Well, first, let’s be clear — it’s tough for your “goal” to be a merger or acquisition in most cases.  There really aren’t that many good acquisitions done a year — maybe 100 in internet, maybe less.  So if that’s really your goal — vs. building an Amazing Company — I’m worried you’ll fail.

Having said that, let’s rework the question.  The best way to maximize the odds a decent ROI acquisition is technically feasible is to (x) raise the least amount of capital necessary to still (y) build a category winner, or at least, a potential category winner.

In acquisitions, usually, the acquirer wants to buy either the category winner (which get a huge premium), or at least, a potential category winner (might be #2 today, but could be #1, it’s growing faster, better tech, etc.).  The #3 player in the space usually gets bought for peanuts.

However … most acquirers, Google and Facebook aside, will have structural and cost constraints.  Billion dollar acquisitions are very rare, and only a handful of companies have the market cap to pull them off.  But $50m acquisitions are fairly common and structurally easy for any company worth >= $1 billion itself.  Very few acquisitions happen that are > 5% of an acquirer’s market cap, or value.  Only if they are truly “must haves”.

And … most investors are only going to be happy if they make at least 3-5x on a deal.  2x, worst case. So if you raise money at a $40m valuation … then selling for $50m becomes structurally hard on the start-up side.

>> Or put differently, the economics with your investors get challenging if, as a rule, you sell for less than 8-10x the amount of capital you’ve raised.  << More on that here: SaaStr | The 10x Rule:  What Raising $1 of Venture Capital Really Means

So, if you aren’t really going for it … at least not yet … not really trying to build your own unicorn.

Then, raise enough to build a strong enough team and product to be perceived as a pre-winner.  But don’t raise so much that your valuation precludes an acquisition at a tolerable price for certain acquirers.

That’s a pretty nuanced play.  But.  It has worked time and time again.

A $1.5b market cap company will go shopping for $50m tuck-in acquisitions.  And they’ll simply rule out anyone that’s raised too much more than $5m in funding, unless it’s a fire-sale situation.

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