2015: The Year of the “Boutique” Acquisition
2014 has marked one of the most active years in tech M&A history, largely caused by the strong public markets and cash-rich tech majors.
The only more active year was during the tech boom of 2000.
This year we’ve seen an inordinate number of billion dollar venture-backed exits such as Nest (acquired for $3.2B by Google), Beats (acquired for $3B by Apple), Minecraft (acquired for $2.5B by Microsoft), Oculus VR (acquired for $2B by Facebook), Twitch (acquired for $970M by Amazon) and of course the largest venture-backed exit of all time with Facebook’s $19B acquisition of WhatsApp.
As we look to 2015 the sustained strength of the public markets is questionable, with macro economic pressures such as rising interest rates and shaky international markets.
If they cool as expected, we’ll see the traditional acquirers be more spendthrift in their M&A strategies, resulting in fewer billion dollar megadeals.
What won’t change however is the number of new buyers coming to the table. These buyers aren’t your typical Silicon Valley tech acquirers, they are more traditional household companies and brands looking to embrace technology to better reach end users and create greater efficiencies within their own businesses. And their appetite for boutique acquisitions of tech companies is just gearing up.
As a leading indicator for corporate interest in the space, recent data from the National Venture Capital Association shows that strategic investments by corporations is at levels not seen since the year 2000, and will reach an estimated $3.5B in investment capital in 2014.
UnderArmour acquired MapMyFitness. Hearst acquired BranchOut. Capital One acquired Adaptive Path. Walmart acquired over 15 tech companies in the past four years. There are more corporate buyers in the market than ever, and as detailed by The Economist, “25 of the 30 firms that comprise the Dow Jones Industrial Average” which include everything from The Coca Cola Co. to Caterpiller Inc. have a corporate-venture unit. Even Chobani, the Greek yogurt company, has a tech incubator. These are all attempts to assimilate technology into the businesses of large companies whose core business or focus is not technology.
A “boutique acquisition” is a deal under $100M transaction size where both the product and selling team experience is the primary driver of the deal – and both investors and selling team members see positive and favorable financial gain.
Google, Facebook, and Twitter cut the path for the acqui-hire and eased the “Series A crunch.” Other companies have paid attention and evolved to realize that there is a more efficient way of building muscle in weak, but important growth areas. Buy the solution, buy a company.
There is certainly no lack of early-stage tech companies out there these days. There is a reason Yahoo’s head of corporate development is also the head of human resources. The rest of the market is wisening up, expect to see these two functions combined more regularly outside of just technology companies.
While some of these deals are buyers looking purely to acquire talent, many of them are equally as much about acquiring a product or Intellectual Property to fill an important need. In many cases, these boutique acquisitions result in key products for a large company in both the short term and long term, consider Twitter’s acquisition of Vine as an example.
Boutique acquisitions don’t mean that early team members and investors have to sacrifice financial gain; in fact, in many cases boutique acquisitions offer greater return on investment in less amount of time (i.e. better IRR).
As detailed in Exitround’s Tech M&A Report $0 to $100M which looked at over 250 actual private tech company exits over the past 8 years, companies that raised between $5M and $10M, on average had higher exit prices than those companies that raised between $10M and $50M.
It’s logical to assume that in these cases as well, the company would retain greater ownership than in the lesser-raised scenario, thus resulting in an overall better outcome for both early team members as well as investors.
As you think through your priorities for 2015 consider how you can take advantage of the skyrocketing demand for technology by companies outside of the traditional tech sector.