The case for inorganic growth in 2025

Welcome to Seed to Sequoia–the weekly newsletter for founders. Today we’re hitting on M&A, always a favorite, but from the opposite angle: how to buy other companies. There are deals out there, and if you’re running a tight ship or sitting on a war chest you might consider taking advantage.

On the other side of that coin–I’m speaking at a TechWeek event on Oct 8 in SF: How to Get Your Company Acquired. It will fill up fast (we haven’t announced to the public yet) so if you’re inclined–sign up early, and feel free to share the invite with founder friends and portfolio companies. We may have room for 1 more cohost–if you’re interested, just reply to this email.

Mergers and Acquisitions (M&A) is always a favorite topic of founders. Some VCs will tell you that it’s IPO-or-bust, and I respect that approach. If you’re raising VC funding that is usually the game you are playing. But great outcomes come through M&A, probably the majority. And no companies are doing an IPO in their first 5 years, so those exits are exclusively M&A. E.g., Base44–six months to acquisition. It takes 6 months to think about preparing for an IPO, let alone prepare.

If you want to nerd out on stats, be my guest, but the numbers are ambiguous and somewhat irrelevant. Carta reported 642 M&A transactions in 2024, based on its data (which only includes companies on Carta). While in the same year there were around 1,133 IPOs globally(according to World Federation of Exchanges), many if not most of those were not tech startups. For example, the parent companies of Viking Cruises and Salomon and Arc’teryx were among the 2024 class of IPOs.

Looked at another way, when I was at Opendoor we did 4 M&A transactions and had done two previously. That is 1 company that IPO’d, but 6 M&A transactions. Does that ratio hold across all companies? No. It’s probably higher, in favor of M&A.

The M&A market changes over time. When I ran M&A at Opendoor in 2021, it was a seller’s market. Lots of M&A was happening and it became contagious. With zero interest rates, venture valuations were at all-time highs, driving M&A activity (waiting was expensive!). Opendoor used M&A to solve for how hard it was to hire great engineering talent; others were solving for other challenges. Boards liked dealmaking and suggested it to their founders and leadership. They were much quicker to approve deals, sometimes at absurd prices.

What about today?

My, things have changed

Things changed for the worse in 2023 and they stayed changed, especially in the market for sub scale or failed startups. In 2024 I helped a good friend try to sell his YC startup. He had amazing tech, a couple of customers, and had run lean for a long time. It seemed like they had found PMF, or at least were close enough it was worth an acquihire to the right strategic.

I introduced him to the CEO of the perfect acquirer. Large, well capitalized, fast moving. But their CEO couldn’t take it to his board. Rounds-to-zero revenue was a nonstarter in 2023. Even though he’d be taking on just 2 employees (the founders), it wasn’t worth it. Even though the risk was near-zero, it still couldn’t be justified. Sucked for everyone.

The biggest change is that fundraising for non-AI companies has become very challenging. While venture investment numbers are staggering–they are almost entirely going to AI startups. In the land of regular VC backed businesses, where hitting $10mm ARR over the course of years–not weeks–is a big deal, fundraising remains very challenging to impossible. The biggest, best VCs only want the $10mm-ARR-in-weeks investments. And smart founders don’t want to bring on low-tier or “venture tourists” because they do stuff like this.

Growth expectations have risen, while in some industries headwinds have become substantial. Take climate, where Biden administration largesse has turned into arbitrary shut downs of already permitted and half built projects.

So what can you do?

M&A as a growth engine

M&A can be your growth engine. Inorganic growth is another way of saying growth via acquisition, and it works. Let’s say your company is doing $5mm ARR. Another company in your space sells to a slightly different but similar ICP and also has around $5mm ARR. Perhaps they’re downmarket; perhaps they’re upmarket; perhaps its an adjacent market.

If you merged, a few things change:

1. You are now big enough for larger funds to care. There is more than a 2x difference between $5mm and $10mm in ARR.

2. You are now big enough for financial acquirers (PE) to care. The juice is not worth the squeeze under $10mm ARR.

3. You may find a better talent pool to unlock more growth, including (possibly) a replacement CEO or other c-suite level person.

4. You may be able to find some economies of scale. You probably don’t need 2 CROs, 2 CMOs, etc.

5. You doubled your revenue, which always looks better than flat growth in a pitch deck.

There are advantages to this strategy–and disadvantages. But it is different than selling to a corporate acquirer in an actual exit, and it is different than a corporate acquirer buying your company.

True mergers

While big companies buy small companies for the new hotness, or growth, or because it’s cool–startups merge because the combination is better than separate, competing entities. Sometimes this is for “economies of scale”.

One of the best examples of this is oDesk–eLance. They were arch rivals whose CEOs regularly got into public fights (before that became commonplace). But with nearly identical solutions, they realized that merging the platforms could help them grow more quickly and expand the market. They merged in 2013-2014 and in 2018, went public as UpWork.

Smaller companies can integrate more quickly and generally experience more economies of scale. This is because there are fewer management layers to begin with, and the overlap is obvious. Two CEOs. Two CMOs. Two Salesforce instances. When you are losing money every month there is every incentive to cut costs quickly. The trick is doing the integration quickly, and not let it distract you (which it did at UpWork, to an extent).

