found his target Learncore and managed the acquisition. The motivation there was around of course the product combination, the two products are much more valuable as a combination then 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 no-brainer formed as well.

Finally the talent pickup was really helpful on techside, so Showpad had struggled hiring certain types of engineering talent, which Learncore had, so that worked out very well for both companies. After some lengthy negotiations both businesses came out with a great experience and are very excited about building the company forward.

So you know the session is called VC’s Pitch Founders, so of course I have to tell you about how inside can help here. So at inside we did 50 acquisitions for portfolio companies just during the last year, and we are probably gonna end up doing the same thing this year. So we have seen a lot of things of different sizes. So what we can do – planning. So building a strategic plan for M&A. What are you looking to buy? What directions 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&A opportunities. You can think about this as like an outsourced corped up team. And then in terms of engaging those opportunities, it’s sometimes much easier if it’s somebody from inside whose reaching out to the target. Trying to see if there’s a deal to be made, if they’re even interested in discussions, then you inquire 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 a deal structure and negotiation is very important with so many benchmark od deals so we can 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 tic all the boxes and as you are doing probably the first time that you don’t make any rookie mistakes and end up buying something that you didn’t intend to.

Financing is a big component, so for example, when Showpad wanted to buy Learncore, there was a big cash component tot the deal so we very flexibly offered additional equity financing to Showpad at market terms without them having to go out and raise yet another round. So having the equity financing on top is a big value add for businesses that go about and buy large companies.

Finally integration is the most important thing. So we’ve done a lot of integration work. We’ve created handbooks, we’ve gone through all the processes you must think about when you put companies together because that’s like really where the rubber hits the road of that’s the you know do you realize the synergies and do you make those visions work.

So a few closing notes. So M&A is an acquired skill. So it’s good to start early and it’s god to start small. So you know, starting early means that you might want to do that small hire of like a 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 that’s your larger company you might be wanting to buy a company for let’s say 50 million dollars. 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 seriously they 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 got through the founder drama bit and across the chasm, when you’re adding a new management team or a new co-founder of business 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 will be working with for the next five plus years. And the 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&A strategy. Thank you.

Published on March 1, 2019

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