There is a lot of <$1b company M&A coming…

Recently I had coffee with David Newns and we were discussing the opportunities around M&A for small-cap companies. Historically the VC world has not been acquisition-driven so it’s reasonably rare for someone to tolerate my perspective on this. It seems clear that over the next few years (probably measured as remainder of average current VC fund term), we’re going to see a vast amount of acquisition strategies being deployed by <$1b valued VC-backed companies. There are a few reasons, all fairly obvious:

1. A vast amount of venture capital has been deployed into technology companies over the last three years. This includes not just new VC funds but many family offices who are now allocating directly.

2. Company valuations have inflated based on that capital availability. Remember that valuations are an expression of belief in future performance.

3. VCs are now warming up to the fact that sensible M&A can drive value.

My biggest opinion change over the last few years is on startups acquiring startups.

I used to think it never works. I've since seen it successful more often than not, and at times save the acquiring company.

I think we under-appreciate how mature the tech industry is.

— martin_casado (@martin_casado) September 20, 2021

There are lots of interesting consequences to this (cap tables, founder positions, investor pref ranking, anti-trust, investment bank configurations etc).