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The True Reasons Why Strategics Buy Non-Profitable Failed Startups

In fundraising, what's reported in press releases about the amount raised often doesn't accurately reflect the entire reality.

Despite the flashy announcement of a $20 million Series A, the actual figure is closer to $7 million, with the remainder subject to specific conditions.

The main reason is to prevent earlier-stage competitors from raising capital. A company may struggle to raise funds from VCs if a competitor has raised a substantial round months prior.

In M&A, there's a similar lack of symmetry between what's communicated and the actual reality regarding the underlying motivations behind the buyer's decision.

While buyers often cite various justifications for M&A, such as access to a new market, gaining more scale, and accelerating development efforts, these explanations are actually consequences rather than causes.

The true motivation behind M&A is the buyer's effort to fill a gap, seize an overlooked opportunity, block a competitor, etc.

In order words, most M&A deals are defensive moves rather than offensive ones.

Though subtle, this distinction is a game-changer from an M&A sales & marketing perspective.

In fact, engaging in M&A exposes strategic buyers to considerable risks. Without a strong willingness to change, buyers will be very creative in finding reasons to avoid your deal.

The more someone is concerned about future pain, the more open they become to change in the present.

Pain is a significantly more powerful force for driving change than positive incentives.

In fact, embracing this basic sales & marketing principle in M&A can significantly improve your odds of success, far more than implementing a disciplined sell-side M&A process.

Today, I'm sharing how we've applied this principle to turn a VC-backed software company, doomed to remain a sub-scale business, into an essential asset of a future unicorn.

I've written before about startup founders who aim for lasting worldwide impact and choose the VC journey to propel their startups into orbit.

After a couple of years of working on your engine since your first round of funding, you may end up with a Helicopter ($1–3m in revenues), a Plane ✈️ ($10m+ in revenues) or a Rocket 🚀 ($100m+ in revenues).If you possess a Helicopter 🚁 or a Plane ✈️, you will be out of the VC path. Despite your burning desire to build a Rocket 🚀, fundraising is now out of reach.

That's the situation the founders of a Helicopter 🚁 company were facing.

With fundraising out of reach and the idea of becoming a small profitable company very painful, M&A was the only option for them to maintain their growth aspirations.

The standard M&A approach generates buyers' interest by approaching them and asking them if a company's asset (customer base, product, technology, team, etc.) could interest them regarding potential synergies.

In other words, standard M&A approaches market their client as an offensive move, allowing buyers to determine whether there's a strategic fit strong enough to justify making an offer. This is where they can get creative in raising objections.

This standard approach has a low chance of success for companies that:

  • are stacking common objections (sub-scale, low-to-no profitability, low growth, customer concentration, highly leveraged, etc.) and/or

  • are looking for a high valuation premium.

Not doing this kind of offensive deal is the safest bet for buyers.

Our M&A approach is rooted in a fundamental sales & marketing principle:

Marketing the status quo as a significantly riskier alternative than acquiring the assets of our client.

In practice, we implemented this approach with a French VC-backed software company to get national buyers to react defensively.

We've started contacting European competitors to learn about their international expansion challenges.

This allowed us to position what our client does best—acquiring blue-chip new logos and upselling—as a safer and more affordable option than entering the French market alone.

Once we confirmed interest from one of them to make an offer, we approached national buyers by instilling fear of potential future consequences:

Enabling a strong competitor to gain a significant foothold in their primary market.

Indeed, not doing this deal could increase difficulties for the national buyers in acquiring new logos and retaining customers.

Moreover, with a specific buyer, we capitalized on the fact that our client could address several other gaps in their Go-To-Market engine, further strengthening the case for an acquisition.

Ultimately, this approach led to an offer just two weeks after the initial meeting, with a valuation twice as high as the alternatives.

The key takeaway from this story is to show the importance of designing exit strategies and M&A processes to generate defensive reactions from buyers.

In M&A, the status quo is the biggest obstacle.

Good luck!

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