Growing your business often demands change – and sometimes that change is mindset. For growth-focused software founders and CEOs, there's often a temptation to spur growth by continuing to invest in-house, adding people and skills to build out new functionality. After all, this drove success in the first place. There's just one challenge: the tech market moves so quickly that industry and customer needs may have changed by the time you've created new functionality. What worked to “land” may not work to “expand.” It also may not be fast enough.
In today's fast-moving market, M&A activity could hold the key to helping high-growth companies sustain momentum and gain an edge over the competition.
With this backdrop, we asked Adam Berger about his perspective on M&A activity for high-growth companies. Until 2017, Adam was CEO of Digital Room Inc. (DRI), an Insight Venture Partners’ portfolio company that he grew to be a multi-hundred million revenue entity. Under his leadership, DRI executed more than a dozen acquisitions. Adam subsequently joined Insight as a Managing Director to be the chairperson of several companies within our portfolio. In turn he helps these companies embrace M&A to accelerate growth and redefine their future.
Why Is M&A Activity So Important Today?
Founders are typically builders and M&A is not their “go to” muscle. But M&A empowers businesses to keep up with rapid change and fiercer competition. Adam puts the situation in simple terms:
"The challenge for entrepreneurs is to grow as large and as fast as possible in order to retain and expand customer relationships, create sustainable advantage, and control their destiny."
Berger continues, “it's natural for founders to believe that if they just had more resources and time, they could build something unique and different from their competitors.” At some point, technology companies need to come to terms with the idea that to continue rapid growth there simply isn't time to build from scratch. Changing to an M&A mindset can provide an adrenaline growth shot and create competitive advantage through scale and capability expansion. Doing this requires businesses to overcome a few real challenges, including:
- Overcoming a mindset: “If we didn't build it, it won’t be good enough”. There's often a belief that there's more risk when buying from other people. While the risk is real, this perception underestimates the inherent risk in building software in-house, where in-house developed solutions can miss key milestones or miss the market altogether. At the startup stage, you can take that risk. As a more mature company, missing a promised delivery date can permanently damage your reputation and credibility. To maintain high growth, you're often better off acquiring an already stable and bankable product.
- Taking full advantage of the "Land and Expand” mentality. In the first instance, landing a customer is expensive and challenging enough. Once you've landed a customer, you need to either develop new products at a rapid rate or own enough products to expand that relationship. As such, sustaining growth hinges on nailing the expansion phase of the relationship. M&A activity makes it easier to expand your product offerings and get more value out of the relationship. It helps you acquire the products you need faster and with less risk than building it yourself.
In most cases, expansion challenges start to pile up when it comes time to operate at scale and “grow up”. Essentially, businesses at this adolescent or teenage stage are racing to overcome high costs in areas such as R&D, sales and marketing or G&A costs to get to adult scale. Scaling via M&A is a faster route to growing your business that provides a vital blend of stability and profitability.
M&A in Practice: Examples of Redefining the Future
Using M&A strategies for growing your business can be valuable in changing how you grow. Berger highlights a few examples as success stories: one focused on capability expansion (E2open) and another on both in-line expansion and capability expansion (Diligent).
E2Open is a clear example of how M&A can transform a business. The company is part of the Insight Portfolio, and when we invested, it was a public company that had a unique and powerful point solution. E2Open provided supply chain visibility for large manufacturers of discrete products - chips and disk drives for example. It had the rich functionality needed to land a customer in the first place, and a logo roster that would be the envy of any enterprise software company. The company focused on the growth of new logos and industry verticals in the short term with the long-term promise of expanding those relationships. E2Open was thus an inch deep and a mile wide, creating the risk of churn since the point solution-based customer relationships were not comprehensive. If one or two large customers fell away either due to their own uncontrollable M&A or competition that offered a broader suite, the company could stumble. That is almost exactly what happened. Two customers stumbled and E2Open’s stock stumbled, too.
Insight acquired E2Open in 2015 in a take-private transaction. Since then, we've partnered with the new CEO and leadership team to acquire eight companies. The company now offers not only supply chain visibility, but also:
- Supply chain management for process industries (parallel to discrete)
- Demand sensing
- Demand planning
- Supply & Demand matching
- Ocean and truck logistics.
As a result, E2Open provides an end-to-end solution for major manufacturers, across multiple industry segments with a full suite of products - a process that would have taken 15 or more years if the company were building all this in-house. E2Open’s transformation has resulted in Gartner creating a new magic quadrant for Multi-Enterprise Supply Chain Business Networks and placing E2Open in the “upper right” for completeness of vision and ability to execute.
