Setting up M&A for Hyper-Growth Companies

How companies evolve to do M&A

Why does a company need to do M&A? Especially on hyper-growth, a company, that is the key question to answer before doing anything. 

You can always buy, but can you build? Can you partner with a company that provides you the same exact skills or products? M&A can be a powerful tool that enables hyper-growth companies to reach their goals faster, but it cannot fix all the problems in the world.

In the "why," I see two common themes: You can fix something that's not working. It could be a country, a department, a product, or anything that's not working. 

Second, you can go faster. You can get a product into your salespeople's hands much quicker if you buy it than if you build it, especially when you talk to me about enterprise scale and a product ready to be deployed to large companies.

Let's talk about Snowflake or Datadog, companies we all know, darlings of B2B SaaS or Enterprise SaaS. If you look at the performance of both companies, they acquired 3-5 startups before they went public, which is the hyper-growth stage. And after they went public, they acquired close to ten each.

In both cases, most of the acquisitions are small tuck-ins. They wanted to get a product to go faster. They can always develop it. They proved that they have the rigor, the people, and the skills to build products. 

Doing M&A allowed them to go faster in fields they didn't have expertise in. So in some cases, it might help them fix their lack of knowledge in a specific domain, and then go faster in that domain. Get a team and a product that can already sell, then start giving it to their salespeople and making money from it.

M&A for hyper-growth companies

My biggest piece of advice is to start early. Buying companies while growing over 60% a year or over a hundred percent a year is difficult. The main challenge is that all the company's people have already been working at 150% capacity. They are already so busy that if they now start hearing about M&A, they want to give up. It's like having a third job to do.

So my advice is to get somebody in the door to help you think through this, to understand the organization, build a relationship with all the executives, and understand how it functions, only then start doing M&A.

If you have a target in mind, it is feasible but will be very difficult to execute because the functional leads are so busy that they would not have enough time to devote to M&A. So you need somebody that truly understands the organization and then can execute M&A when you grow super quickly.

Why is it unique for hyper scalers versus the steady state, large public companies? Mainly, it's because in hyper scalers, there's a lack of middle management. Everybody is extremely busy. 

Even middle management is trying to hire more people now to become more senior management because the company's grown so quickly. Nobody is working at a 70% capacity.

Similarity to the traditional approach

It depends and it's very tricky. When you're so early, you want to understand that your core product works very well before you start anything. The person you want to bring to start helping you acquire companies should be somebody that will understand the domain.

Everybody can read a deck and understand how a market works, but if you want to be good at buying companies, you need to understand how the product works.You need to understand the nuances of the product, why you truly win deals against competitors, and if you have a traditional product to sell, that is good for the buyer. It applies; the technology works together.

Usually, in large deals, you would start assembling a diligence team and bringing your head of product, head of engineering, and head of sales. Those people are building the company at the same time. They don't have time to babysit a head of M&A. 

You need to understand those things by yourself, and your team needs to understand those things. It takes time to understand them, but bring in somebody with the skill set to understand them.

For instance, if you're bringing somebody in that is an ex-banker or ex-consultant and did not work in the early stage, did not experience technology, and you expect them to understand Kubernetes architecture, which was a monolith architecture, that's going to be difficult. So you need to invest a lot of time teaching them.

I recommend bringing someone in who has product chops, has some technical understanding, but can also build models, think about the business, and do the same things that you would expect a Corp Dev function to do at a super scale.

It's a real set of skills. But remember, for the financial models, you can always hire somebody from the finance team to do it. You can ask your VC to give you an analyst to do it. 

It's going to be much harder for them to help you understand if there's a good fit across the board. They will default to a 70% to 80% understanding across multiple functions than an expert in financial modeling that does not understand the product.

Who's involved

If you're thinking about M&A and the product is not on your three-year roadmap, you're doing it wrong. It's very easy to get distracted by a new shiny toy or new shiny opportunity. You need to first build your product roadmap, especially as an early-stage startup, and that's not used to anybody.

The product roadmap is the driving force behind the company's success. Therefore, having a clear understanding of how M&A fits into the bigger picture is essential. It should help you bring forward revenue streams and products that are already on your roadmap. 

Obviously, opportunities can come out of nowhere. You cannot think about something, and then it happens, but those should be an absolute exception. You should not even consider that if it's not already on your roadmap.

