Hot Take #6: Norwest VP on Startup M&A + your action plan for 2025

Applying the MBP lens to four great posts + anticipating a big 2025 for startup M&A

2025 is looking like it’s going to be a big year for startup M&A

Regardless of how you may feel about the totality of the recent election, the near-term implication as it relates to startup M&A is likely positive. If the tailwinds of reduced regulation, lower inflation, favorable interest rates, and aggressive strategic plans materialize you will have the ingredients in place for the key factor in startup M&A: optimism.

Acquiring startups requires faith. Faith that a big, risky, bold, acquisition is going to pay off. It’s hard to have faith when you’re pessimistic. I’ve been doing this a long time, and I can tell you, the best years have been when acquirers are optimistic, with faith that the future is better than the past. In contrast, the worst years have been when acquirers have pulled in their claws, fearing what may be around the corner. As we turn this corner into 2025 things feel promising.

And there’s a secondary booster to this optimism: urgency. The AI revolution is upon us. For many Potential Strategic Partners (“PSPs”) 2024 was a planning year. They were figuring out what AI meant to their company and where they should place their bets. 2025 is looking like an action year. As PSPs see their competitors making AI moves, the pressure for them to act will be tremendous. The AI winners and losers are starting to get sorted, and executive teams aren’t going to want to be stacked with the losers.

Optimism + Urgency = Boomtime

If you’re reading MBP.co then you’re already way ahead of the startup M&A game. But how do you get even more aheader? That’s what we’re going to discuss here, starting with four great posts from Norwest, and ending with your 2025 action plan. I want you to have your priorities set and the ideal steps lined up. 2025 is the year of the PBI (Partner Big Idea). Boomtimes come and go, let’s get the most out of this one while it lasts!

Norwest Venture Partners on startup M&A

Now that the three part series on building the Partner Big Idea is behind us (part 1, part 2, part 3) we can get back to the fun stuff! As I do for Hot Takes I went on the search engines and poked around for posts that appear when you look for startup M&A advice. Norwest has a post that does very well: M&A Strategy Advice for Startup Founders & CEOs (not a huge surprise given the SEO juice that title surely has!). It’s a lengthy piece with lots in it to discuss. At the bottom of the piece are links to three more posts (here, here, and here)! Go big or go home is my motto - so we’re going to expand the aperture of this Hot Take and look at all four posts through the lens of the Magic Box Paradigm.

First a little housekeeping. While the three pieces I discovered at the bottom of the first piece have authors associated with them, this first piece doesn’t (if you’re out there let me know!), so I’m going to refer to the mystery author as “Poster.” Also, these are four dense articles so rather than plod through each of them point-by-point I’m going to pluck out the parts with the greatest alignment, and misalignment, with the MBP - all with an eye towards getting you ready to roll in 2025.

PE vs strategic M&A

The MBP focuses on developing “strategic” M&A opportunities (opportunities with larger operating companies). This isn’t to say that startups shouldn’t consider private equity as a potential path. In her piece Don’t Let Turbulent Markets Stop You from Planning a Smart Exit Strategy Norwest’s Sonya Brown makes a good point that in the current market “there is still a lot of private equity money. As a result some of our exits probably will tap that source of funding, at least in the near term.” I agree, and in recent years I’ve seen an uptick in PE firms acquiring certain types of startups. However, because the thesis for a PE-type acquisitions typically centers on the performance of the startup in-and-of-itself these are often less Magic Box scenarios, and look more like the DCF type M&A deals you learn about in business school. In short, PE acquirers are likely going to take a utilitarian approach to valuation. What we’re looking for are big ideas that lead to big valuations, and those are almost always found in the strategic (operating company) acquirer market.

The centrality of the PBI

The Partner Big Idea is the magic in the box, and the MBP is the method for building them. It’s notable how frequently articles on startup M&A nibble around the edges of the PBI without ever calling it out directly. In the main Norwest piece M&A Strategy Advice for Startup Founders & CEOs the PBI is hinted at, but only gets a passing mention when Poster sites a Bain study that names “clear deal thesis” as the #1 “critical factor to M&A deal success.”

A “clear deal thesis” isn’t just one of several factors, it is the factor. It’s the main event, it’s the show, it’s center court. Building a clear deal thesis isn’t something that just happens, nor is it incidental to factors like valuation or the likelihood of close - it’s what powers everything, it’s the energy source of the entire effort. We’re not going to dive into building the PBI/clear deal thesis as we just covered that in the three part PBI series - but to orient ourselves correctly, all other factors are in service of the PBI, it’s the one ring that rules them all. The elements we’re going to discuss from these posts are the enabling factors to getting you to a PBI, not things that are its substitute, or in some way it’s equal. What we’re looking for are the ingredients and catalysts for building PBIs - and there’s a great deal to uncover in these posts.

