How Founders Should Approach The Coming Wave Of M&A Deals

By Matt Cohen

The current market conditions of slowing growth, high interest rates and dramatically reduced availability of venture capital for startups is creating a surge of M&A interest.

Many startups have built amazing products, teams and companies over the past few years, leveraging frothy venture capital markets to grow rapidly. Many of these companies are approaching the end of their runways without the ability to raise the next round of capital needed to continue on their mission or have existing investors willing to keep supporting them. So what options do founders have?

Founder choices

This leaves them with three real choices. Option one, go into survival mode — conduct deep layoffs, slow growth and extend the runway to at least 18 months of “always alive” status. Depending on the balance sheet, this may not be an option for every startup.

Option two, close up shop — return investor money and fold. This is certainly not an attractive choice.

Option three, sell the company through an M&A deal. There are a large swath of startups that can’t achieve option one and have come too far and created too much value to stomach option two. Private equity investors see this and have been preparing to scoop up the best companies, products and teams at a discount while folding them into their existing anchor investments.

Over the coming one to two years I suspect that the amount of M&A activity is going to increase dramatically as more and more startups find themselves faced with these three options.

What founders should do

So, what do you do if you’re a founder in this situation? Pride would tell you that selling is not an option — you’ll let your investors down, admit defeat and your reputation will be ruined. As an early-stage VC, I’m here to tell you that’s not the case. When faced with a 1.5x exit versus a zero exit, investors will take the former every day of the week. Plus, if founders handle this situation well, their investors will be lined up and ready to invest in their next startup when the dust settles.

Don’t be afraid to entertain M&A conversations and even lean into them.

Although you might want to ignore those strange emails pursuing an M&A avenue, don’t. In fact, if you’re seeing this type of interest hire an M&A adviser or coach to help you mindfully prepare for these conversations ahead of time.

Over the past year I’ve had dozens of founders approach me about M&A interest and 100% of them were hesitant to dedicate resources to this type of endeavor. Those who decided to bite the bullet are glad they did. In addition to bringing on some outside help, I encourage founders to backchannel with their investors and board members to get their advice and experience. Get their input on the prospective buyer, think through how this deal might impact your employees, customers and investors, and even leverage their own portfolio founders for advice.

Treat an M&A deal the same way you’d conduct a funding round. Do your due diligence and take every option seriously. That strange email from an overseas investor might be the deal of a lifetime, so don’t discount any interest.

There’s no doubt over the coming year that times will get harder for startups. I’d urge founders not to consider M&A exits as a failure or an admission of defeat, but rather an offramp instead of ramming flat into a brick wall.

There are forces outside of your control that can dictate your future. As a founder, how you respond to these circumstances, communicate with investors and make the most of the available options will benefit you deeply in the long run. Don’t squander these opportunities and let pride and ego get in the way of your future.

Matt Cohen, founder and managing partner at Ripple Ventures, was founding investor of Turnstyle Solutions, which was acquired by Yelp in 2017. He is a frequent contributor to Crunchbase News, having written about why more VCs are becoming startup founders and other topics.

Illustration: Dom Guzman

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