Another example is Diligent, a company Insight took private in 2016. At the time of investment, Diligent had a very good, albeit narrow, vertical solution that helped aggregate and secure board documents and meeting minutes. While many saw the company as a glorified PowerPoint reader, Insight and management understood the strategic importance of a precious 100 square inches of business real estate: a board directors’ iPad. Access to the board of directors provides the ability to support the most strategic and important business and governance initiatives of an organization.
Prior to going private, Diligent was spending heavily on a new collaboration product that, upon further analysis, was going to be perpetually behind more focused competitors. Post investment, Insight and management scrapped the new product, eliminated the R&D spending and redirected efforts and capital to an M&A program. In less than two years, through over 11 acquisitions - many of which were inline or “closely adjacent” competitors - Diligent has greatly expanded its total addressable market by opening new customer segments beyond Fortune 500 companies (e.g., into education and nonprofits) and opening or expanding into new geographies. In the process, the company has significantly increased its revenue and earnings.
Perhaps the biggest transformation the company has made is moving from a “board presentation reader” to becoming the creator and enabler of the “governance cloud.” Diligent has expanded beyond the board portal vertical to become a total governance package by adding entity management and director information products. With this shift, the company has a vast opportunity to expand beyond what was once a tight vertical tool to be the leader in a new software category. All of this has been made possible through M&A.
Both E2Open and Diligent showcase how evolving from a build mindset to a buy approach can accelerate growth and strengthen a company’s role in the marketplace. Achieving this kind of success begins by approaching M&A activities with the right thought process.
Ground Rules for M&A Success
It is vital that organizations analyze their specific goals and circumstances to identify if a tactic will be right for them. With years of working on M&A projects, Berger has come away with some clear ideas of what really matters when it comes to identifying the right time to pursue an M&A program. Here's a look at his advice:
- Don't get hung up on scale: There isn't a single blueprint for M&A success. There isn't a specific format you need to follow. Every deal is different. This is particularly true in terms of scale. It doesn't matter if your business is small or large; what does matter is that you take a strategic, targeted approach to the M&A process. Small companies are good acquirers and revenue size should not be an impediment to M&A success.
- Understand the investment thesis behind the M&A: Do you want to acquire new customers? Do you want to broaden your services? Do you want to enter an adjacent market? You should have a clear goal for your M&A program.
- Establish a team to guide your process: Due diligence is vital to the M&A process, but it's about more than financial analysis. Financial due diligence is standardized but being intentional and focused on aligning the M&A activities to your company’s core goals is much more difficult. Building a management team to guide this process is critical to both creating a clear vision and to executing on that idea. Ultimately, Berger believes that M&A is most successful when it moves from being a one-time event into being an ongoing capability of your company.
- Take a hands-on approach as the executive team: When M&A is successful, the entire senior management team of the acquiring company is highly engaged in the process and own it. If the CEO, CFO and Head of Corporate Development are doing this on their own, failure is high, particularly in smaller companies earlier in their evolution.
Benefit of an Experienced M&A Equity Partner
A strong company vision for M&A is critical, and it's almost impossible to outsource the process effectively. But, this doesn't mean you have to do M&A on your own. When you're working closely with an equity partner, an executive team can get strategic assistance and tangible resources to navigate the process, access M&A experience and get leverage to move more quickly.
Berger describes his experience as a portfolio company CEO when DRI worked with Insight. At the time, the business didn't have M&A capability. As a result, Berger leaned on Insight to:
- Source acquisitions and build a pipeline of qualified potential targets.
- Field a full-time M&A resource to help build a financial model for the acquisitions and a post-merger operating plan.
- Navigate and introduce financing sources to execute the deal.
In simplest terms, an equity partner can step in to fill gaps during the M&A process. If you lack key roles, they can provide experts. If you lack skills, they can offer training. The potential gains are considerable.
Pursuing an M&A strategy can be intimidating; Berger offers one overarching tip to guide your efforts:
"Don't be afraid. Embrace the possibility. Be methodical and cautious, but don't be afraid. Apply the same bold mindset to change the world that you had when you started your business. Don’t be afraid to take the business you've poured your life's work into and radically evolve it by adding on M&A – even if it is a foreign object to you."
This is the 2nd in a series of Onsite blogposts about M&A. Check out 6 Misconceptions about Growth- Stage M&A and M&A Needs a POT (Pipeline of Targets).
To learn more about Insight’s approach to M&A, please reach out to us at firstname.lastname@example.org.