Riding the Coattail: M&A by 2019's IPO Tech Companies

Who did 2019's IPO tech companies acquire? We looked at 15 venture-backed tech companies to understand what the companies they acquired pre-IPO had in common.

You probably already know that 2019 is setting out to be one of the hottest years in tech IPO, with new listings from Uber, Lyft, Slack, Pinterest, and more. The list of companies that have already gone public is long, and rumor suggests it will keep growing at a rapid pace.

As analysts, we obviously follow public debuts closely, but since our focus is on the venture world, we’re even more interested in the side of this story that’s rarely told—all the acquired companies that contribute to the success of their acquirers.

Many of the newly-listed tech companies have been extremely acquisitive over the past few years. So it’s not just their immediate teams that are going public, but a larger universe of companies that will be riding their coattail into the public market. Let’s take a look at all the acquisitions made by just a few of the biggest companies that have made an initial offering (or probably will) in 2019:

One of the biggest questions we had was: what did the acquisitions look like? Were they similar to each other? Could we find any commonalities that might help early-stage founders understand what makes a company an attractive acquisition for a pre-IPO giant?

To understand the composition of the pre-IPO acquisition market, we looked at acquisitions made by 15 venture-backed tech companies that have already gone public or are rumored to be going public in 2019. Between these 15, they have completed over a reported 90 transactions, with Airbnb, Pinterest, and the We Company accounting for the lion’s share of that number (47 acquisitions, to be exact):

Anatomy of an acquired startup

The first thing we looked at was the age of these companies at acquisition. We’ve previously written that the average time from founding a startup to its acquisition is around 7-10 years (although software companies average closer to five). Strikingly, most of the acquired companies in this set were four years old or younger at the time of the transaction.

There are two ways to read this: founders targeting an acquisition exit tend to do so from a fairly early stage; or, the probability of acquisition decreases after five years (at least in the sample set). But startups grow and progress at different rates—so what about funding? Is there a particular amount of fundraising that makes a startup a good M&A candidate for a big company?

Based on the sample set, yes: most acquired companies had done just one or two fundraising rounds. After the second funding round, the odds of having being acquired by one of these IPO hopefuls drops significantly:

The relationship between funding and acquisition is a little more straightforward—each fundraising round typically pushes a company’s valuation higher and higher, so an acquirer would need to pay more after each subsequent round to provide a buyout price that satisfies board members. Simultaneously, companies raise to grow—so raising a round means tends to commit companies to an additional 12-18 months of operation, usually with a heavy focus on scaling. So a company that is raising money past a second round is more likely planning to go big on their own than seeking an acquisition.

Next, let’s look at the most frequent investors. We looked at the top 5 investors in each acquired company to see which investors were most commonly backing acquired companies, and the results were… not surprising, with Y Combinator, Andreessen Horowitz, GV (Google Ventures), and SV Angel in the top spots.

There’s likely a (referral) network effect at play (since investors benefit from an acquisition, too), and more prestigious investments also tend to raise the profile of a startup significantly, but the takeaway for founders is that an investment from one of these funds would be an early signal that the startup will be able to create a viable exit strategy via acquisition by larger later-stage companies.

How pre-IPO companies pick acquisitions

The commonalities between the acquired startups are striking, but each of the acquirers is different—they cover a fairly wide range of industries, tech concerns, and markets. And as we’ve pointed out before, a good exit strategy requires market-participant thinking. The key to finding an acquirer is to understand the value of your company in the mind of a specific target buyer. So the next thing we did with this data was to break it down on a per-acquirer basis.

First, funding by acquired companies: for the 9 acquiring companies in the dataset with the most acquisitions, we looked at the reported funding amount of each target, and looked at the range of funding amounts of the acquired companies to understand the purchasing behavior of the buyer.

The variance among funding amounts (and therefore acquisition price) of acquisitions within each acquirer ranged from fairly tight (Palantir) to fairly broad (Uber)—but most appeared to target a company of a certain value, and that’s where the more striking variance appeared across the set of acquirers. In other words: if you’re seeking an acquisition, you may want to take a good look at the companies your target acquirer has bought in the past to see if you fit the profile of a company they think makes a good addition to the business—and if they’re typically willing to pay the sticker price for a business with your valuation.

We also looked at the distribution of age, by acquirer, by target. Here, Airbnb and Palantir seem to have a much tighter thesis about the age and stage of a good acquisition, whereas the We Company seems to be more age-agnostic.

Here, again, it’s worth understanding your buyer. It’s like dating—tolerance for age range varies substantially, both person to person and acquirer to acquirer. Some companies may believe that a more established organization is harder to integrate, or that waiting until an acquired company is established enough to function as a semi-independent new wing of the business makes more sense for them.

But that variance largely vanishes when we look at pre-acquisition funding rounds.

Except for Uber and the We Company, almost all acquisitions by these giants were companies that had done less than 3 rounds of financing:

Age of acquisition by acquirer looks pretty close to the same as number of fundraising rounds, too—Uber, the We Company, and Airbnb are more willing to acquirer companies that have raised a few times, but not by much, and not that often.

So, know who you’re talking to and what their buying habits are, but in all cases, it seems like your best bet at finding a viable exit by acquisition will almost always be in your first five years and before your fourth round.

How to go public through private sale

From this data, it’s clear that acquisitions by 2019’s large class of IPO and pre-IPO companies follow logic that is both idiosyncratic to the acquirer and common to the industry. To give your startup a good shot at an M&A, there are a few things you as a founder might want to keep an eye on:

  1. Court the best investors you can, and understand their networks.Since just a few investment groups led the pack in picking startups that successfully sold to big companies, you’ll have your best shot if you can land a round with one of these groups participating. There is a chicken-and-egg question here: are the best teams getting funded by these investors (making M&A fitness inevitable); are these investors the “smartest money” available; or perhaps both?
  2. Start early. Because acquisition by a company in this set was mostly available only to companies in their first few rounds and the first handful of years, founders should start thinking about who they should be talking to fairly early in their company’s story. Acquisitions are long, sometimes grueling conversations, so to be acquired in year four or five, you’ll probably need to have started working on finding one as early as year three.
  3. Know your value; know your buyer. The most significant differences among acquirers were for price (as represented in this data set by funding round) and, to a much lesser extent, age/stage. The key to a good exit strategy is to understand which potential buyers will find your company to be a valuable addition to their operation at a price that will satisfy your investors, so make sure you understand the acquisition history of each specific buyer to maximize your chances of a successful exit.

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Riding the Coattail: M&A by 2019's IPO Tech Companies