M&A: Are tech entrepreneurs selling themselves short?

At the recent Times CEO Summit, Matthew Taylor, CEO of The RSA, remarked: “It’s kind of depressing that when you meet tech entrepreneurs, the biggest aspiration for many of them is that they get big enough for Google to buy them.”

But is this fair?

Exits are happening at high valuations much sooner in the business’ life cycle

The M&A question is one that plays on the minds of entrepreneurs. This is particularly true of the tech sector, to which Mr Taylor referred, which offers such a hotbed for plucky young upstarts to innovate in ways that would otherwise disrupt their big game rivals.

So is aspiring for an acquisition a misguided ambition? Or have goalposts shifted on the strategic vision behind M&A deals?

“That an entrepreneur wants to set up a business with the goal of exiting is no new thing,” says Henrik Persson, a director in corporate finance at finnCap specialising in M&A. “What you might say is different at the moment is that these exits are happening at high valuations much sooner in the business’ life cycle.

Why is exiting to a supportive, well-financed, entity such as Google any worse than a different sort of exit to VC, PE or an IPO?

“Classically, you would have expected to need to have established yourself, maybe become profitable and cash generative. Nowadays, you do see companies being bought before they’ve even shown commercial viability. I’m not suggesting it is a bubble, but there are parallels that can be drawn to some of the deals done during the dotcom boom.”

Referring back to Mr Taylor’s comments, Henrik says it’s worth asking what seems depressing. Aspiring to be bought, rather than strive to build the next ARM, Imagination or Autonomy, amongst the handful of large UK tech companies that have recently been bought, might be seen as selling oneself short. But it doesn’t tell a full story.

Buyers are now required to publicly set out their intentions

“Why is exiting to a supportive, well-financed, entity such as Google any worse than a different sort of exit to VC, PE or an IPO?” questions Henrik. “Surely it is a positive way of securing financing for developing exciting UK tech? There are no suggestions that Skyscanner or DeepMind are not thriving after having been bought.

“Is it depressing because of the impact on R&D investment?” asks Henrik. “There’s nothing to say that the acquiring company won’t continue to invest in the innovative new technology, it may accelerate it, and it is up to the parties to negotiate arrangements in this regard. This is such a hot topic in public company settings after the ARM takeover by Softbank that buyers are now required to publicly set out their intentions in this regard.”

An acquisitive nature can be a great thing for an ambitious entrepreneur, especially in the tech sector

Perhaps Mr Taylor is concerned about the impact on employment. Again, there’s nothing to say the acquiring company will not, or cannot be made to promise to, invest in its new development staff, who would likely benefit from being part of a bigger whole. It could certainly be argued that learning within an environment like that at a Google is a good thing that can be recycled in the next venture. Even if the people are not kept on, this simply creates an opportunity for these people to start over with another bright idea.

That said, not all companies can exit to Google. Sometimes combining two entrepreneurial businesses is for the best.

“We are advising on the takeover of Artilium, an AIM technology company which is stronger in Europe, by Pareteum, a peer which is stronger in the US,” explains Henrik. “Together they are looking to create a much more powerful entity by combining forces.”

There’s nothing to say the acquiring company will not, or cannot be made to promise to, invest in its new development staff

The other point to consider is that in approaching a new challenge – whether that be accessing a new market, trying new technology, or similar – a company like Google is likely to assess whether it’s best to buy it in, build it themselves or partner up. So for example, a new technology they might buy, or if they’re struggling in a particular market, they might buy scale.

“Why is this significant?” asks Henrik. “Well, sometimes an entrepreneur realises that now is the time – either sell now and generate a return for our investors, or run the risk that we are quickly squash us.

“Look at Yelp as a good current example, putting aside the antitrust disputes. Yelp is worth a not insignificant $3.7bn on NYSE, but that’s still only 1% of Google’s value and likely to be squashed as Google have decided to develop technology that will date Yelp quickly. Or take a look at Groupon, which was offered $6bn by Google. It didn’t take it at the time and saw its value decimate.”

Taking the stance of ‘if you can’t beat them, join them’ is not giving up. It is a measured calculation of risk. The savvy entrepreneur can achieve broader objectives value in other ways, such as allowing yourselves be a separate part of Google yet run as an independent business.

Indeed, it is fairly normal that large corporates will often be on the lookout for innovations that make them think ‘younger’. Unilever bought online shaving retailer Dollar Shave Club for $1bn a couple of years ago in a bid to disrupt Gillette’s longstanding dominance of the space. CEO Michael Dubin stayed on and the business is run as an independent, direct-to-consumer entity.

Finally, it’s also worth mentioning that the UK is a comparatively small economy compared to, say, the US. It’s easier to crack a larger economy like the US, China or India with the support of a big company that it is established there already than to try to do so yourself.

An acquisitive nature can be a great thing for an ambitious entrepreneur, especially in the tech sector where so much opportunity lies. Far from being a depressing or defeatist standpoint, a timely and well executed M&A deal can offer just as much opportunity to grow and realise ambition as, for example, an IPO. It is simply a case of knowing what is right for your business and getting the best advice available.

If you are interested in learning more about our M&A work, get in touch with Henrik Persson: hpersson@finncap.com

Find out more about our work in M&A here.