M&A AS A STARTUP GROWTH STRATEGY.
Mergers and acquisitions are in vogue, at least in some circles. The value of transactions involving Canadian companies and investors so far this year is on pace to eclipse last year’s total figure, projections extrapolated from Thomson Reuters data show.
Publicly traded companies dominate the list of acquirers. ( The numbers include two major deals awaiting approval — Potash Corp.’s allstock tie-up with Agrium Inc., and Enbridge Inc.’s proposed takeover of U.S.-based Spectra Energy Corp.)
The l i st shrinks when transactions involving public companies are excluded. Canadian companies, both public and private, have to date acquired 251 private firms, 16 of which were backed by venture capitalists, CB Insights reports. And when it comes exclusively to deals among startups and mid-sized private enterprises, the slate is nearly bare.
While an acquisition can be a shortcut to growth in the fast-paced world of startups, the preferred and reliable path to growth still appears to be building from within. One plausible explanation, found in a recent Deloitte report, argues that just a tiny fraction of Canadian companies are intrepid risk-takers.
But Barry Gekiere, who helps seed- stage companies get to market in his role as manager of the MaRS Investment Accelerator Fund, disagrees. He contends the primary reason for the sporadic M& A activity among startups is a capital shortage.
“They’re trying to use their capital to grow their business rapidly,” Gekiere said. “They don’t have sufficient capital to make those acquisitions.”
There are a few exceptions in recent years. A few of the country’s leading startups have opened their chequebooks to bring another organization i nto the f old — Kik and Vidyard among them — and they suggested future acquisitions down the line could be a key component of their growth strategy.
“We are constantly looking at what’s coming down the pipe from a new technology perspective: What are people building, why are they building it,” said Vidyard cofounder and chief executive Michael Litt in an interview.
Kitchener, Ont.-based Vidyard got the ball rolling last July after it began to evaluate how to move forward with San Francisco- based Switch Merge, a partner that wanted to use Vidyard’s APIs to build its own products. Litt and his team felt Switch Merge’s personalized videos could be valuable to Vidyard’s marketing platform and a partnership limited how it could use that asset.
Since it became evident to Switch Merge’s founder that Vidyard was in a better position to take advantage of its technology, the timing of the deal also made sense.
Even though that was Vidyard’s first acquisition, the process was smooth because the two teams knew each other well. "No one actually tells you, at the earliest stage, how to acquire a business. ( It) can be emotional,” Litt said.
“People start companies because they have a dream and a vision. In a lot of cases, they sell companies because it hasn’t necessarily come true. You deal with that in the process.”
The argument to make an acquisition, Litt contends, is different for a small company like his compared to a larger corporation, which he said is either trying to block competitors or “buying” revenue.
“For a startup like us, it’s not the way we think because anything in meaningful revenue would be too expensive to buy,” he added.
When Waterloo, Ont.based messaging app Kik made the first of its two acquisitions two years ago, it was all about keeping up with its competitors. Kik coveted Relay’s ability to move GIFs and video on its own chat platform. “If we buy them, we can really accelerate how quickly we can get it to market for our users,” Ted Livingston, Kik founder and CEO, recalls about the decision. “If you’re always relying on hiring great people and then building great stuff, you’ll quickly fall behind.”
Livingston said that it’s short- sighted for startups to rule out acquisitions, and founders shouldn’t be discouraged by a shortage of funds.
Fintech startup Peotic (formerly Nerture Financial) did an all- stock swap in a takeover that provided a missing building block in its very early days. In 2013, the Vancouver- based firm, which compiles financial data to give retailers a better profile of their customers, wasn’t even a year old and was little more than an idea. Yet, without any money in the bank, the deal happened in early 2014.
“I didn’t want to wait extensively and have the market move from our solution,” said Ray Gill, founder of Peotic.
The acquired company, whose name Gill wouldn’t disclose, provided Peotic with a solid customer base to execute Gill’s vision, even if its technology was marginal and it was struggling along with the VC firm that backed it. Gill didn’t have a single customer despite actively negotiating, so ultimately he offered a one per cent equity stake in Peotic to the acquired firm and rebuilt the platform.
Since then, he has been attempting to take Peotic’s platform around the world. The company is generating revenue and Gill said it would soon be cash flow positive.
Vidyard’s Switch Merge deal also paid off. The company gave itself a year to recover the money used in the transaction, but did it in half that time.
Litt still scrutinizes each opportunity that’s presented and assesses what an idea, technology or talent pool is worth. But, unlike Silicon Valley with its bountiful assortment of startups to pick from, there aren’t many compelling prospects here, and shopping across the border comes with complications such as foreign exchange disparity and cultural differences.
“If you’re not immersed in that ecosystem, ‘A,’ you’re probably not going to find the companies and ‘B,’ if you wanted to buy them, it might be more difficult,” Litt said.
NO ONE ACTUALLY TELLS YOU HOW TO ACQUIRE A BUSINESS.