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Telling the stories of startup founders and creators and their unique journey. Each episode features actionable tips, practical advice and inspirational insight.
Welcome back to the Founder's Journey podcast. It's a different edition this week. We're actually gonna kinda deep dive into a topic, and the reason we're doing that is because it's a it's an area where I get a lot of questions about. It's kind of a unique area of startups that, that we'll talk about today, which is using inorganic growth or m and a to actually fuel your growth faster. One of the things that I've done in my past in in building businesses, I've done a number of acquisitions.
Greg Moran:More than 12, I think, over the, over the years all around the world. And it's been a really interesting part of the overall growth of my of my companies. It's really accelerated those growth because a lot of times, I was dealing with, these were HR technology companies that were not historically super high growth businesses. And the the reason I say that is because the the businesses were growing fine, but they weren't those kind of rocket ships that you see, and that really incorporating the mix of organic growth, you know, kind of traditional sales led growth, and m and a really became an important part of our strategy. And I wanna talk about that because it is a really important thing in even earlier stage startups, not super early stage, but once you start to get to maybe a couple million in ARR, it really is a it really is an important part.
Greg Moran:Now I know it's easy to get scared away by m and a. There's all kinds of statistics out there about m and a that, you know, 90% plus fail, and that's right. But a lot of that m and a is really, you know, not well thought out, never gets fully integrated, and it sort of fails from the get go. We're gonna talk about that today and really avoiding those avoiding those common pitfalls. So we're gonna talk about m and a.
Greg Moran:We're gonna talk about m and a in the world of start up growth to really help you understand the benefit that it can really bring to your organization and really deep dive into the mechanics. So welcome back to this edition of the Founder's Journey podcast. Welcome to the Founder's Journey podcast. Inspiration, education for founders. By founders.
Greg Moran:Alright. So we're gonna get into it today by really talking about looking at m and a from the lens of how it can really do several things to expand our business. Right? It can open up new markets and new customer segments. This is something that became important in my businesses, and it really became a great way to not only open up markets, geographic markets, but potentially adjacent markets to what we're selling.
Greg Moran:And this was a really big deal for us. So we used m and a to open up the European market. We used m and a to open up the Latin American market, so geographic. But we also used m and a to get some of our largest enterprise clients. And that became a real linchpin, and the overall growth was big.
Greg Moran:And, again, if I look back at the market expansion because of that revenue diversification, What it really did for us was allow us to take big leaps in the business. So I'll tell a story as we go through this. But back in the early days of my last company, one of the things that we were actually able to do was we're about a $2,000,000 early, you know, stage ARR business. We actually ended up acquiring about a 9 or $10,000,000 business, so we acquired them. It was a really different kind of transaction, but what it enabled us to do is rapidly expand.
Greg Moran:So, suddenly, we went from this kind of emerging struggling startup to really this much larger, almost at scale business, and we did that overnight. So, you know, that market expansion, the geographic expansion, the customer expansion, that's just only one benefit. The other big benefit of looking at m and a at a fairly early stage is from a talent acquisition lens. The value of the talent that you can bring into your company is often different than if you tried to go out and recruit that talent. You can bring in skilled and experienced people through acquisition.
Greg Moran:I have so many examples over the years of incredible people that I hired because of m and a. Sometimes we acquire their businesses simply because of those people. For instance, my CFO, still a great friend of mine to this day, came into the business because we acquired his start up. Now we were, at this point, probably 10,000,000 in ARR, maybe maybe 15,000,000 in ARR, and acquired his business, which was an early stage start up. He came in, joined the team, ultimately became our CFO and and worked with me right through the acquisition at when we were 50,000,000.
Greg Moran:So much different much different kind of ability there to bring in that talent. I've got you know, our head of product came in through an acquisition. We acquired his business largely because of him. We wanted to bring him onto the team, and it'll enable us to do it. And a lot of times, these acquisitions were, you know, while they they brought a creative value to the business from a, you know, revenue standpoint or an EBITDA standpoint, More importantly, they brought this talent that really, enabled us to scale.
Greg Moran:Doesn't always work like that. One when you look at talent acquisition, one of the biggest issues, challenges is also the cultures of those business. We're gonna talk about that a little bit, but, you know, merging together different cultures. But, man, when it works, that the talent acquisition becomes a big lever. The 3rd major lever of m and a, the 3rd major reason to be thinking about this at an early stage is enhancing your product capability.