Now that you have your roadmap, you can bring in a head of M&A, a head of Corp Dev to start thinking about what pieces of those roadmap you can bring forward. 

• How can you get to this roadmap faster? 
• What will it mean for the company?
• Can a company digest it? 
• Do you have enough runway to support another unprofitable product for a while at least? 

Keep in mind that we're talking about a hyper-growth environment. When many of the startups are not profitable, they're burning cash. Now you bring in more people to build more products, they're going to burn more cash.

Those are the base things that I will start thinking about before bringing anybody in and massively exploring M&A opportunities. You don't even source the deals or identify the targets. Just talk about the strategy and where you want to be as a company.

After that, I would do a high-level build, buy, or partner analysis. Figure out what you are good at building, what are synergetic, and what you know how to do. If you are a data company and now need to build DevOps tooling because they're for the same buyer, you probably don't have the people internally to build those tools.

It's just a different domain, a different experience. So that's something you might consider buying, but if it's a data company and you want to build the data product, building it might be a better idea. 

So try to break it down to your internal skills as a company, from selling to building. And then, where do you need help? Where do you need the main expertise? Those areas are probably very well-fitted for other partnerships or acquisitions.

So we got the roadmap and the areas to focus on, and I'll start sourcing. I would begin to understanding the market.

• Who are the players?
• What do they do? 
• How do they work?
• Who are the big ones?
• Who are the small ones?

Just understand how their products work, what you can buy, and how it will help. 

In parallel, there's some level of preparation that you need to do for internal teams. Educating the executive team on how the deal will affect their roles is crucial since they are the ones managing the assets. 

You don't need to bring everybody under the tent and bring everybody in the know, but there's some executives you probably can buy a company without. A general council, head of HR, or even head of IT even at some point. I'm disregarding sales, product, and engineering, but there's an obvious need to talk to them.

As Corp Dev, we need to remember that after everything's said and done, we're not the ones operating the assets. The asset's going to get dispersed into your organization. Somebody, there will be operating the asset, so they need to be onboard. If they're not on board, the acquisition will not be successful.

This is not that different from larger scale companies, but smaller scale companies, and those executives are already overworked, overstretched, and don't sleep. So you're asking them to sleep even less, to work even more because now they need to integrate into the transaction.

Communication transparency

You can't disclose that your team will sleep less when the deal gets pushed through. As head of Corp Dev, you need to keep that in mind. You don't communicate with those executives that way.

It's more about understanding that a lot is riding on you as a corporate development team to help execute. You can't always get a point of contact or a subject matter expert who will dedicate time from every function, especially earlier when the transactions are small.

So this will be on you to do a lot of the heavy lifting and eventually bring in the head of HR when there's a payroll-specific question in country X, Y, Z that you can't really answer. But everything beyond that, you need to do and prepare for.

In a traditional M&A environment with large-scale companies, you'll probably get an M&A person dedicated to every function that will do the majority of the work and the corporate development function will be PMO. In this case, the ownership of the corporate development function is much larger than the actual work that needs to be done for every function.

There are legal documents that corporate development will not draft. But within the operating functions that are not very as particular, such as legal, corporate development will act as working hands.

From thinking about sales and sales synergies and how sales will be delivered to which people will be on which teams, that's not HR–that's corporate development early on, eventually getting there and validating that with the functional leads. So you need to do much more of the work as corporate development than relying on the teams.

Product roadmap

Good leadership that doesn't deviate from the product roadmap is crucial to prevent distractions. It's the same as every company. 

Think about the companies that stayed true to their mission and vision and built over the years the same thing and did not catch up in the trends here and there. I'm not saying AI is not viable and it should not be integrated into your roadmap.

Every company should consider how AI impacts their product roadmap and business. However, running and buying an AI company tomorrow, I don't know if it will be a wise decision. 

But that is something that corp dev is not going to set. That is a vision that the broader leadership of the company should set. By the CEO, by the executive team, Corp Dev being part of it, or not. Corp Dev cannot drive it, and they cannot suggest immediately to buy an AI company.

There's a product vision; there's a product roadmap. That is the truth. That's what we should be operating. Is this a huge opportunity and something really worthwhile to consider? Maybe, but it should be earth-shattering.

Managing the engineering team culture of building in-house

Engineers always want to build everything because they think they know how to, can, or have the immediate skills and tools. It's not always the case and not because they're not good enough. Sometimes it's just a capacity constraint. 

