Using SaaS M&A to grow

In 2020, Unity Software went public and one very interesting graphic from their prospectus is below. It shows their journey to becoming a public company (founded 2004) and one thing that stands out is the number of acquisitions they’ve made along the way. Unity has made no less than 4 important acquisitions since founding, which not only drives product, but as importantly bolts on revenue.

Most of the larger SaaS companies you know have made significant acquisitions to get so big. ZoomInfo which went public made a number of important acquisitions as well.

There is a downside. While M&A is a way to grow, bolting on revenue is not the same thing as growing revenue organically. Organic growth is more sustainable, more valuable, and healthier. Relying on acquisitions to keep growing means you’ve got to find ever larger companies to acquire; you’re unlikely to organically grow fast enough to maintain your prior trajectory. You’ve also got to integrate products and cultures, which is the real challenge. If you need to get bigger and shorten your time to exit/IPO, M&A is akin to steroids: so long as you keep doing it, you’ll get bigger. Of course like steroids, there can be significant side effects to M&A.

The only time we’ve seen M&A work for software companies is when a large company ($30mm+ ARR) with significant infrastructure (significant HR function, middle management, etc) is acquiring a much smaller one (<$5mm ARR). The size means the acquirer has the personnel to integrate not only the code but also the employees. It also makes it crystal clear which company’s brand, culture, processes, etc will be the one that survives. We’ve actually never seen M&A work when two equally sized SaaS companies smash together. It’s typically a desperate move.

Almost every large successful software company has executed M&A successfully because organic growth has its limits. M&A is a valid way to bolt on revenue and product, but the dynamics going in (large company acquiring a much smaller company) need to be right and the acquirer needs significant infrastructure to absorb acquiree.

Thank you for your readership. See more blogs and SaaS data at blossomstreetventures.com. Email the author at sammy@blossomstreetventures.com.