Greg Moran:All of us, every founder, every high growth startup has a product roadmap that is way larger than we're gonna be able to get to. But really, being able to take kind of that really quick leap from a product capability standpoint can really make a make a difference. So you you could be adding complimentary products or even services to your portfolio that you can use to then sell new logos, upsell existing. We saw this over and over in my business at Outmatch where we were able to bring in a product. We did this.
Greg Moran:We had a video interviewing product. This was at the earlier stages of, when video interviewing was really just emerging. So Outmatch was a behavioral assessment company. We assessed millions and millions of candidates all over the world for job fit for some of the top brands in the world. And one of the things that we did was acquired a video interviewing company.
Greg Moran:And this video interviewing company could take that assessment and then basically turn it into an interview so the candidate was actually taking an online interview. Now today, that's more commonplace. But bear in mind, this was before COVID. So at the time this was about a year before COVID. So at the time that that at that acquisition, that business was growing well, Suddenly, COVID hit, and the world turned to video interviewing as really its only way to interview.
Greg Moran:Suddenly, that acquisition propelled the growth of the business enormously. That's kind of the case study in looking at what adding that product capability. If we tried to build that ourselves, we would have it would have taken years because, again, our product road map was too big, just like yours. But because we were able to actually bring that technology in, do it in one shot, be able to immediately sell it, we were we were in a position to be able to actually then leverage that when that moment of COVID hit where we could really use it as a huge accelerant. Now, again, just like talent acquisition, product integration can still this can be a challenge.
Greg Moran:You you know, you've gotta be able to look at it. You've gotta be able to really understand if these technologies could be merged together, if they even should be merged together. Sometimes there's a use case for not integrating the tech. But when you can integrate them, it when you can integrate them, it really can become the a a really large lever for faster innovation in the company. We wanna talk a little bit about scaling your company faster through m and a.
Greg Moran:There's a lot of we're gonna really kinda get into a few topics here. The market dynamics, the importance of the competitive advantage, and how m and a can really get you on a path to scale far faster than organic growth. But there's also we're gonna talk about a couple of the areas you really need to be aware of. One is, how does how does the market actually perceive your, m and a as part of your scaling efforts? And talk about the do's and don'ts a little bit of of due diligence and really the kind of the key elements of due diligence.
Greg Moran:Right? Financial health, legal issues, business compatibility, and some common pitfalls in the diligence process because there are a lot of them. So we're gonna get into some of those some of those topics here. Overall, if you look at m and a, it was a highly transformative thing in my businesses. And I mentioned we're doing this podcast today as kind of a special, you know, special edition because I do get a lot of questions about that because the thought of m and a at a pretty early stage is something that, you know, most people don't don't think about.
Greg Moran:So let's let's really, let let's dive into it here. So as we get into it, what are the what are the market dynamics behind this? Right? There are markets where there is a premium for scale. There are other markets.
Greg Moran:So think of, like, really emerging tech markets, AI, crypto, Web 3, things like that. There's not a there's not really a a scale premium yet. When I say scale premium, the market itself, the PE market or the IPO market or anything is not necessarily rewarding. You don't have to be a large business, but there are some industries that there are just really large competitors, and scaling becomes a really important competitive advantage. You have to get to scale faster.
Greg Moran:Now the industry I was in, HR technology, is one of those. There are some really large companies out there today. We are competing with some of those. Large a lot of large public companies. And being the upstart carried a lot of risk.
Greg Moran:Now we were selling into a very risk averse environment, human resources. And, you know, because of that, getting to scale, getting people confidence that we were here, we were built this company was really built to last, became a major part of it. So there were a lot of market dynamics there that really pushed us toward doing more and more of this, and it became an important part of building our competitive advantage. We could not have done that. We could not have gotten to scale just organically.
Greg Moran:So think of it like this. We're a couple $1,000,000 ARR business. We're growing at maybe 20% a year. Right? 30% a year.
Greg Moran:And, you know, if you're starting at 2,000,000, 3,000,000 in ARR and you're growing at 20, 30%, you're not adding much more than maybe $1,000,000 in revenue a year. Right? And that's, you know, on the high side. So we needed to augment that. It would take us too long to be able to get, say, north of 10 or 20,000,000 in ARR.