You need good people to build good products. Sometimes you don't have the time or you don't know a specific piece of it. If I tell you now, that's a data and DevOps environment. If your data product is focused on AI and you need to build a product that is focused with Kubernetes architecture for DevOps, you have great AI engineers. It doesn't mean they're going to be phenomenal engineers for Kubernetes.

Even at sales, salespeople think they can sell everything to everybody all the time. If you sold your entire career to the head of engineering and sold them products if I give you a head of HR to sell to, can you do it? Of course, you can. Can you do it effectively from day one? Probably not. 

You're going to have a very significant grant period. That's the difference. It explains that we're buying time. We're not saying you can't do it, we just want to do it faster.It takes some work to convince them to onboard with that. Everything will require work.

Convincing engineers is one of the hardest things, and getting their buy-in is hard. But in many cases, they also know they won't get there without help.So, do you hire 50 more people? Or do you buy a company that can get you those skill sets from day one? In some cases, it's not an engineering decision. That's a business decision. 

Sourcing deals

Earlier on in the hyper-growth stages, sourcing deals should come from three primary areas:

• The product team who can tell you which product might make sense for your customers. Sometimes the customer will tell you which product they're using.

• The VCs who know your business and investors and whose interests are aligned with yours. They can think together about what they see in the market.

• From research - a lot of proprietary research you have to do to understand markets and the products that are best for those markets and act accordingly.

In some rare cases, bankers are good references. However, it's rare because the deals are not large enough for bankers to care. The fees are just not there, so it's much harder for them to pay attention to these companies in scale. 

That's why I find bankers ineffective in a hyper-growth stage because unless you're doing over half a billion dollar deal, the number of bankers and the help they can provide you will be limited.

I know a few that are great, but you're asking the person to spend significant time understanding a relatively small market. 

And they really need to invest a lot because instead of investing in you, they can invest in a publicly traded company from which they know they can get the fees. When I say VCs, it's not just your investors. I would build a relationship with the broader VC community as they see many of the companies. 

Some VCs are very focused on very specific themes. If you're a potential buyer in this space, talking to them and building a relationship with them is critical. They see all the companies; they can help you benchmark one against the other.

Hiring key individuals

When hiring key individuals, identify those who have an interest in and an aptitude for understanding the product and market operations. Do they have the skills to truly understand how the product and tech markets work?

There's a big difference between analyzing public traded companies and digging through 200 early-stage companies that were just founded and have a landing page. First, you need to understand what they are doing and if that makes sense.

So I would optimize for passion for the product and knowledge of it. I would check the box if they can model and understand how the M&A process works. That is needed, but are they the best in class for that? 

Even if they don't but they have the passion to understand a product, I would take that over somebody that knows M&A in the best way possible, but just doesn't understand the product well enough. The priority is to find individuals who can contribute to the product roadmap. 

The candidates that I found the most appealing here are the ones that did traditional banking/consulting, and then either went to VC. Because they see a lot of deals and they see it at an early stage or went to a startup and know how it feels to be down the trenches in an early stage startup that you don't have the structure. 

Nobody's telling you what to do. You always need to continuously build your own book, and create your own opportunities. It's way beyond doing the deal itself.

Differences between traditional and hyper-growth process

There's not much difference at a high level. You still need a PMI, functional leads, and people to help you. You still will hold those people accountable for executing because we all signed up to do the deal. 

In larger companies, in many cases, the sourcing and the deal team will be separate from the PMI team. Well, that's not the case in hyper-growth companies. It's going to be soup to nuts. It's from the thinking of the strategy to finishing the item on the PMI list. It's all still owned and operated by Corporate Development.

It's one significant difference. I saw large companies structure this way so it might be different, but handholding and helping execute some of the items is still the case in the early stage. So you still help and support a lot of the doing and not just point it to the functions.

Support is needed. It's not because they're not capable of doing it, it's because you need to remember they're so stretched in terms of their work capacity. Sometimes it'll just fall through the cracks. Being much more hands-on is the critical part.

Overall team structure

In terms of the size of the team, it depends on how acquisitive you want to be. It could be from one person to five. The corporate development team ends up being not just pure plain M&A because you go through different cycles in your business and you still want to be effective and productive and contribute value to it.