If done right, the merged entity comes out of the transaction leaner and stronger. The best people in each position have been kept, the weaker let go. Efficiencies have been quickly found with fresh eyes and acted upon. M&A can also be great for marketing–creating more market awareness and excitement.

Tuck in acquisitions

The other way to grow inorganically is to buy smaller companies or teams. This gets tricky. Lots of smaller startups who are realizing they are off-track for Series A are also burning a fantastic amount of money to try to make their Series A metrics. These are not viable acquisitions.

Worse, many would be acquirers in the $5-15mm ARR category are also losing money every month. So adding a money-losing business to a money-losing business simply means losing money faster. You might convince investors (new or existing) to back such an enterprise, but you will have to really tell a great story.

Instead, consider finding a team of 2-5 hungry founders who are tackling an adjacent problem without the sales or marketing acumen (or luck) to get traction in the market. Maybe you can bring that hunger and know-how onto your team for not very much (if anything) up front. You might even add a couple of customer logos. This is where a lot of the opportunity is in today’s market.

How to set yourself up as a target

If you’ve realized you’re at the end of your runway, first go read this post. Your best option is selling to a cash-rich acquirer. It is not necessarily better to be acquired than it is to simply shut down. Here’s more on the shut down process, if you’re in that spot. A merger or equity acquisition can be a solid option, and better than shutting down, in many circumstances. I maintain that the rise of AI coding tools like Cursor also makes it viable to sell your IP without your team to run it, which opens up new possibilities.

Build relationships with partners and potential acquirers from early on, so that if you are in this difficult spot you have people to call who can start a process from a position of trust. Then, make sure you have runway. Be realistic and unafraid to cut costs. It’s very hard to dictate the timing of a transaction, and anyway nobody wants to buy a liability–and if you have a high burn, your company is effectively a liability in the eyes of your acquirer’s finance department.

How to run M&A as an acquirer

If you’re a startup looking to acquire companies, first off recognize that every single acqusition is a “bet the company” activity unless it is truly an acquihire. M&A is not something to be taken lightly or to learn on the job. Why?

1. It will distract your management team completely for at least 2-3 months.

2. It will involve significant cost (cash or dilution or both)

3. It will change the culture and composition of your team

4. It may bring on company-ending liabilities

5. Your board will judge you for it, as boards judge every CEO doing M&A

All of that considered, acquisitions can be a great idea. Many acquisitions made companies. Zynga was famous for acquiring popular Facebook apps with all of the cash it minted from its early success. Opendoor’s acquisition of Pro.com helped it reduce costs in its entire business and weather the downturn in the real estate market.

Here’s some quick advice on how to set yourself up for success in M&A.

1. Get board buy in first. Do not go rogue. Best case it slows down deals. Worst case you pour a lot of time into a deal and then your board shuts it down AND fires you. (I did say “worst case”)

2. Get good advice. Interviewing bankers or advisors is free and will teach you a lot. If your CFO or someone on your team is experienced, great. Fractional is also great–I do this work and many others do, as well. Get intros from your board and experienced founders you trust. Do not learn this activity on the job. There’s a reason why advice is expensive: a small mistake can literally cost millions.

3. Run an actual process. Do not just buy the first company you come across. Look across the entire market, possibly globally, and talk to multiple companies at once. Some will have ridiculous expectations. Some will sell for peanuts. You may have choices–you may not. Only one way to find out.

4. Once you find a target, do real diligence. Like a customer at Bloomingdales–you’re the buyer. Make demands. Get the data you need, in the format you want. If you get weird vibes–walk away. If you were looking for XS and this is an S, walk away. Your advisor should handle this for you, with help from other professionals (lawyers, accountants, etc.). People do diligence even in a “sellers market” (which this is not) so don’t feel bad about asking tough questions. Ignorance is not bliss.

5. Plan the integration. This is where even experienced, public acquirers fail all the time. Make sure you as a CEO and company focus on getting the integration right–and do the work. There is no magic-hand-waving that makes this easy. It’s tough and a LOT of work. Far more, usually, than getting a deal done–and for longer.

The word that sums all of this up best is “discipline”. It can be a long process and deal fatigue is real. But you need to keep disciplined the whole time. If you find some show-stopping finance issue on day 54 of due diligence, stay disciplined. Even if you thought you were 48 hours from closing, you may need to call the deal off.

If you find the dream startup with the perfect product but $1mm net burn a month–and a CEO who wants a 15x revenue multiple–maybe lose a night of sleep, but pass. Stay disciplined.

The M&A window may be open

Back in late 2024 I had made my peace with the election results reasoning that at least the casino will be open. Turns out I was wrong. But the M&A window may be opening again, in a different way. Boards are looking to land their underperforming companies, and extend the growth of the ones that are doing ok if not great.

Climate and clean tech are particularly affected. The negative perception has probably exceeded reality. EV charging stocks are all in the dumps–Chargepoint down 99% from its peak–even though there are more EVs on the road than ever before. If you’re disciplined, there are deals to be had. It might be bet-the-company, but if it’s a bet you can win… it may be worth taking.