Greg Moran:That's why we talk about it being this faster path to scale. It would have taken us years years years what we were able to do then, through some transformative m and a. When when I talk about the market, I'm talking about if you're a start up, what I'm really talking about is more likely the private equity market, potentially the public markets. There's kind of a mixed perception of some of this. And when you look at m and a, there is this kind of perception that, you know, you you sort of hacked your way to growth.
Greg Moran:It's one of those things you just have to be aware of that, you know, the the perception of the buying market or the strategic acquiring market can be a little skewed on this. And there's a lot of good reasons for that. Really, one is a lot of m and a, like we talked about, fails. So if you can prove you've got a road map, if you can prove you've got a playbook to integrate these companies successfully, that's a really important thing. At Outmatch, when we were doing this, we really built an interesting playbook around the type of m and a that we were doing.
Greg Moran:And that m and a was typically tuck in acquisitions of competitors that had inferior technology but good clients. So there's a lot there to unpack. Right? So we're looking at competitors that are out there. Now we were in an industry where there were a lot of competitors with very outdated technologies.
Greg Moran:They were built, you know, a decade earlier. They hadn't been largely updated, but they had a good customer base, and they had a good loyal customer base. So the playbook that we really built was to be able to acquire those competitors. Now talk about the importance of valuation, but but acquire those competitors at a good valuation less than our own, so it was accretive to our value. Acquire their technology and acquire the business, and with that, along with the technology and the people.
Greg Moran:And then very rapidly integrate that techno or integrate those customers onto our technology platform. What that did is it derisks derisks one of the major parts of this, which is the tech integration. We didn't have to do it. We just had to migrate their customer base onto our technology platform. And we did this very quickly.
Greg Moran:So we gave this typically, you know, we like to say a 90 day window, sometimes that lag. But to get those customers over, we'd make it very, we make it a relatively easy decision for the customer. We're gonna bring you over to our platform. We're gonna give you a price discount. You're gonna get a much you're dealing with a much larger company that has more capability to serve you, more products to continue to expand the relationship, and we're gonna do it at less cost.
Greg Moran:So it was a pretty compelling value prop. And we're able to move them over very quickly onto our platform. And with that, we would then look at our job openings within the company, and we would be able to take the best talent from those acquired businesses and bring them into the into our business. If there wasn't a place for them, we'd have to unfortunately kind of break that relationship. But we were usually able to bring a number over onto our into our business.
Greg Moran:This created a very easy you know, I don't wanna say easy, but an easier pathway to get that integration done. They became they're these are high gross margin businesses, even higher when we brought them onto our tech platform. We brought a great customer base that we can then start to expand. We brought we brought great talent over into the into the business. And then suddenly, we were able to take a leap, and these things were not only accretive from an overall value, an overall enterprise value standpoint.
Greg Moran:So, you know, let's say we're trading at the 5, 6 times revenue level. We're buying these businesses at the 2 to 3 times revenue. So we got accretive value on the top, but we also were able to drive EBITDA accretion on the bottom, which was which was really significant for us because, again, still, even at this point, we were not huge. Maybe at this point when we started to really execute on this playbook consistently, maybe we were 15, 20,000,000 in ARR. So we were growing, but this became a major, major growth lever to add to our normal organic growth of 20, 30%.
Greg Moran:So if you're gonna do this, you've gotta look at due diligence. Right? This is a major, major part of any m and a campaign. You've gotta really look at the sort of the big key elements of due diligence. What's the financial health of the business?
Greg Moran:Are there any legal issues? Boy, do we step in this one once or twice? What is the compatibility of the business? There's a lot of pitfalls you can fall into from an overall financial health standpoint. Some of the businesses that we were acquiring, a lot of them were a lot smaller than ours.
Greg Moran:And, well, we never had any issues of, you know, malicious behavior or anything like that, digging into the financial health of some of these businesses was sometimes a real challenge. We had to really understand how first thing we had to understand was how good is their bookkeeping. Right? Now some of them were audited and things like that. That makes it a lot easier.
Greg Moran:But we then had to really dive in, not only from a financial health, down a layer to a customer health level to say within the customer base, how healthy are these clients? When we bring these clients over, are they gonna actually stay? Are the customers actually healthy? That was a really big part of this. So we had to really understand those things.