In terms of where it sits, in my opinion, it can sit under the CEO or within the product organization, not under the standard CFO. Mainly because the knowledge of the product is much more important than the ability to financially engineer. If you have to pick between one of them, I would always optimize for the knowledge of the product.

The CFO's job is controlling the money, especially considering it earlier. It might be an experienced CFO, or it might be a new CFO, but their goal is to control the spending, not think about how to deliver the best product to your customers.

Your goal as a corporate development function is to improve or enhance the product you deliver to your customers faster. 

• Where can you execute this the best? 
• Which executive on the executive leadership team, if not the CEO, do you align the most with?

Functional leads constraints

Burn rate is one of the key constraints. You will eventually buy companies. If it's smaller than you, it's probably something that's also a startup. So you're adding burn rate. It was easy in 2020 and 2021, but it's much more difficult today.

Adding additional burn rates will impact your runway so understand it early on. When can the product turn profit? Is it synergetic?

The second one is, does it truly fit? How quickly can it generate revenue? Is the buyer the same? As an early-stage company, you're probably used to selling to a single buyer. So you optimize that very well. 

You have a product that makes revenue and has a true product market fit. You're growing very quickly, but you're still selling to a single person. You're selling to the chief revenue officer of your organization. 

Now we have an excellent opportunity to start selling to the chief data officer of the organization. There will be a conflict there. You need to understand that your team will need to be retrained and you have to remember that. That has to be a consideration because the cost of making that mistake and if that's not working will be much greater the earlier you are in the company's life.

It's the same with every deal, but the earlier you go the cost of the mistake is higher. And the cost of wasting time on a transaction you will not do is higher. I wouldn't say it's always riskier. It needs to be thought about well enough when you do it. 

Now, you might understand why I always say earlier that the corporate development function needs to understand much more of the business than later on, because the cost of the mistake is so high. So you need to have and develop a good sense of the following before you do a transaction.:

• how the sales function is working
• how the engineering function is working
• how the product function is working
• what do they really care about
• what they can digest
• what they cannot digest

It takes you time to generate those relationships to get the understanding of the business truly. So if you want to hire a corporate development function earlier and immediately give them a deal to do, the risk you're adding to the deal is pretty high because you just don't know your business well enough yet.

Getting go-to-market right

I'll say it's more important to get the go-to-market right more than the product coming together. Mainly because you can keep separating the backend part of the product. No one knows what's going on behind the scenes if you put in a nice enough abstraction. 

The go-to-market is the go-to-market either you sell or don't. The gross market might be lower if the deck end is wonky. You can fix it over time. 

If you're still figuring out your go-to market, you should not do M&A. If you don't know who your buyer is and you don't have a repeatable motion that you need to put a dollar in and more dollars come out, don't do M&A. Go figure that out.

You will feel that you found product market fit, you will feel astronomic, you will feel that the product is selling itself. You just know how it works. Give me ten more sales people, I will make more money in an efficient way. 

There's no magic trick there. It's the same as any company. Do customer interviews. Go ask your customers what to think about this opportunity. Go validate the market. It's not easy. It always comes down to talking to the customer.

Doing customer interviews is even more important in early stages because you want to bring more products to your customers for the product roadmap. Go figure out if the customers want those products and if they want them from you.

I like doing a hypothesis-driven approach to it. I'll have a hypothesis about exactly what I think is true. What I think is true with a customer, I'll do some validation first to understand if I even should go and search for a company that I can buy and do X validation. 

After that, after I have a target, I might continue doing that validation because targets can look so different. Even if the problem you're trying to solve is the same problem, the approach different startups take to the same problem are just different.

What you thought was true and the perfect approach might not be the case. You might have the best product operated by a team of 10 people that you just don't get along with. The great people just don't get along with them. So you'll never do the deal because those 10 people can disrupt your culture. 

I try to catch that up early because when the teams are small, the founders drive the coach. You get to meet the founders very early on in the process. I try to meet all the founders immediately to just understand the nature of them, how they got started, and tell me the story of the company because there's always a story behind every company.

Now, if I find the culture is not a good fit for us, I'll pass mainly because the product might be great, but I'm losing all the people, the great people that built it. They might be a great fit for a different company, but not for our culture. 

Doing private to private deals versus buying from institutions

The private-to-private market is struggling now. Q4 was in a 94% decrease in private to private deals. Private to private is struggling and in many cases they're struggling because of what they pay with. Cash is expensive. For stock, how do you price it?

