According to The Deal, “M&A accounted for 70% of the angel investment exits [in 2008], while bankruptcies made up 26% and IPOs 4%.”
In a down economy, valuations drop and some companies see it as an opportunity to snap up smaller competitors or to bargain-hunt for startups that are strategically valuable to the acquiring company. Which means you can cash out via an M&A exit.
Exit strategist Basil Peters sums it up nicely –
The only reason any company buys another company is because they believe
- they can increase the value of the company being acquired, and/or
- the acquired company will increase the value of their company.
For example:
In many cases, the common motive is to acquire innovation. Big companies are better off buying smaller companies outright than to waste time and resources on internal R&D. Growing by acquisitions allow them to begin adding value and/or generating revenue pronto — assuming they’ve made the right purchases, of course.
According to Peters, you should focus on smaller M&A transactions if you want to exit and make several million dollar capital gains within a few years after the startup’s launched. Big companies typically purchase tech companies that are under US$30 million.
Once the selling price exceeds that sweet spot, it becomes more difficult for the corporation’s M&A department to get approval for the acquisition. For early exits, don’t wait till the startup has grown so big that it’s become an unattractive acquisition target.
Instead of waiting to get noticed, you may want to tee up the startup exit and seek help and advice from M&A professionals. Below, I’ve summarized 2 of Peters’ posts on this topic:
In other words, companies under US$30 million should look for individual practitioners and boutique firms. And for these smaller transactions, be sure to look for an M&A advisor who’s close to home – the farther away the company is from the M&A advisor, the higher the transaction failure rate.
* For series, references are published in the last installment of the series.