Greg Moran:We had to understand the technology health of the business. Lot of these things if we were gonna try to do an, an integration, we really had to understand if these things were compatible. If we were not gonna try to do an integration, we needed to make sure that the technology was gonna be able to stand up on its own while we migrated customers. We did have instances once in a while where the technology was not as presented at all, and that really created a challenging set of circumstances for us. So we had to go in and, you know, you really do have to understand what is it that you're dealing with, from an overall technology standpoint.
Greg Moran:The legal issues were a big one. Sometimes, you know, with any company, there are lawsuits. There are things that occur. And you really gotta make sure that you understand what kind of liability that you're dealing with. There were instances that we in acquired businesses, where there were unsettled legal matters that suddenly because we didn't know it, we suddenly were in the middle of those things.
Greg Moran:It's not a great set of circumstances. Fortunately, we were able to deal with all of them, but it's something you really do have to spend some time really trying to understand. And lastly, you have to understand the business compatibility. When I say business compatibility, I'm talking about really cultural compatibility. What we're really looking for here is is are the cultures of these business compatible?
Greg Moran:Now, again, if your intention is to bring together these companies, this is a really, really important thing. If your intention is to do what I mentioned in our earlier playbook, right, which was to sunset their technology, move the tech over, and just hire their best people onto your team becomes less of an issue. In doing this, I did we did occasionally buy businesses where our intention was to actually integrate the companies. And this is the most challenging type of integration that you can do. The tech integration can be solved.
Greg Moran:The culture integration is really, really a challenging one. We did have instances where it just didn't work. We had we tried to mesh leadership teams, one instance, and it totally blew up. We tried to mesh the cultures of the company. And while it didn't blow up, it took a while.
Greg Moran:So and and there was a lot of pain associated with that, huge amounts of turnover. You really wanna look at what are these cultures like. Are these 2 really high growth start ups that together form an even faster growing start up? That's great. That can work.
Greg Moran:Is one company a larger company that maybe has a little bit more, corporate like culture, where the other is a, you know, garage kind of start up, that's gonna be a tough one. So you need to look at that compatibility very honestly and really understand what is it about these cultures that's either gonna make them mesh or not. And it becomes a really, really common pitfall in the diligence in the diligence process by not looking at that closely. The other biggest pitfall when you're looking at diligence, the other thing that really becomes a major factor, you know, a major pitfall is I I talked about not looking at the culture, honestly, but also not looking at the problems of the business, honestly. It's really easy to get super excited through m and a.
Greg Moran:It's really easy to kinda fall in love with the business you're trying to acquire. And while that's a good thing, it can really have you put on some rose colored glasses. There were instances over the years where we looked past some technology issues that really came back to haunt us. We looked past some management issues, some leadership issues, some culture issues that really, really came back to haunt us. We haunt us.
Greg Moran:We really felt that we could solve those problems easily, so we didn't look at it as closely as we should have. The biggest pitfall in diligence, like I said, is just it's falling in love. It's it's glossing over the negatives and only focusing on the positive. It's something that over the years, we really had to had to spend a lot of time trying to get much better at. One of the reasons that it became a really important thing for us was because it was a big part of our strategy.
Greg Moran:So we had to get really good at smoothing out the execution of this process, of not only diligence, but then the integration process so that we can minimize the disruption to the business. And when I say that, you know, so much of m and a is about the timing of the transaction. It's about when you do it. The execution and the minimization of disruption is really a big thing. One thing occurs every time almost every time you do m and a, and people get nervous.
Greg Moran:Turnover goes up. Customer churn goes up. It's something that you need to be able to minimize, and you need to be able to minimize it. By using the diligence process to understand where the pitfalls may be, doesn't mean you don't do the deal. But to understand where the pitfalls may be so that you can plan for those things as you go into the post acquisition process and the integration process.
Greg Moran:It's really important. If you're not doing solid diligence, you don't you will not have the plan to be able to solve for the areas that you really need to that you need to be able to solve for, whether that's customer health and staying really on top of customers that may be a little bit higher risk, talent that you really need to maintain that you know is really gonna get sketchy. It's it's those things from the diligence process that then allow you to carry them over to the integration process. Really important, thing as you start to move from pre deal to post deal. So and it's gotta be seamless.
