M&A for Private VC-backed Companies

Jul 18, 2023 08:07 AM -08:00

When it comes to mergers and acquisitions (M&A), we’ve heard all the adages and popular wisdom…

     “When M&A is done right, 1 + 1 = 3”

     “Post-deal integration is the hardest part about M&A”

     “M&A is reserved for public companies”

Wait is that last one true? Absolutely not.

This post will explore the different types of M&A that private VC-backed companies might pursue along with pros and cons of M&A for a private company.

When it comes to deal making, the general public tends to think about splashy and headline grabbing transactions. These deals get the most press, the most chatter, and typically involve household public company names that most folks would be familiar with. But pre-IPO companies merge and acquire other companies all the time.

Early-stage companies are in the mix too! It’s just not as frequently talked about.

Types of M&A for a VC-backed Private Company:

Horizontal merger

Type of transaction in which two companies that operate in the same industry combine. This type of merger is often done to increase market share, eliminate competition, achieve economies of scale, enter new geographies, etc. Companies can be similar in size, which is referred to as a merger of equals (MOE); or be very different sizes, which is considered more of a takeover.

  • Public company examples: T-Mobile & Sprint, Okta & Auth0, AMD & Xilinx
  • OCV portfolio example: Social Native & Olapic (read more here)
  • Rationale: Social Native is an all-in-one user generated content (UGC) platform and influencer solution to power branded content. This was a strategic step toward consolidating the user-generated content space. It also expanded Social Native’s reach globally adding new customers and staff worldwide.

Vertical merger

Type of transaction in which two companies that are involved in different stages of the production process of a good or service join together. Typical goal is to reduce the cost and / or improve the quality of the final good. This type of acquisition is more common for companies that have a multi-step supply chain.

  • Public company examples: Amazon & Whole Foods, eBay & PayPal, Disney & Pixar
  • OCV portfolio example: ByHeart & Cascadia Nutrition + DairiConcepts (read more here and here)
  • Rationale: ByHeart is a US infant formula company built from the ground up. It’s FDA approved formula utilizes organic, grass-fed whole milk and features its own patented protein blend with the compounds found in breast milk. These transactions best position ByHeart to reliably and safely meet the needs of families across the country with end-to-end control and oversight of product manufacturing.

Talent and technology acquisitions 

This is a type of merger where the acquired target company yields deep domain expertise via exceptional team and / or IP as key factors to the deal. Often times, these types of transactions are a way to accelerate key hiring of engineering or executive talent. This type of acquisition can also be used to augment key gaps in the product offering, which can lead to better customer experience or new customer acquisition. 

  • Public company examples: Google & Nest Labs, Twitter & Periscope, Apple & AuthenTec
  • OCV portfolio example: Rad AI & Equium (read more here)
  • Rationale: Rad AI is a next-gen platform provider empowering radiologists and health systems with AI. Rad AI’s software empowers radiologists to save time, reduce burnout, and improve patient care. This transaction further enhanced Rad AI’s radiologist led leadership team.

“As we look to accelerate development of our portfolio of radiology workflow products, acquiring Equium Intelligence was a natural fit both because of their innovative software but also because of the stellar track record of their radiologist leaders. We are confident that this combined team will accelerate innovation within radiology workflow at an even faster pace.”

-Doktor Gurson, Co-founder and CEO of Rad AI

Joining a bigger platform, better together  

The above examples have all been stories where the VC-backed company is the buyer. However, in a majority of transactions where a VC-backed private company is involved, they tend to be the seller. Often called an “exit” – this can be a bittersweet moment. Some may view it as the end of being a “startup” while others see it as an opportunity to join a larger platform and continue accelerating the vision with shared resources. There’s a lot to consider here in regards to: consideration mix, whether the brand will be retained or incorporated, and what happens to employees / customers.

  • OCV portfolio example: Invoice2go’s $625M sale to Bill.com (read more here)
  • Rationale: Invoice2go empowers small businesses with straightforward payment and invoicing tools to simplify their day-today workflow. They sold to public company, Bill.com, in July 2021. The ability to join forces with Bill.com and combine market-leading SMB payments with deep AR expertise was a win-win situation for both teams as well as the shared customer base. The go-forward shared vision is to deliver innovation and exceptional customer value for small business owners.

The above are just common examples for M&A, but it is very much an art full of nuance and we encourage further exploration of themes from the linked video at the end of the article from OCV’s Managing Partner, Hemi Zucker.

Tips for VC Backed Company to Win in an M&A Process:

Truthfully, if you find yourself in a competitive process as an early-stage venture backed Company, you really need to consider if you should really be there in the first place. While there are many reasons to DO M&A, there are also many reasons to NOT DO M&A. Critics of M&A too early will cite:

  • Loss of focus on core mission or product
  • Integration challenges / risks
  • Shift or loss of culture
  • Poor use of cash or dilutive use of equity
  • Potential signal that organic growth has stalled

However, if you’ve considered all these factors and have conviction that this deal will propel your company and vision forward, then give the following some thought. Competitive processes are hard…a startups comparative advantage isn’t typically associated with being able to win on price…you need to change the discussion away from price. How else can you compete?  

  • You can take great care of the customers
  • Can you move faster than other buyers
  • Can you be the best home and landing spot for acquired employees
  • Is there a way to sell the importance of your brand so that acquired group can ride upside together

About the Authors and OCV’s M&A Expertise:  

Andy is a Vice President at OCV focused on software and tech investments. Prior to joining OCV, Andy spent 3 years in technology investment banking, most recently at Morgan Stanley. Andy’s select M&A deal experience includes: sale of CDK Global ($8.3Bn), sale of Sumo Logic ($1.7Bn), Cardlytics acquisition of Dosh ($275M) and Bridg ($350M).

Hemi is a Managing Partner at OCV. Before joining OCV, Hemi was CEO & Co-founder of J2 Global, which he grew to a global conglomerate and took public in 1999. As public company CEO, Hemi acquired 165 companies, employing 4,000 people across 15 countries, and scaled revenue over $1 billion+ with market cap north of $5B. You can watch Hemi’s excellent fireside chat on M&A tactics during a recession below.

Andy Liu
Andy Liu

Andy is passionate about continuous innovation and supporting visionary teams with the grit to build industry-transforming companies.