Relationships

Relationships are the foundation upon which big ideas are built. In her post titled How to Get Your Company Acquired, Not Sold (a title I love BTW, for more on why I love this title read this MBP post on the pitfalls of the sales process mindset) Priti Youssef Choksi describes how a “over the years, two well known entrepreneurs (acquirer and acquired) had developed a strong rapport and eventually were so aligned on a future together that the actual deal process was very short.” That alignment on the future together is code for the PBI. These two founders had a clear deal thesis, one they had developed over many years, to the point that when it made sense to actually put it to work, getting the deal done was easy.

In the main Norwest piece M&A Strategy Advice for Startup Founders & CEOs Poster speaks at length about Relationships, it’s arguably the central point of the piece. PBIs take time to develop. Sometimes their gestation period is years. It’s important to start developing relationships early, and to get that thinking started.

Trust

Startup M&A is exceedingly risky for PSPs. They’re paying a premium price in the hope of achieving a transformational outcome, at some point in the future. That’s one heck of a leap of faith! The only way they are going to make that leap is if they trust the people they are going to make it with: you and your team. Poster makes some excellent points about building trust through the process itself. For example Poster has a section on not “hiding bad news during the M&A process” - nothing kills trust like a lack of transparency. Going even further Poster talks about founders not “letting ego get in the way.” As it says in the MBP: confidence is inspiring; humility is endearing; arrogance is a deal killer. Trust is subtle, it takes time to develop, and it can be destroyed in the blink of an eye. You need to build an enormous amount of trust if you’re going to pull together an epic startup M&A deal.

The trust point is extended in Gary Walter’s post How to Sell Your Company: 5 Lessons Learned from Doing it Twice. Walter’s point #5: “Be open, honest, and a bit vulnerable” is right on. PSPs are rarely acquiring your startup for what it is today, they are acquiring a work in progress, that is in turn going to fold into their work in progress. It’s all becoming. They want to know they can work with you. They will be looking to understand if you’re collaborative, if there’s a strong culture fit, if yours is the right team to help them tackle unknown future challenges. Walter speaks about his changing posture from his first startup M&A transaction to his second, how by opening up the second time around (and abandoning the projection of perfection) he was able to establish a framework for confident collaboration. It’s more important to create an environment of productive problem solving than it is to show you’ve already solved all the problems.

Engage

There can often be a hesitance from startup leaders to engage with PSPs. The concern is that PSP engagement may send a signal the startup is for sale. The good news is that you can engage without sending that “for sale” signal, you just have to engage in the right way. As I discussed in the MBP post extending on Chapter 3 of the book, the grand unifying word of startup M&A is: impact. You are an innovative team looking to have the biggest impact possible on the world. It may be that that impact is maximized by going it alone, or maybe it’s through a commercial partnership, and it could even be that it’s best achieved by fully joining forces through an acquisition. You’re open to every conversation that relates to your potential impact, and you can start each of those conversations with the prior sentence.

Choksi rightly advises startups to “take the corporate development meeting.” Corp dev’s mandate isn’t just processing near term M&A transactions, they are also responsible for mapping the market and understanding how longer-range priorities could be enhanced by relationships with certain startups. But Choksi takes it one, good, step further. She advises you to leverage these corp dev outreaches “to get connected to product teams and company leadership and have them get to know you.” Bingo! Certainly take the corp dev meeting, but don’t go into the meeting flat footed, do your research and identify the key people at the PSP in product and leadership and leverage the conversation with corp dev into introductions to them.

Choksi even uses the magic word, impact, when says startups should seriously consider joining forces: “if it’s clear that the acquiring company’s resources will help you realize your vision and have a more significant impact.”

Startup M&A is a buy-side driven business

In startup M&A it’s not about when you want to sell, it’s about when buyers want to buy. Startup M&A is about powering a partner’s big idea. It’s about how you fit into, and accelerate, the PSP’s product roadmap. Those spots on the roadmap appear very rarely, and usually for only a moment in time. When the deal door is open, you need to at least take a good look inside.