Greg Moran:It's gotta have that kind of really strategic execution or else you're gonna start to introduce real disruption in the business. So there's a lot of risks and challenges here. We talked about culture fit and why that is such a risk because that culture compatibility is really critical for the long term success. So when you're looking at culture fit, you've got to really assess what are the cultures of these businesses? What's gonna work about it?
Greg Moran:Where do we believe, the issues are gonna lie? Depending on the nature of acquisition, I've kinda used 2 playbooks here. One is, again, if you're doing the playbook I mentioned before, it's really more of the roll off, bring them onto your platform, it becomes less important. You're introducing people to your culture. In the scenario where you're actually merging these businesses together fully, It's a whole other and that really is trying to figure out how you manage that merger of cultures of different companies.
Greg Moran:Where is the common ground between these companies? That was always something we spent a lot of time. This is a this is an issue of sometimes actually stepping back with not only the leaders, but all of the people in the in both companies, the acquirer and the acquirer, to really say what what is common about our culture? Where are we more alike than And in doing that, how do we take the best of culture a and the best of culture b and bring them together as well. And make it something that both companies are working on together, that the people in the company are working on.
Greg Moran:Way too often, this comes from a CEO or an executive level, and you've got all kinds of egos involved that we're better than them and it's nonsense. This is something that needs to be a full company, all hands process to really define what this culture is gonna be together post m and a. And it's the best advice I can give you. Get everybody involved. Resist the temptation to build a top down culture and really let it be a bottoms up culture from both the acquired business and the acquiring business.
Greg Moran:From a product integration standpoint, another big area of potential risk. There are always technical challenges when you're bringing in different product lines. No. It depends. Sometimes we're looking at it and saying, okay.
Greg Moran:We're bringing 2 products together, and we're actually trying to merge 2 of these. And other times, it's saying we're gonna integrate product a and product b. Almost always, what you end up with is a bunch of tech debt. And when I say tech debt, bunch of leftover tech that is becomes challenging to deal with over time. Sometimes, when you're looking at this, there's really a couple strategies to kind of minimize that tech debt.
Greg Moran:Sometimes it's just easier to rebuild the the technology being acquired, especially if you're a platform play onto your platform. I've had a number of instances where we spent so much time trying to integrate it that if we just started a rebuild from day 1, it would have been much faster. So look at the complete rebuild kind of strategy. Secondly, look at if you even need to do integration. Can it be just a loose API type integration where technology a still exists, technology b is just pulling data and moving data back and forth.
Greg Moran:That's an easier type of integration to deal with. Merging the code bases is something totally different. My best advice there to look at is, to the extent possible, do it outside the company. And I say that because the amount of disruption I've lived this experience where entire tech teams, I mean, 50, a 100 people, suddenly are doing nothing but trying to figure out how to integrate these businesses. I've seen situations been involved in situations where it's years later and that's still going on.
Greg Moran:And they just rebuilt it, and we just rebuilt it. We would have been far ahead of that strategy. So, you know, a few different strategies there to look at it. We rebuild light integration. And if you're gonna do a full integration, look to take it outside the business and use an outsourcer for it, and often just save you enormous amounts of time and ultimately enormous amount of money.
Greg Moran:But the important part when you're dealing with, when dealing with the overall tech integration, there there's 2 ways to think about the tech. Integration of these things. Right? Product integration. 1 is everything I just talked about.
Greg Moran:How do you deal with the tech debt? But the second is this post product. This is the customer facing version of this. And while you're figuring out all of the mechanics in the back end about how to get the technology to work together, It's incredibly important on day 1 of this acquisition that you're able to roll out a broader product vision that your customers can see, your prospects can see, and your people in the company, in both companies, can see. That product vision is incredibly important.
Greg Moran:So I say this because it's easy to get caught up in all the tech issues here. But having that product vision front and center, so we're all looking at it and saying, this is where we're going. This is why we did this transaction. This is what we're building for the future. It's a really important part.
Greg Moran:The other area potential pitfall here, the other areas of risk and how to deal with this is leadership integration. Again, if you are looking at bringing doing a full integration of the company, we're bringing leadership together. You've got to have an aligned leadership vision and leadership strategy. Had issues around this one. Bringing together company leadership from an acquired company and acquirer is brutally difficult.