Is the last valuation of the larger company valid? Is the last valuation of a small company valid? It gets very, very complicated and very difficult because, everybody thinks that the other side needs to adjust their expectations. 

And if you are the larger company, you'll think the smaller company is running out of funding. If you're the smaller company, you'll say the larger company's valuation decreased. So you get into a dynamic where you are playing chicken, and we're not even at the end of the rope yet.

There's still private funding in the market, so everybody is in a holding pattern.I believe that dynamic will break at the end of Q2 and will start seeing many more companies just going out of business or getting sold in a fire sale.

Portfolio rebalancing strategy

I'll go first at strategic, then go to the product roadmap. Is that something you want to do? Have you already thought about it somewhere? Then yes, it's going to make sense. I believe there will be a decent amount of consolidation driven around specific buyers.

Let me own the chief revenue officer in the organization, sell them everything soup and nuts. In that case, there will be many different smaller companies that you can buy to just figure out small holes in your portfolio. But strategic will be active.

Being public having the resources to put behind it, not just capital, but the human resources to put behind it and for it not to be extremely disruptive to the business. Private-to-private deals are a priority thing to do right now. At least at this point.

As time goes by, people start accepting what they can get, and we'll definitely see some corrections on evaluations. The question is, who's going to blink first? The smaller companies or larger companies? 

And I believe it's going to be the smaller companies because they're going to run out of finance. Larger companies still produce money, they can get credit lines, they can get structures and whatnot. When you're a Series A company, it could be much harder for you.

Staying true to the product roadmap 

If it's part of the roadmap, do it. If not, think about how distracting it will be for your business and if you're willing to live with that distraction. In many cases, your answer will be NO because it's too distracting.

If you're gaining market share, and it's exactly the same product and you just want to get the product, get the customers, that's fair and square. That's on your roadmap. That's your existing product. That's getting more customers, and you're just getting faster in a different way. 

Ask yourself, how much is it going to cost you to acquire those customers. I always keep an open mind for every deal that comes across that somebody might propose and I never thought about, I'll go back and look at our products roadmap and say, does it fit? And did we not completely think about it possible? Or did we think about it and say it does not fit?

If we thought about it and it doesn't fit, does this change anything? Does this change the fact that we get such a great asset? 

Of course, but it's extremely rare because our goal and our job is to know our business in and out, is to know our products and know the adjacent products, and the adjacent to the adjacent products. So we probably have thought about it in some way, shape, or form if you truly understand the product roadmap.

Leveraging external resources

External resources don't know the business. And by the time it will take them to get to know the business, the business is gonna be in a different place. You started the process with a consultant and by the time they're hired and you signed the documents, it's like four months in and the business grew by 80% in those four months and hired 80 more people. So the person that we're supposed to work with changed three times over.

Now my suggestion is get creative. There's somebody in the business that knows the business. Try to bring them to be a project manager. 

See if you can figure out your internal resources, not necessarily from corporate development, or it will be somebody from sales that actually has been here enough who knows the executive and knows how the business works. Try to bring that person to help and get things done quickly.

When to bring specialists

It depends. If you're trying to get acquired, you can hire a Corp Dev function to manage the processes for you but to be fair, on certain scales, let the banks do that. If you're planning to be acquired and you're a Series A company with 30 employees, I would probably tell you not to bring a corporate function. 

The CEO should run the process and should potentially hire an advisor, maybe to get, and that will come from the VCs. The VCs know those advisors and can help.

If you're planning to buy, get the person in at least six months before you want to do a deal. Let them get to know the business, get to know how it works, understand the product itself, understand the market around the business, and only then try to start doing a transaction.

Advice

Know the product, know how the technology around it works. Know who the buyer is, and truly understand it. If you want to be successful in it, knowing just how to model it doesn't count. Know who to sell it to.

For somebody new to the organization, they just need to be curious. It's very hard to teach somebody to be curious. You don't want to be the person telling people to go learn that field or go learn this, go understand this. You want the person to do it themselves.

I'll do a business case that could sound weird and completely unrelated. I'm testing curiosity in many cases. I don't care about which answer you give me. I care about how you got to the sensor. What did you do? And my entire interview would be around not the answer itself. I'll test it logically and have some common sense in it, but I'll care more about the process you took together.