Blog

January 2, 2019

Product Stack Companies are Prime M&A Targets

Written by and shared with permission of: Mighty Capital Founder & Managing Partner, SC Moatti

The stock market turmoil of December 2018 reminds us to never take anything for granted. Still, good investment opportunities exist if you know where to look. My expectation is that 2019 will see significant private equity and venture capital activity thanks to multiple economic factors including a solid M&A appetite.

Why do I say this? Beyond being die-hard fans of product, our team unearthed some interesting data that backs up my optimism. In Q4 2018, we commissioned Products That Count to conduct a survey of 50+ large, acquisitive product-driven companies and learned about their M&A appetite for 2019. The results surprised even this die-hard product fan.

Survey Highlights

Here’s quick rundown of the most revealing findings in the study:

  • Smaller acquirers plan to increase their M&A activity in 2019, while larger ones will continue at pace.
  • A whopping 24% of surveyed companies target acquisitions at >$100M valuations. That’s huge!
  • Most (65%) surveyed companies listed artificial intelligence, big data and cloud at the top of their 2019 priorities.
How We Did It

“The end result was an elite group of high quality, innovative companies already demonstrating measurable success.”

To gain the most valuable insight into M&A trends, the study began by gathering data on 2,000+ Product Stack companies. What’s a Product Stack company?! It’s a company that sells a product or service to product managers. We categorize them in 15 categories, mapped into the 5 stages of the product lifecycle:

  • Collaborate
  • Conceive
  • Design
  • Build
  • Operate

Next, the pool was narrowed down according to the Mighty Capital investment criteria, which are:

  • Demonstrated evidence of product/market fit
  • Amazing CEO and Bay-Area-based leadership
  • Not the first money in –previous funding or revenue traction

The end result was an elite group of 200 high quality, innovative companies already demonstrating measurable success. I consider many of these gems to be incredible investment opportunities or perhaps even early versions of industry giants.

As a final step, we identified 65 potential buyers in strategic and private equity that might be interested in acquiring or investing in this elite startup class. Then we surveyed this group of potential buyers about their plans for 2019.

Acquisitive Companies Not Holding Back

Overall, the results forecast a 2019 that should see a flurry of M&A activity, namely in the product lifecycle segment. While larger acquirers plan to keep the same pace, smaller brands are taking a more aggressive posture.

“It’s a clear signal that product lifecycle companies occupy a sweet spot in the eyes of innovation-starved corporations.”

Perhaps the most surprising finding was that nearly a quarter of companies surveyed target acquisitions of $100 million valuations or more. Meanwhile, CapitalIQ states that in tech overall, this level of acquisition is only anticipated in 3 percent of companies. It’s a clear signal that product lifecycle companies occupy a sweet spot in the eyes of innovation-starved corporations.

Hot Tech for 2019

As other publications have verified, hot tech for 2019 acquisition orbit around the following specialties (percentage of companies listing the category as a priority):

  • Artificial intelligence (23%)
  • Cloud computing (23%)
  • Big data (20%)

Meanwhile Security (17%) and Blockchain (4%) receive honorable mention. I’m not surprised investment capital lags a bit behind talent acquisition. Talent scouts are heavily recruiting Augmented Reality now, and AR will inevitably grow in investor interest in the near future.

East Vs. West Coast

The survey data also revealed regional differences. For instance, on the West Coast, 45 percent of companies site Team/Talent as their top acquisition driver. Out East, however, 53 percent are driven mostly by Customers/Market interests.

Anticipating 2019

The survey clearly reveals that Product Stack companies represent a hot market for VC and private equity because of the high probability of exit at a higher price than average. Admittedly, such a high level of interest was somewhat unexpected. For entrepreneurs and investors alike, it’s an exciting time to be see the Product Stack segment explode and I can’t wait to see how this plays out in 2019!

© 2019 Mighty Capital All Rights Reserved