Greg Moran:On multiple occasions, I've tried to bring together leadership teams. Sometimes it's worked. Often, it hasn't because there wasn't that alignment of vision. Underlying it, sometimes there was even resentment for being acquired or, you know, various things. It becomes a really, really difficult thing.
Greg Moran:Having a pure, true alignment of vision and strategy is a really important thing. So there's a lot of there are multiple models for integrating leadership teams. Ultimately, though, it does go back to that alignment. You've got if you don't have a shared vision for what you're trying to build, It will never work. That's just the reality of it, and I'd love to say, oh, you know, it will be fine.
Greg Moran:It won't. So know that upfront. Now if you do have that aligned vision and you do have that aligned strategy, then there are ways to bring it you know, to bring these teams together to have the teams, you know, mesh into 1, and you can really pull this off. But without that alignment of vision and strategy, you're not gonna be able to deal with it. These are highly sensitive transitions, and they need to be handled really effectively, or else they will blow up very quickly.
Greg Moran:I've had situations where we've acquired businesses, trying to bring the companies together and have entire founding teams walk out in one day because the alignment of the vision wasn't there. And it's a super unfortunate thing. You talk about disruption. It causes massive, massive, massive disruption in the business. And a lot of the value that you that you acquired ends up walking out the door.
Greg Moran:So these things have to be handled really sensitively. They have to be handled effectively because when they go wrong, they really can go wrong. So, you know, those are just kind of some of the some of the issues around it. But I don't wanna use those to scare you off. If m and a looks like a part of your strategy, there's a lot of ways to fund, these deals.
Greg Moran:You can use debt. You can use equity. Private equity is a great option to look at here, especially if you're high growth and this is an overall part of your tech strategy or your growth strategy. You know, private equity is a great channel here using debt, some debt, some equity, a lot of different a lot of different, ways to do this. But you've got it.
Greg Moran:It all is gonna start on the valuation that you're applying, the accretive value of those companies. What is it that you, as the acquirer, are gonna trade at? Right? What is your sort of perceived multiple? And you can get work with investment bankers, things like that, to get a good gauge of what the market is.
Greg Moran:And then when you're buying, it's you know, what is the mark what is the multiple that you're gonna be paying? What you ideally want is an arbitrage between those two things. Buy low, sell high. Right? You wanna buy the company lower than your value because you immediately get that bump in the overall enterprise value of the business.
Greg Moran:So it becomes a it becomes a really important thing. My best advice here, consider using an investment banker to help you in that process. They not only will help you negotiate a better deal potentially with the seller, but they'll also be able to give you a far better, better approach. You've gotta be really getting deep into the integration planning. They can help you with that.
Greg Moran:So a lot of benefits to really using, a banker here. All of this is to say, you know, so many lessons learned in the 12 plus, you know, dozen plus integrations that I've done with you know, some of those, like I said, have been that kind of roll up playbook. Some of them have been the full integration. Some have been kind of a combination. So many lessons learned.
Greg Moran:Don't overlook the tech. I say that because I've done it many times. Really understand at the tech diligence level what are you getting. It doesn't mean you don't do the deal, but it just means you understand what you're dealing with. Understand the cultures and the differences both on the leadership level and on the individual contributor level.
Greg Moran:Understand those differences. See if there's alignment. If you're dealing with more of the roll up playbook, these things become a little less important. But if you're dealing with the full integration, they become enormously, important. So huge benefits here.
Greg Moran:You know, it's an area that more start ups should be looking at. Or and I say start ups not if you're under, say, a few million in ARR. But once you hit that, call it, 3 to 5000000 point, it's something that can really start to enhance your overall growth strategy. So, you know, as always, reach out to me if you want more advice on this. You can find me through our website, the foundersjourneypodcast.com.
Greg Moran:Find me on LinkedIn. I'm just at gregmoran. And, you know, hit me up with a DM. I'm happy to answer more questions about this. So that's different episode, deep dive episode of the Founder's Journey podcast.
Greg Moran:If you like this episode, if you found it valuable, please take a moment, share it, comment. If you've got questions, like I said, ask me about it. And, and whatever platform you're looking at, if you could just take a minute and like the podcast, it really helps us get ranked. So hopefully, you found this valuable. We'll see you in the next edition of The Founder's Journey Podcast.