Poster makes this essential point in the main piece: “don’t ignore offers to sell the company.” However, to align with the MBP, I’m going to adjust this sentence to read “don’t ignore opportunities for your startup to be acquired” - which I actually think is closer to the point Poster is trying to make. Many inbound PSP inquiries will be high level in nature and you’ll quickly realize if it’s more of a “get to know you” type outreach. However, you’ll also quickly realize if it’s more than a casual outreach, and there’s a substantial PBI in the works; if there is, I’d take it seriously. Legitimate PBIs are few and far between. As Brown says, don’t ignore “the importance of timing.”

Scarcity

As we know from the MBP, startup M&A valuation = opportunity / scarcity. With the scarcity denominator often having the biggest impact on the equation. Right in line with this thinking is #3 on Walter’s list of 5 lessons: “Know your differentiation.” Walter astutely says “buyers are looking for assets that are better than the competition or better than themselves. Too often we entrepreneurs are not able to quickly and succinctly articulate how and why we are different from our competition.” In MBP speak this is your ability to articulate your scarcity narrative. I dove deep into articulating scarcity in this MBP.co post on scarcity so I won’t expand on the mechanics here, but the headline point, as confirmed by Walter, is that being able to articulate what makes you different and special is of critical importance.

Being an attractive acquisition target

In the main piece Poster has a lengthy section on the makings of an attractive M&A target. This is where we start to see a deviation from the MBP and it’s good for us to dig in a bit here. Poster is trying to unpack how it is that some startup acquisitions achieve outperforming valuations, in certain cases reaching “revenue multiples as high as 20 times to above 100 times revenue.” Poster attributes these outsized valuations to the “strategic premium the buyer places on the team, the product and technology, and the dynamics in the market.” That’s kinda right, but not exactly in the way Poster goes on to frame it as: “Premium M&A valuations will go to companies with high growth, amazing technology, strong pipeline, highly recurring revenue with annual or multi-year contracts, signals of sales efficiency, gross margins, and low churn.” Poster extends this to the Rule of 40, highlighting that as the valuation-driving equation. Don’t get me wrong, these are all fantastic, and if a startup has all of these attributes then they are surely a very strong company. In fact, in a case where all of these were present, I’d echo Choksi and consider that this may be a time “when not to sell” under almost any circumstances!

The items that Poster lists will most certainly make you more attractive to growth capital investors, but I’d argue that these aren’t the core driver of massively outperforming startup M&A valuations. What drives an outperforming startup M&A valuation is the Partner Big Idea. An idea so big that it consumes the attention of the acquirer, and to which your startup is so critical that they have no other option but to pay a premium to acquire it. The structure of your revenue, the nature of your contracts, even your margin profile and churn, may, or may not, be of critical importance to the PSP. They aren’t paying 100x revenue because they care about your revenue, they are paying a giant price that backs into 100x revenue because they care a lot about something other than your revenue. Big ideas come in all shapes and sizes and what they may be looking to accomplish is almost certainly quite different from the path you’re on today. Said simply, if your conversation with the PSP is centered on how great you are independently, you’re probably on the wrong track. To dig deep into building the Partner Big Ideas that lead to outperforming valuations read the three part series here: part 1, part 2, part 3.

Valuation and negotiation

Then we get to the ultimate point of the whole conversation, determining valuation, and Poster and the MBP again have a bit of divergence. If you’re following the MBP, and you’ve correctly gone through the process of building the PBI, then you’ve established tremendous value in the eyes of the partner. They have so much urgency about the larger strategy that they don’t want to waste time with lowball offers, and there’s a strong enough relationship that there’s significant social pressure for them not to want to burn this important relationship by offending you. You want the PBI to power a strong first offer. You want your valuation to be your portion of their strategy, and not a function of revenue or EBITDA multiples applied to your startup as an independent company.

The MBP and Poster rejoin the same path with the advice to “seldom say your number first.” As I say in the MBP book, when a value is relatively determinable, like when you’re selling a house, then it can make sense to plant a high anchor price to start negotiations. However, since the PBI process is a buildup to an ultimate moment of maximum value, maximum urgency, and maximum pressure - and since you don’t have complete visibility as to how big this opportunity might be perceived to be by the PSP, you are wise to let them speak first so as not to leave anything on the table. And as I say in the book, sometimes you just don’t get there in the first round of discussions, but that typically means the PBI needs more development (as opposed to the buyer having enormous valuation flexibility that they just don’t happen to be sharing in their opening offer).

Four great startup M&A posts from Norwest! Now how do we turn this all into strategy?

2025 is looking like it’s going to be a big year

Here’s the five step plan for getting things rolling in Q1: