How to thrive in the upcoming start-up acquisition wave

In start-up boardrooms around the world, acquisitions are becoming a central topic of discussion. Those with capital and thriving businesses are looking for ways to grow, expand product lines or build a foothold in new markets. Conversely, those facing challenges can seek the security of an acquisition to cope with the storm. Especially in fintech, as forecast for the year, we will probably see an increase in strategic acquisitions (ie from other companies instead of financial investments).

In this piece, we will explore the key reasons for acquisitions, as well as important strategies for making them successful. There are five reasons for start-up acquisitions. Let’s dive in there first.

Justification 1: Revenue growth

Acquisitions can drive revenue growth at the top line. This can manifest itself in several separate and often overlapping ways.

First, they allow companies to expand their reach to new customer segments.

For example, UBS bought Wealthfront for $ 1.4 billion. The rationale was to acquire a millennial and Gen-Z customer base that was largely different from UBS ‘traditional asset management department. With more than 130 million investors in the US alone, millennials and the Gen Z population together make up a high-growth segment that will own a growing share of the world’s wealth … Wealthfront’s capabilities will be the basis for the new digital offering that will also include access to external human advice. ”

Acquisitions provide the opportunity for cross-selling. For example, Bill.com bought Divvy for $ 2.5 billion. The reason was that ”

Some companies have distribution benefits that can make them valuable targets. For example, the H&R block benefits from Wave’s free accounting system, which provided strong organic growth. Similarly, Credit Karma brought one of the largest fintech customer bases in the United States to IntuitINTU
and an opportunity to cross-sell to other products such as Mint or Turbo Tax.

The ultimate procurement strategies are perhaps the ones that drive legendary network effects. The combined unit is not only worth 1 + 1 = 2 (or 3 with synergies), but instead 1 + 1 = 5. Most fintech products are not the most natural uses for network effects (eg lending, insurance), but some startups have shown their potential. In some ways, it is the long-term promise of the buy-now-pay-later offer: by embarking on sales, BNPL suppliers get customers cheap. If a network on the other side of it can be created so that customers can access brands that offer BNPL, or other financial products, an ecosystem can be produced. This is part of the rationale for many of the recent BNPL acquisitions, especially Paidy by Paypal and Afterpay by Square.

Payments offers perhaps the most direct network effects application. This is definitely BlockSQ
(Squares) cashapp strategy. Venmo is therefore the typical example of an acquisition for network effects: the value of the P2P payment platform increases as more people send capital (and pizza emojis) to each other. That’s part of the reason it was acquired (twice) by Braintree and later by Paypal.

Justification 2: Building blocks and efficiency

Acquisitions can also have transformative effects on a business through vertical building blocks. For example, Lending Club’s $ 185 million acquisition of Radius Bank has transformed it from a pure peer-to-peer lender to a much broader financial institution with more diversified revenue streams. The acquisition allowed for several benefits. “One is financial. We knocked out very, very significant costs. [including a warehouse facility swapped for deposits] The other major expense that we have eliminated [involved] issuing banks … We have also added a whole new income stream, interest income. We used to sell all the loans we produce. We now have about 15% to 25% of the loans we take out, and holding these loans generates an interest income stream, which is new and independent of origination. ”

In some cases, companies can implement a roll-out strategy to take advantage of both rational 1 and 2 through economies of scale across customer acquisitions and synergies in operations.

Acquisitions provide the opportunity to purchase key building blocks that provide greater strategic options. For example, when SOFI acquired Galileo, they reasoned: “Galileo’s digital payment platform enables critical checking and savings account-like functionality through its powerful open APIs, giving businesses an easy way to create sophisticated consumer and B2B financial services.” Similar to American ExpressAXP
bought Kabbage for $ 850 million to expand its small business offering.

Justification 3: Defensive

Sometimes the best defense is a strong attack. Some assets are too valuable to risk being bought by someone else, and must therefore be bought. Undoubtedly the attempt at visaV
acquisition of Plaid and corresponding MastercardsMA
Finance transactions are suitable for this form. Plaid, for example, is a horizontal tool for the fintech industry to allow interoperability between many players, something many customers look for and evaluate table efforts. Their technology has become the core infrastructure for many fintech offerings.

Defensiveness can also be in the form of neutralizing competition. Peter Thiel once wrote “Competition is for losers”. In many ways, this was the rationale for the original Paypal & X merger at the time. The two companies competed against each other, but together created one dominant market leader.

Justification 4: Talent

One of the classic reasons to complete acquisitions is to bring in the talent required for a new strategy. This can of course overlap with building blocks in adjacent products. For example, ZenBusiness (a portfolio company) bought Joust to build the foundation for the fintech offering for small businesses and expand beyond formations. More importantly, it acquired fintech talent that it did not have internally to scale.

Although these are often minor acquisitions, they do not have to be. Large-scale talent infusions are possible.

Justification 5: International expansion

One last important driver for acquisitions may be gaining an international foothold. The approach often also overlaps with some of the other goals mentioned above, including revenue growth, building blocks, competitive defensiveness and talent. For example, PayPal’s acquisition of Paidy expanded its foothold in Japan. Equally possible is to buy key building blocks or talent as a basis for future growth.

So you have decided to merge: Considerations

First the bad news: while the above reasons are all pretty compelling, most acquisitions fail. Therefore, be sure to reflect on a number of important considerations before embarking on a buying spree:

1. What is the reason you buy the business? It is easy to point out several reasons why an acquisition will be beneficial. Rarely is everyone possible. Therefore, be honest about the rationale for the agreement, and the KPIs that you want to measure success by. Then create a plan to optimize around these KPIs.
2. Be conservative: Acquisition of startups is not easy to complete. The DNA of small layers and cultures can often be quite different. Few acquisitions are transformative. When building estimates, be conservative about what can be achieved within a reasonable time frame.
3. Assess management capacity: Acquisitions have one underestimated opportunity cost: management time. Integrating a new team and building a growth strategy will take part in the thinking, at the expense of other initiatives. Consider the trade-offs and make sure you are comfortable.
4. Build muscle over time: The most successful buyers do not even do it. They refine a culture, process and organization to acquire and integrate companies. If you have not done this before, start with something small instead of transformative. Then build this ability over time.
5. Consider other tools to reach your goals: Acquisitions offer many benefits, but are not the only way to achieve them. For example, partnering with others can bring the necessary talent. Leadership time can also be focused on recruiting talent and building internally. Sometimes these options can be cheaper financially and easier to integrate.

Good luck!